Author: B2B

Issues related to Minimum Support Price in India

Minimum Support Price

Definition: MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the government purchases crops from the farmