Fixed and Floating Exchange Rates

Welcome to India India is the second most populous country and the largest democracy in the world. The far reaching and sweeping economic reform undertaken since 1991 have unleashed the enormous growth potential of the economy. There has been a rapid, yet calibrated, move towards deregulation and liberalisation, which has resulted in India becoming a favourite destination for foreign investment. The mood is upbeat and the signals strong. Undoubtely. India has emerged as one of the most vibrant and dynamic of the developing economics. What India Offers One of the largest economies of the world, fourth largest economy in terms of purchasing power parity. Large and rapidly growing consumer market-up to 300 million people constitute the market for branded consumer products. Easy access to markets of the other nations belonging to the South Asian Association for Regional Cooperation (Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka). Large and diversified infrastructure spread across the country. Promising future in the Information technology industry. Large manufacturing capability, spanning almost all areas of manufacturing activities. Well-developed research and development (R&D) infrastructure and technical and marketing services. Well established knowledge industry. Abundance of natural resources (has a rich mineral base), and agricultural selfsufficiency. Developed banking system-commercial banking network of over 63,000 branches supported by a number of National and State level financial institutions. Vibrant capital market consisting of 22 stock exchanges with over 9,000 listed companies. Skilled manpower and professional management including engineers, managerial personnel, accountants, and lawyers, available at competitive costs. Conducive foreign investment environment that provides freedom of entry, investment, location, choice of technology, import and export.

The policy environment provides clear guidelines for entry, freedom of location, choice of technology, production, repatriation of capital, dividends, etc., which is specifically aimed of enhancing the flow of FDI. Well-balanced package of fiscal incentives. Stable democratic environment fostered by over 53 years of Independence. Established, Independent judiciary. English the preferred business language. Investment Policy Foreign Direct Investment As part of the economic reforms programme, policy and procedures governing foreign investment and technology transfer have been significantly simplified and streamlined. Automatic Route Today, foreign investment is freely allowed in all sectors including the services, sector except in cases where there are sectoral ceilings. All items/activities except the following are under the automatic route for foreign direct investment (FDI): i. if: All proposals that require an industrial Licence. An industrial Licence is mandatory a. the item involved requires on industrial licence under the Industries (Development & Regulation) Act, 1951 or b. the foreign equity portion is more than 24% of the equity capital of units manufacturing items reserved for small scale industries; or c. the item concerned requires on industrial Licence in terms of the locational policy ii All proposals in which the foreign collaborator has a previous venture or tie-up in India. (excluding IT Sector). iii All proposals relating to the acquisition of shares in an existing Indian company in favour of a foreign investor. a. iv. All proposals outside the notified sectoral polict/caps, or under sectors in which FDI is not permitted

Investment in public sector units as also in Export Oriented Units (EOUs), and units in Export Processing Zones (EPZs), Special Economic Zones (SEZs), Software Technology Parks (STPs) and Electronics Hardware Technology Parks (EHTPs) also quality for the Automatic Route. FDI in the Sector upto 26%, is allowed under the automatic route subject to licence from the insurance regulatory & development Authority for undertaking insurance activities. In addition to Automatic Approval for new companies, such approval can also be granted for existing companies proposing to induct foreign equity, for existing companies with an expansion programme, the additional requirements are that:i. ii. iii. the increase in equity level must result from the expansion f the equity base of the existing company. the money to be remitted should be in foreign currency, and the proposed expansion programme should be predominantly in the sector(s) under automatic route.

For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are : i. ii. iii. they should be engaged predominantly in industries under the automatic route. the increase in equity level must be from expansion of the equity base, and the foreign equity must come in foreign currency.

Otherwise, the proposal would need Government approval through the Foreign Investment Promotion Board (FIPB). Investors coming through the Automatic Route are required to file relevant documents with the Reserve Bank of India within 30 days after the issue of shares to foreign investors. Proposals which do not fulfill the conditions for automatic approval will require the approval of the Government. The investors have to make an application to the Foreign Investment Promotion Board, Ministry of Commerce & Industry, Udyog Bhawan, New Delhi, for obtaining such approval. Trade Policy-Year 2000 Special Economic Zones to be set up, Export processing zones at Mumbaii, Kandala, Visakhapatnam and Cochin to be coverted into special economic zones. Quantitative restrictions on 714 items removed. Duty free replenishment certificate scheme for over 5,000 products introduced.

Major sector sperecific intitiatives in gems & jewellery, agro-chemicals, bio-technology, pharmaceuticals, leather, garments, silk, etc. Boost to e-commerce - electronic filing of applications to be the norm. Deemed export benefits extended to core infrastructural sectors involving an investment of Rs. 1 billion or above, like coal and hydrocarbon, and also for renovation of power plants. Import of second-hand capital goods less than 10 years and allowed without licences, against surrender of special import licences. Pre-export Duty Entitlement Passbook Scheme abolished. Export Promotion Capital Goods scheme extended to all industrial sectors, at 5% import duty. Pharmaceutical and bio-tech firms allowed to import R & D equipment and goods dutyfree up to 1% of free-on-board value of their exports. Trriff protection and safeguards under antidumping and anti-subsidy mechanism to continue for domestic industry.

Business opportunities The reform process has deregulated the economy and stimulated domestic and foreign investments, taking India firmly into the forefront of investment destinations. The Government, keen to promote investment in the country has radically simplified and rationalised polices, procedures and regulatory aspects, Foreign investment is welcome in almost all sectors, except those of strategic concern ( for instance, defence and atomic energy). A series of incentives has been announced to promote investments. These include import of capital goods at concessional customs duty (subject to fulfillment of certain export obligations), liberalisation of external commercial borrowing norms, tax holiday, and concessional tax treatment for certain sector. In addition, several State Government offer incentives, such as subsidy on fixed capital, loans at concessional rates of interest, and attractive power rates, While several incentives are project specific, a number of firms have been successful in negotiating favourable investment terms with the State Government concerned. Since the initiation of the economic liberalisation process in 1991, sectors such as automobiles, chemicals, food processing, oil & natural gas, petrochemicals, power, services, and telecommunications have attracted considerable investments. Today, in the

changes investment climate, India offers exciting business opportunities in virtually every sector of the economy. Energy Power Investment Policy The 1991 Power Policy seeks to attract significant private sector investment in the Indian power sector. The key initiatives include: Private sector permitted to set up cool, gas or liquid based thermal project, hydel projects and wind or solar projects of any size. Foreign equity participation brought under automatic approval of generation, transmission and distribution of power generated in hydroelectric, oil based and coal/lignite based power projects. Role of the Central Government curtailed and the State Governments and State Electricity Boards (SEBs) empowered to negotiate directly with developers, facilitating speedy clearances for the investor. Ancillary sector such as cool significantly deregulated. 100% foreign equity permitted. Opportunities Demand is expected to grow to 570 billion Kwh by 2001-02 and to 782 billion Kwh by 2006-07. Over the 10 year period from 1997-2007, a total capacity addition of 98,000 MW is envisaged, entailing an investment of Rs. 5,750 billion in power generation, transmission and distribution. The specific project opportunities expected in the near future include: Liquid Fuel Based Projects using low sulphur heavy stock (LSHS), furnace oil (FO), heavy petroleum stock (HPS), Naphtha, Vacuum Residue, Condensate and Orimulsion are permitted by the Government. Import of liquified natural gas (LNG) is also being considered for setting up large capacity combined cycle power plants, Transmission projects for power transfer are available for competitive bidding by the Central Transmission Utility (Power Grid) and State Transmission Utilities (SEBs)/Grid Corporations). The transmission system project are being identified for competitive bidding by the Central and State Transmission Utilities.

Attractive investment opportunities are likely to develop in distribution of power as several State governments have agreed to allow the gradual entry of the private sector in distribution. Non-Conventional Energy Sources Investment Policy Foreign Investors can enter into a joint venture with an Indian partner for financial and/or technical collaboration and also for setting up of renewable energy based power generation projects. The liberalised foreign investment approval regime is aimed at facilitating foreign investment and transfer of technology through joint ventures. 100% foreign investment as equity is permissible. Government of India encouraging foreign investors to set up renewable energy based pwer generation project on Build-Own-Operate basis. Opportunities In India, investment opportunities are available for the following types of investors and users:Investment by foreign investors in renewable energy: Wind, Solar Photo-voltaic, Solar Thermal, Small Hydro, Biomass, Co-generation, Geothermal, Tidal and Urban & Industrial Wastes based power projects. Investment by foreign investors for manufacturing of renewable energy systems and devices based on: Wide, Solar Photo-voltaic, Solar Thermal, Small Hydro, Biomass, Co-generation, Geothermal, Tidal and Urban & Industrial Wastes for their utilisation in India and also for exports to developing and Third World countries. OIL & NATURAL GAS Investment Policy The Government has announced significant new policy initiatives to attract foreign investment: In exploration and production, oil and gas fields are open to the private sector as well as for foreign participation under production sharing contracts. Foreign investment it to be permitted up to;

100% in small-sized oil fields 60% for unincorpoorated joint ventures and 51% for incorporated joint ventures 100% for exploration and production of blocks identified under the new Exploration Licensing Policy In the case of private Indian companies, FDI in refining is permitted up to 49%. The level of FDI in the oil refining sector under automatic approval has been raised from 49% to 100% EOU refineries, 100% FDI is permitted. For gas fields developed in the private sector, promoters are free to market the gas at market related prices. For the petroleum products and pipeline sector, FDI is permitted up to 51% FDI is permitted up to 74% in infrastructure related to marketing and marketing of petroleum products. 100% wholly owned subsidiary (WOS) is permitted for purpose of market study and formulatopn. 100% wholly owned subsidiary is permitted for investment /financing. For actual trading and marketing, minimum 26% Indian equity is required over 5 years. Opportunities Total sedimentary basins, including deep waters; 3.14 million sq . kms (41% of this still unexplored) Large demand for natural gas: Year 1999 2002 2007 2012 2025 Demand (MMSCMD) 110 151 231 313 391

MMSCMD : Million Standard cubic Metres Per Day

The present domestic gas supply is only 65 MMSCMD. The increasing demand-supply gap is expected to be met by imports. Development of infrastructure 1998-99 2024-25 Product Pipeline 22.85 Capcaity (MMTpa) Port Capacity (MMT) Coal Investment Policy Private Indian companies setting up or operating power projects as well as cool or lignite mines for captive consumption are allowed FDI up to 100%. 100% FDI is allowed for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing. FDI upto 74% is allowed for exploration or mining of coal or lignite for captive consumption. In all the above cases, FDI is allowed up to 50% under the Automatic Route subject to the condition that such investment shall not exceed 49% of the equity of a PSU. Communication & Information Technology TELECOMMUNICATION Investment Policy In Basic, cellular Mobile, Paging and Value Added Service, and Global mobile personnel communications by satellite, FDI is limited to 49% subject to grant of licence from the Department of Telecommunications and adherence by the companies (who are investing and the companies in which investment is being made) to the licence condition for foreign equity cap and lock-in-period for transfer and addition of equity and other licence provisions. 111.00 166 361

FDI upto 100% is allowed for the following activities in the telecom sector. a. b. c. d. ISPs not providing gateways (both for satellite and submarine cables): Infrastructure Providers providing dark fibre (IP category); Electronic Mail; and Voice Mail

Upto 100% FDI in telecom manufacturing activities on automatic approval basis. Opportunities There exists an enormous demand-supply gap for basic services, with the average waiting period for telephone connections exceeding one year. Sector Basic Service Current Size 19 million lines Projections Additional 64 million lines required over the next 9 years to meet the demand for basic services; 20.4 million lines expected to be provided by the private sector Cellular subscribers expected to cross 1.6 million by March, 2000 1.5 million subscribers expected by the end of financial year 2000 VSAT demand estimated at 11,000 shared hubs and dedicated hub terminals by 2000 2 million Internet subscribers expected by the year 2000

Cellular Services Radio Paging Very Small Apertue Terminal (VSAT) Internet

0.9 million subscribers 0.8 million subscribers 6,000

150,000

Internet Services There in no restriction on the number of Internet Service Providers (ISPs). No licence fee is payable up to October 31, 2003; thereafter a taken licence fee of Rs. 1 per annum is payable, ISP are free to fix their own tariff; ISPs have been permitted to establish their own international gateways for carrying internet traffic. They can obtain transmission link on lease from DTS, licensed basic service providers, railways, SEBs, Power Grid Corporation or any other operator specially authorised to lease such lines, ISPs can also establish their own transmission link within their service area if such links are not available from any of the authorised agencies.

Basic Telephone Services Basic service providers are permitted to establish last mile linkages and carry their own long distance traffic within their service area. They are to be permitted direct interconnectivity and sharing of infrastructure with other basic service providers or any other type of service providers in their area of operation. Cellular Mobile Services Cellular service providers are permitted to carry their own long distance traffic within their service area. They are to be permitted direct interconnectivity and sharing of infrastructure with other cellular service providers or any other type of service providers in their area in their area of operation. National Long Distance Services As per the National Telecom policy `99, National Long Distance Services (NLD) beyond the service area shall be opened for competition. With a view to providing choice to consumers and promoting competition, all access provides would be mandatorily required to provide interconnection to all NLD providers. Global Mobile Personal Communication By Satellite (GMPCS) There is no restriction on the number of GMPCS licences and licences are issued on firstcome-first-served basis. Gateways for GMPCS are to be located in India and operation and maintenance of the same are to be with an organisation designated by the Government. A two-tier licence fee is payable- a fixed component plus a variable component as percentage of revenues. Other Value Added Services As the telecommunications and Information Technology(IT) infrastructure in the country is expanding, there is a surge in demand for a range of value added services. The scheme for value added services has been considerably liberalised. These services include radio paging, public mobile radio trunking, and domestic data using VASTs, Evolving of new services- Tele-education, Tele-medicine, Tele-banking, Call Centre-is catching up with the Indian Industry and has recently witnessed significant investments from domestic and foreign investors. INFORMATION TECHNOLOGY Investment Policy Automatic approval for foreign equity in software and almost all areas of electronics.

Automatic approval accorded for foreign technology agreements in all areas of electronics except aero-space and defence, subject to specified conditions. 100% foreign investment permitted in units set up exclusively for exports. Such units can be set up under any one of the following schemes; EHTPs, STPs, Free Trade Zones/EPZs, and 100% EOUs. Opportunities According to a recent World Bank study, India is the preferred location for software vendors for its quality and cost. India has strong Unix base which provides opportunity for the development of products for internet based applications. Further, India has global connectivity with international dialing facility from over 13220 locations, Leased/switched high-speed data links from major centres through STPs and VSNL for point-to-point communication are also available. Internet connectivity is provided through several networks. Abundant investment opportunities exist in the following thrust areas in India: Communication Infrasture Optic Fibre Cable Gateways Satellite based Communication Wireless Software Development IT-enables Services IT Education (100,000 post graduate professionals in IT required annually by 2004) IT-enabled education Data Centres & Server Farms E-commerce Investment Policy Upto 100% FDI is permitted for e-commerce, subject to the condition that the companies concerned would divest 26% of their equity in favour of the Indian public in five years, if the companies are listed in other parts of the world. Opportunity According to a study by ICRA Ltd., the volume of e-business in India is likely to increase from the level of Rs. 4.7 billion in 1999-00 to a level above Rs. 250 billion in the next three to four years, The figure makes a clear case for large scale investments in the Indian e-commerce sector. Knowledge Based Industries Pharmaceuticals

Investment Policy Automatic approval for up to 74% foreign equity in the case of bulk drugs, their intermediates and formulations (except those produced by the use of recombinant DNA technology). Opportunities India pharmaceutical industry has shown tremendous progress in terms of infrastructure development, technology base and range of production, India derives its technological strengths in pharmaceuticals on the following bases: Self reliance displayed by the production of 70% of bulk drugs and almost the entire requirement of formulations within the country. Low cost of production Low R&D Costs. Innovative scientific manpower Strength National Laboratories Increasing balance of trade in Pharma sector. Chemicals and biotechnology Investment Policy As referred t in section on Investment Policy Opportunities Chemicals The chemical industry in India is well established and has recorded a steady growth in the overal Indian industrial scenario. The chemical and allied industries have been amongst the faster growing segments of the Indian industry. The Indian chemical industry had a turnover of around Rs. 900 billion in 1996-97. The chemicals industry also accounted for over 10% of total Indian exports during 1997-98. The chemical industry is highly heterogeneous encompassing many sector like organic and inorganic chemicals, dyestuffs, paints, pesticides, and specialty chemicals, Some of the prominent individual chemical industries are caustic soda, soda ash, carbon black, phenol, acetic acid, mathanol and azo dyes.

Currently, there is tremendous scope for growth in chemical sector. The per capita consumption of chemicals in India is well below the prevailing world level. For instance, in sulphuric acid, which is considered the barometer of growth in the chemical industry, the per capita consumption is only about 5kg per annum in India as compared to 40kg in industrially develoed countries. Biotechnology The setting up of a separate Department of Biotechnology (DBT) under the Ministry of Science and Technology in 1986 gave a new impetus to the development of modern biology and biotechnology in India. In more than a decade of its existence, the department has promoted and accelerated the pace of development of biotechnology in the country. In India, concerted efforts for over a decade in R&D in the identified areas of modern biology and biotechnology have paid rich dividends. The proven technologies at the laboratory level have been scaled up and demonstrated in field. Patenting of innovations, technology transfer to industries and close interaction with them have given a new direction to biotechnology research. Necessary guidelines for transgenic plants, recombinant vaccines and drugs have also been evolved. A strong base of indigenous capabilities has been created. Opportunities Biotechnology industry serves as a research arm to Agritech, and Pharma industry with increased Potential for strategic alliances. Global trends show that all large pharmaceutical players are putting their money in healthcare for long term benefits. It is expected that nearly half the drugs in the next decade would be biotech Products. Tremendous potential in agri business in an agrarion economy like India. Potential therefore for transgenic seeds, bio-fertilizers etc. Number of small firms is high, knowledge based, research intensive industry, withlow capital Requirements. Status and Scope Sector Turnover (1997) Estimated Turnover for 2000 (million USD) Estimated Turnover for 2005 (million)

Healthcare Products Agriculture Industrial Products Total (including other)

650 480 556 1,790

800 650 67 2,100

1,300 1,110 830 3,240

The field of biotechnology both for new innovations and application would form a mojor research and commercial endeavour for socio economic development in this decade. Infrastructure Sector Roads Investment Policy FDI upto 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours. Opportunities Investment worth an estimated US$34 billion needed, till 2005-06, for the development of National and Stte Highways. Of this figure, the requirement of private sector investment is US$8.3 billion. Opportunities exists in : Highway construction Four-Laning of over 35,000 km of National Highways. Highway related en route activities like restaurants, motels, and rest/parking areas as may be decided by the implementing agency. Select project opportunities include : Chennai-Nellor (US$ 350 million) Bangalore-Chennai (US$ 305 million)

Surat-Manor (US$ 180 million) Jaipur-Ajmer (US$ 147 million) Ports Investment Policy The principal legislations governing Indian ports are The Indian Ports Act, 1908, and the Major Ports Trust Act, 1963, the Indian Government recently announced a series of measures to promote foreign investment in the port sector as listed below: No approval required for foreign equity up to 51% in projects providing supporting services to water transport, such as operation and maintenance of piers, loading and discharging of vehicles. Automatic approval for foreign equity upto 100% in construction and maintenance of ports and harbours, However, if the total foreign equity investment exceeds Rs. 15 billion, the proposal will be referred to the FIPB. Open tenders are to be invited for private sector participation on a BuildOperate-Transfer (BOT) basis. Evaluation of bids will be based on the maximum licence period will not exceed 30 years and at the end of the BOT period all assets will revert to the port in accordance with the conditions of the agreement. The Government has announced guidelines for private/foreign participation that permit formation of joint venture between major ports and foreign ports, between major ports and minor ports, and between major ports and companies. The measures are aimed at attracting new technology, fostering strategic alliances with minor ports to create on optimal port infrastructure and enhancing private sector confidence in the funding of ports. The guidelines permit the formation of a joint venture between : a major port and foreign ports for the purposes of constructing new port facilities within existing ports, improving productivity of existing ports, and development of new port ; a major port trust and a company or a consortium of companies where ; a company or a consortium of companies, selected through a BOT bidding under the guidelines of private sector participation alliances with a major

port trust for improving the viability of the scheme and/or to enhance the confidence of the private sector. A company or a consortium of companies is selected under the scheme of innovative/unsolicited proposals Oil PSUs/a joint venture company of oil PSUs are/is selected for oil related port facility as a port based industry. Opportunities The areas identified for privatisation or investment by the private sector include: Leasing out of existing port assets Creating of additional assets : Construction or operation of container terminals Construction or operation of break-bulk, multipurpose and specialised cargo berths Warehousing, container freight stations, Storage facilities and tank farms Cranage and handling equipment Setting up captive power plants, Dry docking and ship repair frailties Leasing of equipment and floating craft from the private sector Pilotages Captive facilities for port based industries. Civil Aviation Investment Policy The momopoly of public sector air carriers ended with the repenling of Air Corporarion Act, 1953 on March1,1994. Automatic approval for foreign equity participation in Airport infrastructure upto100 percent Foreign equity upto 40 per eent; investment by Non Resident Indians upto 100 per cent permitted

In domestic air-transport services. Equity from foreign airlines not allowed in domestic air-transport services either or indirectly. Foreign Financial Institutions allowed to hold equity in the domestic air-transport sector provided they do not have foreign airlines as their shareholders Foreign Investors allowed to have representation (upto 33 per cent of total) on Board of Directors of the domestic airline company. Government to consider private sector participation construction and operation new airports on a BOT basis. Minimum fleet size for a scheduled operator raised from the existing 3 aircrafts to 5 Management contract with a foreign airline is not permitted Opportunities Construction of world class international airports in five cities, permitting upto100% foreign equity investment announced. Important private sector aided projects; New airport near Kochi (US$ 85.7 million). Projects for development of new airports at Bangalore and Mumbai with private sector participation are under consideration Other private sector aided airports planned; Ahmedabad airport, Amritsar airport upgration, Chennai cargo complex, new international terminal and a second runway for Delhi airport, runway extension and international block for Jaipur airport Private Sector-Where? Restructuring & privatization through long term lease Green-field airports Construction of terminal/facilities Ground handling

STATEMENT ON INDUSTRIAL POLICY New Delhi, July 24, 1991. POLICY OBJECTIVES Pandit Jawaharlal Nehru laid the foundations of modern India. His vision and determination have left a lasting impression on every facet of national endeavour since Independence. It is due to his initiative that India now has a strong and diversified industrial base and is a major industrial nation of the world. The goals and objectives set out for the nation by Pandit Nehru on the eve of Independence, namely, the rapid agricultural and industrial development of our country, rapid expansion of opportunities for gainful employment, progressive reduction of social and economic disparities, removal of poverty and attainment of self-reliance remain as valid today as at the time Pandit Nehru first set them out before the nation. Any industrial policy must contribute to the realisation of these goals and objectives at an accelerated pace. The present statement of industrial policy is inspired by these very concerns, and represents a renewed initiative towards consolidating the gains of national reconstruction at this crucial stage.

2. In 1948, immediately after Independence, Government introduced the Industrial Policy Resolution. This outlined the approach to industrial growth and development. It emphasised the importance to the economy of securing a continuous increase in production and ensuring its equitable distribution. After the adoption of the Constitution and the socio-economic goals, the Industrial Policy was comprehensively revised and adopted in 1956. To meet new challenges, from time to time, it was modified through statements in 1973, 1977 and 1980. 3. The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution of 1956 which had as its objective the acceleration of the rate of economic growth and the speeding up of industrialisation as a means of achieving a socialist pattern of society. In 1956, capital was scarce and the base of entrepreneurship not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the State to assume a predominant and direct responsibility for industrial development. 4. The Industrial Policy statement of 1973, inter alia, identified high-priority industries where investment from large industrial houses and foreign companies would be permitted. 5. The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on the role of small-scale, tiny and cottage industries. 6. The Industrial Policy Statement of 1980 focused attention on the need for promoting competition in the domestic market, technological upgradation and modernisation. The policy laid the foundation for an increasingly competitive export based and for encouraging foreign investment in high-technology areas. This found expression in the Sixth Five Year Plan which bore the distinct stamp of Smt. Indira Gandhi. It was Smt. Indira Gandhi who emphasised the need for productivity to be the central concern in all economic and production activities. 7. These policies created a climate for rapid industrial growth in the country. Thus on the eve of the Seventh Five Year Plan, a broad-based infrastructure had been built up. Basic industries had been established. A high degree of self-reliance in a large number of items - raw materials, intermediates, finished goods - had been achieved. New growth centres of industrial activity had emerged, as had a new generation of entrepreneurs. A large number of engineers, technicians and skilled workers had also been trained. 8. The Seventh Plan recognised the need to consolidate on these strengths and to take initiatives to prepare Indian industry to respond effectively to the emerging challenges. A number of policy and procedural changes were introduced in 1985 and 1986 under the leadership of Shri Rajiv Gandhi aimed at increasing productivity, reducing costs and improving quality. The accent was on opening the domestic market to increased competition and readying our industry to stand on its own in the face of international competition. The public sector was freed from a number of constraints and given a larger measure of autonomy. The technological and managerial modernisation of industry was pursued as the key instrument for increasing productivity and improving our competitiveness in the world. The net result of all these changes was that Indian industry grew by an impressive average annual growth rate of 8.5% in the Seventh Plan period. 9. Government is pledged to launching a reinvigorated struggle for social and economic justice, to end poverty and unemployment and to build a modern, democratic, socialist, prosperous and forward-looking India. Such a society can be built if India grows as part of the world economy and not in isolation. 10. While Government will continue to follow the policy of self-reliance, there would be greater emphasis placed on building up our ability to pay for imports through our own foreign exchange earnings. Government is also committed to development and utilisation of indigenous capabilities in technology and manufacturing as well as its upgradation to world standards. 11. Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and increasing competitiveness for the benefit of the common man. The spread of industrialisation to backward areas of the country will be actively promoted through appropriate incentives, institutions and infrastructure investments. 12. Government will provide enhanced support to the small-scale sector so that it flourishes in an environment of economic efficiency and continuous technological upgradation. 13. Foreign investment and technology collaboration will be welcomed to obtain higher technology, to increase exports and to expand the production base.

14. Government will endeavour to abolish the monopoly of any sector or any individual enterprise in any field of manufacture, except on strategic or military considerations and open all manufacturing activity to competition. 15. The Government will ensure that the public sector plays its rightful role in the evolving socio-economic scenario of the country. Government will ensure that the public sector is run on business lines as envisaged in the Industrial Policy Resolution of 1956 and would continue to innovate and lead in strategic areas of national importance. In the 1950s and 1960s, the principal instrument for controlling the commanding heights of the economy was investment in the capital of key industries. Today, the State has other instruments of intervention, particularly fiscal and monetary instruments. The State also commands the bulk of the nation's savings. Banks and financial institutions are under State control. Where State intervention is necessary, these instruments will prove more effective and decisive. 16. Government will fully protect the interests of labour, enhance their welfare and equip them in all respects to deal with the inevitability of technological change. Government believes that no small section of society can corner the gains of growth, leaving workers to bear its pains. Labour will be made an equal partner in progress and prosperity. Workers' participation in management will be promoted. Workers cooperatives will be encouraged to participate in packages designed to turn around sick companies. Intensive training, skill development and upgradation programmes will be launched. 17. Government will continue to visualise new horizons. The major objectives of the new industrial policy package will be to build on the gains already made, correct the distortions or weaknesses that may have crept in, maintain a sustained growth in productivity and gainful employment and attain international competitiveness. The pursuit of these objectives will be tempered by the need to preserve the environment and ensure the efficient use of available resources. All sector of industry whether small, medium or large, belonging to the public, private or cooperative sector will be encouraged to grow and improve on their past performance. 18. Government's policy will be continuity with change. 19. In pursuit of the above objectives, Government have decided to take a series of initiatives in respect of the policies relating to the following areas. A. Industrial Licensing. B. Foreign Investment C. Foreign Technology Agreements. D. Public Sector Policy E. MRTP Act. A package for the Small and Tiny Sectors of industry is being announced separately. A. INDUSTRIAL LICENSING POLICY 20. Industrial Licensing is governed by the Industries (Development & Regulation) Act, 1951. The Industrial Policy Resolution of 1956 identified the following three categories of industries: those that would be reserved for development in public sector, those that would be permitted for development through private enterprise with or without State participation, and those in which investment initiatives would ordinarily emanate from private entrepreneurs. Over the years, keeping in view the changing industrial scene in the country, the policy has undergone modifications. Industrial licensing policy and procedures have also been liberalised from time to time. A full realisation of the industrial potential of the country calls for a continuation of this process of change. 21. In order to achieve the objectives of the strategy for the industrial sector for the 1990s and beyond it is necessary to make a number of changes in the system of industrial approvals. Major policy initiatives and procedural reforms are called for in order to actively encourage and assist Indian entrepreneurs to exploit and meet the emerging domestic and global opportunities and challenges. The bedrock of any such package of measures must be to let the entrepreneurs make investment decisions on the basis of their own commercial judgement. The attainment of technological dynamism and international competitiveness requires that enterprises must be enabled to swiftly respond to fast changing external conditions that have become characteristic of today's industrial world. Government policy and procedures must be geared to assisting entrepreneurs in their efforts. This can be done only if the role played by the government were to be changed from that of only exercising control to one of providing help and guidance by making essential procedures fully transparent and by eliminating delays.

22. The winds of change have been with us for some time. The industrial licensing system has been gradually moving away from the concept of capacity licensing. The system of reservations for public sector undertakings has been evolving towards an ethos of greater flexibility and private sector enterprise has been gradually allowed to enter into many of these areas on a case by case basis. Further impetus must be provided to these changes which alone can push this country towards the attainment of its entrepreneurial and industrial potential. This calls for bold and imaginative decisions designed to remove restraints on capacity creation, while at the same, ensuring that over-riding national interests are not jeopardised. 23. In the above context, industrial licensing will henceforth be abolished for all industries, except those specified, irrespective of levels of investment. These specified industries (AnnexII), will continue to be subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and over-riding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. The exemption from licensing will be particularly helpful to the many dynamic small and medium entrepreneurs who have been unnecessarily hampered by the licensing system. As a whole the Indian economy will benefit by becoming more competitive, more efficient and modern and will take its rightful place in the world of industrial progress. B. FOREIGN INVESTMENT 24. While freeing Indian industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited. In view of the significant development of India's industrial economy in the last 40 years, the general resilience, size and level of sophistication achieved, and the significant changes that have also taken place in the world industrial economy, the relationship between domestic and foreign industry needs to be much more dynamic than it has been in the past in terms of both technology and investment. Foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. This is particularly necessary in the changing global scenario of industrial and economic cooperation marked by mobility of capital. The government will therefore welcome foreign investment which is in the interest of the country's industrial development. 25. In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment upto 51% foreign equity in such industries. There shall be no bottlenecks of any kind in this process. This group of industries has generally been known as the "Appendix I Industries" and are areas in which FERA companies have already been allowed to invest on a discretionary basis. This change will go a long way in making Indian policy on foreign investment transparent. Such a framework will make it attractive for companies abroad to invest in India. 26. Promotion of exports of Indian products calls for a systematic exploration of world markets possible only through intensive and highly professional marketing activities. To the extent that expertise of this nature is not well developed so far in India, Government will encourage foreign trading companies to assist us in our export activities. Attraction of substantial investment and access to high technology, often closely held, and to world markets, involves interaction with some of the world's largest international manufacturing and marketing firms. The Government will appoint a special board to negotiate with such firms so that we can engage in purposive negotiation with such large firms, and provide the avenues for large investments in the development of industries and technology in the national interest. C. FOREIGN TECHNOLOGY AGREEMENT 27. There is a great need for promoting an industrial environment where the acquisition of technological capability receives priority. In the fast changing world of technology the relationship between the suppliers and users of technology must be a continuous one. Such a relationship becomes difficult to achieve when the approval process includes unnecessary governmental interference on a case to case basis involving endemic delays and fostering uncertainty. The Indian entrepreneur has now come of age so that he no longer needs such bureaucratic clearances of his commercial technology relationships with foreign technology suppliers. Indian industry can scarcely be competitive with the rest of the world if it is to operate within such a regulatory environment. 28. With a view to injecting the desired level of technological dynamism in Indian industry, Government will provide automatic approval for technology agreement related to high priority

industries within specified parameters. Similar facilities will be available for other industries as well if such agreements do not require the expenditure of free exchange. Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgement. The predictability and independence of action that this measure is providing to Indian industry will induce them to develop indigenous competence for the efficient absorption of foreign technology. Greater competitive pressure will also induce our industry to invest much more in research and development and they have been doing in the past. In order to help this process, the hiring of foreign technicians and foreign testing of indigenously developed technologies, will also not require prior clearance as prescribed so far, individually or as a part of industrial or investment approvals. D. PUBLIC SECTOR POLICY 29. The public sector has been central to our philosophy of development. In the pursuit of our development objectives, public ownership and control in critical sector of the economy has played an important role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development serves the common good. 30. The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments have been made over the past four decades to build a public sector which has a commanding role in the economy. Today key sectors of the economy are dominated by mature public enterprises that have successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in a number of areas. 31. After the initial exuberance of the public sector entering new areas of industrial and technical competence, a number of problems have begun to manifest themselves in many of the public enterprises. Serious problems are observed in the insufficient growth in productivity, poor project management, over-manning, lack of continuous technological upgradation, and inadequate attention to R&D and human resource development. In addition, public enterprises have shown a very low rate of return on the capital invested. This has inhibited their ability to re-generate themselves in terms of new investments as well as in technology development. The result is that many of the public enterprises have become a burden rather than being an asset to the Government. The original concept of the public sector has also undergone considerable dilution. The most striking example is the take over of sick units from the private sector. This category of public sector units accounts for almost one third of the total losses of central public enterprises. Another category of public enterprises, which does not fit into the original idea of the public sector being at the commanding heights of the economy, is the plethora of public enterprises which are in the consumer goods and services sectors. 32. It is time therefore that the Government adopt a new approach to public enterprises. There must be a greater commitment to the support of public enterprises which are essential for the operation of the industrial economy. Measures must be taken to make these enterprises more growth oriented and technically dynamic. Units which may be faltering at present but are potentially viable must be restructured and given a new lease of life. The priority areas for growth of public enterprises in the future will be the following. · Essential infrastructure goods and services. · Exploration and exploitation of oil and mineral resources. · Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate. · Manufacture of products where strategic considerations predominate such as defence equipment. At the same time the public sector will not be barred from entering areas not specifically reserved for it. 33. In view of these considerations, Government will review the existing portfolio of public investments with greater realism. This review will be in respect of industries based on low technology, small scale and non-strategic areas, inefficient and unproductive areas, areas with low or nil social considerations or public purpose, and areas where the private sector has developed sufficient expertise and resources. 34. Government will strengthen those public enterprises which fall in the reserved areas of operation or are in high priority areas or are generating good or reasonable profits. Such enterprises will be provided a much greater degree of management autonomy through the

system of memoranda of understanding. Competition will also be induced in these areas by inviting private sector participation. In the case of selected enterprises, part of Government holdings in the equity share capital of these enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises. There are a large number of chronically sick public enterprises incurring heavy losses, operating in a competitive market and serve little or no public purpose. These need to be attended to. The country must be proud of the public sector that it owns and it must operate in the public interest. E. MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT (MRTP ACT) 35. The principal objectives sought to be achieved through the MRTP Act are as follows: i. Prevention of concentration of economic power to the common detriment, control of monopolies, and ii. Prohibition of monopolistic and restrictive and unfair trade practices. 36. The MRTP Act became effective in June 1970. With the emphasis placed on productivity in the Sixth Plan, major amendments to the MRTP Act were carried out in 1982 and 1984 in order to remove impediments to industrial growth and expansion. This process of change was given a new momentum in 1985 by an increase of threshold limit of assets. 37. With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring high productivity and competitive advantage in the international market, the interference of the Government through the MRTP Act in investment decisions of large companies has become deleterious in its effects on Indian industrial growth. The pre-entry scrutiny of investment decisions by so called MRTP companies will no longer be required. Instead, emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices rather than making it necessary for the monopoly house to obtain prior approval of Central Government for expansion, establishment of new undertakings, merger, amalgamation and takeover and appointment of certain directors. The thrust of policy will be more on controlling unfair or restrictive business practices. The MRTP Act will be restructured by eliminating the legal requirement for prior governmental approval for expansion of present undertakings and establishment of new undertakings. The provisions relating to merger, amalgamation, and takeover will also be repealed. Similarly, the provisions regarding restrictions on acquisition of and transfer of shares will be appropriately incorporated in the Companies Act. 38. Simultaneously, provisions of the MRTP Act will be strengthened in order to enable the MRTP Commission to take appropriate action in respect of the monopolistic, restrictive and unfair trade practices. The newly empowered MRTP Commission will be encouraged to require investigation suo moto or on complaints received from individual consumers or classes of consumers. F. DECISIONS OF GOVERNMENT 39. In view of the considerations outlined above Government have decided to take a series of measures to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic control. These measures complement the other series of measures being taken by Government in the areas of trade policy, exchange rate management, fiscal policy, financial sector reform and overall macro economic management. A. Industrial Licensing Policy i. Industrial licensing will be abolished for all projects except for a short list of industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons, and items of elitist consumption (list attached as Annex II). Industries reserved for the small scale sector will continue to be so reserved. ii. Areas where security and strategic concerns predominate, will continue to be reserved for the public sector (list attached as Annex I). iii. In projects where imported capital goods are required, automatic clearance will be given a. in cases where foreign exchange availability is ensured through foreign equity or b. if the CIF value of imported capital goods required is less than 25% of total value (net of taxes) of plant and equipment, upto a maximum value of Rs. 2 crore. In view of the current difficult foreign exchange situation, this scheme (i.e. (iii) b) will come into force from April, 1992. In other cases, imports of capital goods will require clearance from the Secretariat for Industrial Approvals (SIA) in the Department of Industrial Development according to availability of foreign exchange resources.

iv. In locations other than cities of more than 1 million population, there will be no requirement of obtaining industrial approvals from the Central Government except for industries subject to compulsory licensing. In respect of cities with population greater than 1 million, industries other than those of a non polluting nature such as electronics, computer software and printing will be located outside 25 kms. of the periphery, except in prior designated industrial areas. A flexible location policy would be adopted in respect of such cities (with population greater than 1 million) which require industrial re-generation. Zoning and Land Use Regulation and Environmental Legislation will continue to regulate industrial locations. Appropriate incentives and the design of investments in infrastructure development will be used to promote the dispersal of industry particularly to rural and backward areas and to reduce congestion in cities. v. The system of phased manufacturing programmes run on an administrative case by case basis will be applicable to new projects. Existing projects with such programmes will continue to be governed by them. vi. Existing units will be provided a new broad banding facility to enable them to produce any article without additional investment. vii. The exemption from licensing will apply to all substantial expansions of existing units. viii. The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects. Procedural consequences ix. All existing registration schemes (Delicensed Registration, Exempted Industries Registration, DGTD registration) will be abolished. x. Entrepreneurs will henceforth only be required to file an information memorandum on new projects and substantial expansions. xi. The lists at Annex II and Annex III will be notified in the Indian Trade Classification (Harmonised System). B. Foreign Investment i. Approval will be given for direct foreign investment upto 51 percent foreign equity in high priority industries (Annex III). There shall be no bottlenecks of any kind in this process. Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. Consequential amendments to the Foreign Exchange Regulation Act (1973) shall be carried out. ii. While the import of components, raw materials and intermediate goods, and payment of knowhow fees and royalties will be governed by the general policy applicable to other domestic units, the payment of dividends would be monitored through the Reserve Bank of India so as to ensure that outflows on account of dividend payments are balanced by export earnings over a period of time. iii. Other foreign equity proposals, including proposals involving 51% foreign equity which do not meet the criteria under (I) above, will continue to need prior clearance. Foreign equity proposals need not necessarily be accompanied by foreign technology agreements. iv. To provide access to international markets, majority foreign equity holding upto 51% equity will be allowed for trading companies primarily engaged in export activities. While the thrust would be on export activities, such trading houses shall be at par with domestic trading and export houses in accordance with the Import Export Policy. v. A special Empowered Board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This would be a special programme to attract substantial investment that would provide access to high technology and world markets. The investment programmes of such firms would be considered in totality, free from pre-determined parameters or procedures. C. Foreign Technology Agreements i. Automatic permission will be given for foreign technology agreements in high priority industries (Annex III) upto a lumpsum payment of Rs. 1 crore, 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production. The prescribed royalty rates are net of taxes and will be calculated according to standard procedures. ii. In respect of industries other than those in Annex III, automatic permission will be given subject to the same guidelines as above if no free foreign exchange is required for any payments. iii. All other proposals will need specific approval under the general procedures in force.

iv. No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies. Payment may be made from blanket permits or free foreign exchange according to RBI guidelines. D. Public Sector i. Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained there would be no bar for areas of exclusivity to be opened up to the private sector selectively. Similarly the public sector will also be allowed entry in areas not reserved for it. ii. Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. A social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages. iii. In order to raise resources and encourage wider public participation, a part of the government's shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers. iv. Boards of public sector companies would be made more professional and given greater powers. v. There will be a greater thrust on performance improvement through the Memoranda of understanding (MOU) systems through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective. vi. To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprise would be placed in Parliament. While focussing on major management issues, this would also help place matters on day to day operations of public enterprises in their correct perspective. E. MRTP Act i. The MRTP Act will be amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. This eliminates the requirement of prior approval of Central Government for establishment of new undertakings, expansion of undertakings, merger, amalgamation and takeover and appointment of Directors under certain circumstances. ii. Emphasis will be placed on controlling and regulating monopolistic, restrictive and unfair trade practices. Simultaneously, the newly empowered MRTP Commission will be authorised to initiative investigations suo moto or on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices. iii. Necessary comprehensive amendments will be made in the MRTP Act in this regard and for enabling the MRTP Commission to exercise punitive and compensatory powers. ANNEX I PROPOSED LIST OF INDUSTRIES TO BE RESERVED FOR THE PUBLIC SECTOR 1. Arms and ammunition and allied items of defence equipment, Defence aircraft and warships. 2. Atomic Energy. 3. Coal and lignite. 4. Mineral oils. 5. Mining if iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond. 6. Mining of copper, lead, zinc, tin, molybdenum and wolfram. 7. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953. 8. Railway transport. ANNEX II LIST OF INDUSTRIES IN RESPECT OF WHICH INDUSTRIAL LICENSING WILL BE COMPULSORY 1. Coal and Lignite. 2. Petroleum (other than crude) and its distillation products. 3. Distillation and brewing of alcoholic drinks. 4. Sugar.

5. Animal fats and oils. 6. Cigars and cigarettes of tobacco and manufactured tobacco substitutes. 7. Asbestos and asbestos-based products. 8. Plywood, decorative veneers, and other wood based products such as particle board, medium density fibre board, block board. 9. Raw hides and skins, leather, chamois leather and patent leather. 10. Tanned or dressed furskins. 11. Motor cars. 12. Paper and Newsprint except bagasse-based units. 13. Electronic aerospace and defence equipment; All types. 14. Industrial explosives, including detonating fuse, safety fuse, gun powder, nitrocellulose and matches. 15. Hazardous chemicals. 16. Drugs and Pharmaceuticals (according to Drug Policy). 17. Entertainment electronics (VCRs, colour TVs, C.D. Players, Tape Recorders). 18. White Goods (Domestic Refrigerators, Domestic Dishwashing machines, Programmable Domestic Washing Machines, Microwave ovens, Airconditioners). Note: The compulsory licensing provisions would not apply in respect of the small-scale units taking up the manufacture of any of the above items reserved for exclusive manufacture in small scale sector. ANNEX III LIST OF INDUSTRIES FOR AUTOMATIC APPROVAL OF FOREIGN TECHNOLOGY AGREEMENTS AND FOR 51% FOREIGN EQUITY APPROVALS 1. Metallurgical Industries i. Ferro alloys. ii. Castings and forgings. iii. Non-ferrous metals and their alloys. iv. Sponge iron and pelletisation. v. Large diameter steel welded pipes of over 300 mm diameter and stainless steel pipes. vi. Pig iron. 2. Boilers and Steam Generating Plants 3. Prime Movers (other than electrical generators) i. Industrial turbines. ii. Internal combustion engines. iii. Alternate energy systems like solar wind etc. and equipment therefor. iv. Gas/hydro/steam turbines upto 60 MW. 4. Electrical Equipment i. Equipment for transmission and distribution of electricity including power and distribution transformers, power relays, HT-switch gear synchronous condensers. ii. Electrical motors. iii. Electrical furnaces, industrial furnaces and induction heating equipment. iv. X-ray equipment. v. Electronic equipment, components including subscribers' end telecommunication equipments. vi. Component wires for manufacture of lead-in wires. vii. Hydro/steam/gas generators/generating sets upto 60 MW. viii. Generating sets and pumping sets based on internal combustion engines. ix. Jelly-filled telecommunication cables. x. Optic fibre. xi. Energy efficient lamps and xii. Midget carbon electrodes. 5. Transportation i. Mechanised sailing vessels upto 10,000 DWT including fishing trawlers. ii. Ship ancillaries. iii. (a) Commercial vehicles, public transport vehicles including automotive commercial three wheeler jeep type vehicles, industrial locomotives. (b) Automotive two wheelers and three wheelers. (c) Automotive components/spares and ancillaries.

iv. Shock absorbers for railway equipment and v. Brake system for railway stock and locomotives. 6. Industrial Machinery i. Industrial machinery and equipment. 7. i. Machine tools and industrial robots and their controls and accessories. ii. Jigs, fixtures, tools and dies of specilised types and cross land tooling, and iii. Engineering production aids such as cutting and forming tools, patterns and dies and tools. 8. Agricultural Machinery i. Tractors. ii. Self-propelled Harvestor Combines. iii. Rice transplanters. 9. Earth Moving Machinery i. Earth moving machinery and construction machinery and components thereof. 10. Industrial Instruments i. Indicating, recording and regulating devices for pressures, temperatures, rate of flow weights levels and the like. 11. Scientific and Electromedical Instruments and Laboratory Equipment. 12. Nitrogenous & Phosphatic Fertilizers falling under i. Inorganic fertilizers under '18-Fertilizers' in the First Schedule to IDR Act, 1951. 13. Chemicals (other than fertilizers). i. Heavy organic chemicals including petrochemicals. ii. Heavy inorganic chemicals. iii. Organic fine chemicals. iv. Synthetic resins and plastics. v. Man made fibres. vi. Synthetic rubber. vii. Industrial explosives. viii. Technical grade insecticides, fungicides, weedicides, and the like. ix. Synthetic detergents x. Miscellaneous chemicals (for industrial use only) a. Catalysts and catalyst supports. b. Photographic chemicals. c. Rubber chemicals. d. Polyols. e. Isocyanates, urethanes, etc. f. Speciality chemicals for enhanced oil recovery. g. Heating fluids. h. Coal tar distillation and product therefrom. i. Tonnage plants for the manufacture of industrial gases. j. High altitude breathing oxygen/medical oxygen. k. Nitrous oxide. l. Refrigerant gases like liquid nitrogen, carbondioxide etc.in large volumes. m.Argon and other rare gases. n. Alkali/acid resisting cement compound o. Leather chemicals and auxiliaries. 14. Drugs and Pharmaceuticals According to Drug Policy. 15. i. Paper and pulp including paper products. ii. Industrial laminates. 16. i. Automobile tyres and tubes. ii. Rubberised heavy duty industrial beltings of all types. iii. Rubberised conveyor beltings. iv. Rubber reinforced and lined fire fighting hose pipes. v. High pressure braided hoses. vi. Engineering and industrial plastic products. 17. Plate Glass i. Glass shells for television tubes. ii. Float glass and plate glass. iii. H.T. insulators.

iv. Glass fibres of all types. 18. Ceramics i. Ceramics for industrial uses. 19. Cement Products i. Portland cement. ii. Gypsum boards, wall boards and the like. 20. High Technology Reproduction and Multiplication Equipment. 21. Carbon and Carbon Products i. Graphite electrodes and anodes. ii. Impervious graphite blocks and sheets. 22. Pretensioned High Pressure RCC Pipes. 23. Rubber Machinery 24. Printing Machinery. i. Web-fed high speed off-set rotary printing machine having output of 30,000 or more impressions per hour. ii. Photo composing/type setting machines. iii. Multi-colour sheet-fed off-set printing machines of sizes 18"x25" and above. iv. High speed rotograture printing machines having output of 30,000 or more impressions per hour. 25. Welding Electrodes other than those for Welding Mild Steel 26. Industrial Synthetic Diamonds. 27. i. Photosynthesis improvers. ii. Genetically modified free living symbiotics nitrogen fixer. iii. Pheromones. iv. Bio-insecticides. 28. Extraction and Upgrading of Minor Oils 29. Pre-fabricated Building Material. 30. Soya Products i. Soya texture proteins. ii. Soya protein isolates. iii. Soya protein concentrates. iv. Other specialised products of soyabean. v. Winterised and deodourised refined soyabean oil. 31. (a) Certified high yielding hybrid seeds and synthetic seeds and (b) Certified high yielding plantlets developed through plant tissue culture. 32. All food processing industries other than milk food, malted foods, and flour, but excluding the items reserved for small-scale sector. 33. All items of packaging for food processing industries excluding the items reserved for small scale sector. 34. Hotels and tourism-related industry.

The features of India's Small Sector Industrial Policy 1991
The new policy measures for promoting and strengthen small, tiny and village enterprises were announced on 6th August, 1991. The main thrust of the new policy is to impart more vitality and growth to employment and exports. The salient features of the new policy are:

• • • • • •

De-regulation, debureaucratisation and simplification on status, regulations and procedures. Increase in the investment limit in plant and machinery of ting enterprise forms 21 lake to Rs 50 lakh, irrespective of the location of the unit. Inclusion of industry related services and business enterprises, irrespective of their location, as small scale industries. Ensuring both adequate flow of credit on a normative basis and quality of its delivery for viable operation on the SSI sector. Setting up a special monitoring agency to oversee the genuine credit needs of the small scale sector. Introduction of suitable legislation to ensure prompt payment of small industries bills.

• • • •

Introduction of a scheme of Integrated Infrastructural development (including technological back up services) for small scale industries. Setting up a Technology Developed Cell in the Small Industries development Organization. Market promotion of SSI products through co-operative/public sector institution's other specialized professional/marketing agencies and the consortia approach. Setting up of an Export Development Center in the Small Industries development Organization.

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Foreign Direct Investment (FDI) is normally defined as a form of investment made in order to gain unwavering and long-lasting interest in enterprises that are operated outside of the economy of the shareholder/ depositor. In FDI, there is a parent enterprise and a foreign associate, which unites to form a Multinational Corporation (MNC). In order to be deemed as a FDI, the investment must give the parent

enterprise power and control over its foreign affiliate. Foreign Direct Investment in India In India, Foreign Direct Investment Policy allows for investment only in case of the following form of investments:

• • • •

Through financial alliance Through joint schemes and technical alliance Through capital markets, via Euro issues Through private placements or preferential allotments

Foreign Direct Investment in India is not allowed under the following industrial sectors:

• • • • •

Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc

FDI In India Across Different Sectors Hotel & Tourism Hotels include restaurants, beach resorts and business ventures providing accommodation and food facilities to tourist. Tourism would include travel agencies, tour operators, transport facilities, leisure, entertainment, amusement, sports and health units. 100 per cent FDI is permitted for this sector through the automatic route. Trading For trading companies 100 per cent FDI is allowed for

• • •

Exports Bulk Imports Cash and Carry wholesale trading.

Power For business activities in power sector like electricity generation, transmission and distribution other than atomic plants the FDI allowed is up to 100 per cent. Drugs & Pharmaceuticals For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed, subject to the fact that the venture does not attract compulsory licensing, does not involve use of recombinant DNA technology. Private Banking FDI of 49 per cent is allowed in the Banking sector through the automatic route provided the investment adheres to guidelines issued by RBI. Insurance Sector For the Insurance sector FDI allowed is 26 per cent through the automatic route on condition of getting license from Insurance Regulatory and Development Authority (IRDA).

Telecommunication

• •

For basic, cellular, value added services and mobile personal communications by satellite, FDI is For ISPs with gateways, radio-paging and end to end bandwidth, FDI is allowed up to 74 per cent.

49 per cent. But any FDI above 49 per cent would require government approval. Business Processing Outsourcing FDI of 100 per cent is permitted provided such investments satisfy certain prerequisites. NRI's And OCB's They can have direct investment in industry, trade and infrastructure Up to 100 per cent equity is allowed in the following sectors

• • • • • • • • • • • • •

34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries Reserved for Small Scale Sector

fixed and floating exchange rates

In a fixed exchange rate system, the government (or the central bank acting on the government's behalf) intervenes in the currency market so that the exchange rate stays close to an exchange rate target. When Britain joined the European Exchange Rate Mechanism in October 1990, we fixed sterling against other European currencies. The pound, for example, was permitted to vary against the German Mark by only 6% either side of a central target of DM2.95. Britain left the ERM in September 1992 when the pound came under sustained selling pressure, and the authorities could no longer justify very high interest rates to maintain the pound's value when the domestic economy was already suffering from a deep recession. Since autumn 1992, Britain has adopted a floating exchange rate system. The Bank of England does not actively intervene in the currency markets to achieve a desired exchange rate level. In contrast, the twelve members of the Single Currency agreed to fully fix their currencies against each other in January 1999. In January 2002, twelve exchange rates become one when the Euro enters common circulation throughout the Euro Zone. EXCHANGE RATE SYSTEMS FOR THE UK SINCE 1944 1944-72: Fixed Exchange Rates Occasional devaluations against dollar (1948 and 1967) 1972-87: Managed Floating 1987-88: Shadowing the DM (Under Chancellor Nigel Lawson) 1988-90: Managed Floating (prelude to ERM entry) 1990-92: Semi-Fixed Exchange Rates 1992-01: Floating Exchange Rate Bank of England has not intervened in the currency markets Sterling has been market determined for the last nine years EXCHANGE RATES UNDER FIXED AND FLOATING REGIMES With floating exchange rates, changes in market demand and market supply of a currency cause a change in value. In the diagram below we see the effects of a rise in the demand for sterling (perhaps caused by a rise in exports or an increase in the speculative demand for sterling). This causes an appreciation in the value of the pound.

Changes in currency supply also have an effect. In the diagram below there is an increase in currency supply (S1-S2) which puts downward pressure on the market value of the exchange rate.

A currency can operate under one of four main types of exchange rate system FREE FLOATING • • • • • • Value of the currency is determined solely by market demand for and supply of the currency in the foreign exchange market. Trade flows and capital flows are the main factors affecting the exchange rate In the long run it is the macro economic performance of the economy (including trends in competitiveness) that drives the value of the currency No pre-determined official target for the exchange rate is set by the Government. The government and/or monetary authorities can set interest rates for domestic economic purposes rather than to achieve a given exchange rate target It is rare for pure free floating exchange rates to exist - most governments at one time or another seek to "manage" the value of their currency through changes in interest rates and other controls UK sterling has floated on the foreign exchange markets since the UK suspended membership of the ERM in September 1992

MANAGED FLOATING EXCHANGE RATES • • • Value of the pound determined by market demand for and supply of the currency with no pre-determined target for the exchange rate is set by the Government Governments normally engage in managed floating if not part of a fixed exchange rate system. Policy pursued from 1973-90 and since the ERM suspension from 1993-1998

SEMI-FIXED EXCHANGE RATES • • Exchange rate is given a specific target Currency can move between permitted bands of fluctuation

• • • •

Exchange rate is dominant target of economic policy-making (interest rates are set to meet the target) Bank of England may have to intervene to maintain the value of the currency within the set targets Re-valuations possible but seen as last resort October 1990 - September 1992 during period of ERM membership

FULLY-FIXED EXCHANGE RATES • • • • • • Commitment to a single fixed exchange rate No permitted fluctuations from the central rate Achieves exchange rate stability but perhaps at the expense of domestic economic stability Bretton-Woods System 1944-1972 where currencies were tied to the US dollar Gold Standard in the inter-war years - currencies linked with gold Countries joining EMU in 1999 have fixed their exchange rates until the year 2002

Advantages of floating exchange rates Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit. If an economy has a large deficit, there is a net outflow of currency from the country. This puts downward pressure on the exchange rate and if a depreciation occurs, the relative price of exports in overseas markets falls (making exports more competitive) whilst the relative price of imports in the home markets goes up (making imports appear more expensive). This should help reduce the overall deficit in the balance of trade provided that the price elasticity of demand for exports and the price elasticity of demand for imports is sufficiently high. A second key advantage of floating exchange rates is that it gives the government / monetary authorities flexibility in determining interest rates. This is because interest rates do not have to be set to keep the value of the exchange rate within pre-determined bands. For example when the UK came out of the Exchange Rate Mechanism in September 1992, this allowed a sharp cut in interest rates which helped to drag the economy out of a prolonged recession.

Advantages of Fixed Exchange Rates (disadvantages of floating rates) Fixed rates provide greater certainty for exporters and importers and under normally circumstances there is less speculative activity - although this depends on whether the dealers in the foreign exchange markets regard a given fixed exchange rate as appropriate and credible. Sterling came under intensive speculative attack in the autumn of 1992 because the markets perceived it to be overvalued and ripe for a devaluation. Fixed exchange rates can exert a strong discipline on domestic firms and employees to keep their costs under control in order to remain competitive in international markets. This helps the government maintain low inflation - which in the long run should bring interest rates down and stimulate increased trade and investment. Countries with different exchange rate regimes

Countries with fixed exchange rates often impose tight controls on capital flows to and from their economy. This helps the government or the central bank to limit inflows and outflows of currency that might destabilise the fixed exchange rate target, The Chinese Renminbi is essentially fixed at 8.28 renminbi to the US dollar. Currency transactions involving trade in goods and services are allowed full currency convertibility. But capital account transactions are tightly controlled by the State Administration of Foreign Exchange. The Hungarians have a semi-fixed exchange rate against the Euro with the forint allowed to move 2.5% above and below a central rate against the Euro. The Hungarian central bank must give permission for overseas portfolio investments on a case by case basis. The Russian rouble is in a managed floating system but there is a 1% tax on purchases of hard currency. In contrast, the Argentinian peso is pegged to the US dollar at parity ($1 = 1 peso) but international trade transactions (involving current and capital flows) are not subject to stringent government or central bank control.
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Discuss the arguments for and against floating exchange rates and explain how the monetary authorities act to maintain exchange rates within certain limits.

The exchange rate in a free market is the result of the interaction of demand and supply. Demand for a particular currency is, from tangible view point, the export of the country, because people want to buy English exports need pounds to do so. On the other hand the supply for pounds is determined by the amount that England imports as the England importers need to change their pounds to other currencies to do so. Where the two intersect the equilibrium is formed:

In the current example the equilibrium occurs at a rate of 1.60 where q units (e.g. pounds) are demanded and q units are supplied. The same type of analysis applies to every currency. The demand for sterling is also the supply of dollars if the pounds are exchanged to dollars etc. This is a very simplified view of real life, because only demand for tangible reasons is included (trade, tourism etc.) In actual life the changing of currencies because of these reasons only account for 5% of the total volume of the trade. The currencies against which the rate is measured can change too. That is why a system of trade weighted indices was set up to take account of all the changes. The other 95% comes partly from the different interest rates in different countries and from the speculation with currencies. If interest rates are high, people want to hold their money in the banks in this country. That increases demand for that particular currency. Look at diagram over the page:

As seen in the diagram, the new equilibrium is reached at E1 and the exchange rate has risen. Sometimes the changes are more complex, because the supply of pounds can contract at the same time, because people want to hold their money in the home country (high interest rates). That will increase the exchange rate even further. Rising or lowering the exchange rates is widely used by governments world-wide to maintain the exchange rate within a desired range. A government can do that by buying or selling its fixed interest rate securities. If it sells them, the price will fall and so the relative interest rate will rise and vice-versa. The government can also just set its rate (usually the rate by which it is prepared to lend to LDMA as a last resort) as the commercial banks in the UK will set the same interest rate as the Bank. Other rate determining reasons are the inflation differences, differences in invisible trade, capital movements between countries, speculation with currencies, government activities (supporting the pound by buying it up) and the confidence in the future (the anticipation of future exchange rates). They all have similar effects on demand as interest rates do. Floating exchange rates were only first introduced in the 1970s. When the exchange rate is not allowed to move freely based on demand and supply, that is called fixed exchange rates. A government can base the exchange rate on the gold standard (largely abandoned nowadays) or it can peg its currency (fix the exchange rate to another currency, e.g. 1DEM=8 Estonian crowns). The peg is called an adjustable peg, if the rate is fixed, but if it can vary a bit. Another method of stabilising the rate is by exchange controls. This means putting restrictions on changing currencies into effect (used by USSR for many years in the past). Both floating and fixed exchange rates have numerous advantages and disadvantages.

The advantages of floating rates include automatic stabilisation of the exchange rate. It has been argued that the fixed rate system could not have coped with the huge fluctuations of the 1970s. A Fixed exchange rate places constraints upon internal policies that floating exchange rate does not. For example, a country with balance of payments problems, if it has adopted a fixed exchange rate policy, can only cure its economy by deflating it, which causes unemployment, whereas floating exchange rates will "cure" the problems automatically in the short run, by lowering the rate. This again has several problems the from moral point of view, because every country wants to (in non-economic terms) keep its currency "strong", or more economically, to boost it's exports. The presence of crisis that occur when a fixed rate system is badly managed will be eliminated with the floating rate system. These crises happen specially when pressure is put on a currency to devaluate or revaluate it and a government has to "fight" with it. Floating rates offer greater flexibility of trade, especially after the oil price have changed and extraction of the North Sea oil has been started. Floating rates also avoid the "import" of inflation as the rate will change accordingly, whereas with fixed rates the country would face inflation because of the rising import prices. High reserves are needed with fixed exchange rates to support the rate. Governments usually buy up the excess supply or sell to the excess demand or just restrict the amount a person can change. Big reserves are also required if a government wishes to maintain the rate , although, because of the relative inelastic supply / demand, not as much as might be predicted:

In this example the fixed rate is taken to be 120 (price floor) and equilibrium is E. When demand decreases to DD1. The government buys up the excess E1A to maintain the rate. The reverse applies when the demand falls to DD2 then the government has to sell E2B to maintain the rate. The Exchange Equalisation Account was set up for this purpose in 1932 and is controlled by the Bank. Nearly all governments operate a similar system and it is called a "dirty float" system. The Equalisation Account has lost great sums of money in 1970s by defending an unrealistic exchange rate. So management of the currency can still exist even in the floating exchange rate system. There are also some disadvantages with the floating exchange rate. The main one is the uncertainty involved in the future. Firms and banks have overcome this by setting up a forward system. That means contracts with promises to change a certain amount of money with a certain exchange rate after a certain period. Lack of investment is also associated with a floating exchange rate as firms can not be sure about their future profits. Large scale speculation will also take place if the exchange rate changes as it has been a quick way to make profits. Also, if interest rates are changed,

the "hot money" will be moved to that country. This distorts the balance of trade. A country with a fixed exchange rate seems to have greater discipline in its economy. Many organisations were set up to reduce the floating of the currencies. These include the European Monetary System, the International Monetary fund and some others. The Plaza agreement and the Louvre accord attempted to limit the fluctuations in G5 and G7 countries respectively. Although the greater insurance that the fixed exchange rates give to international trade and investors, it is argued that it is too expensive to maintain and floating exchange rates have generally been adopted with governments intervening often to diminish the fluctuations.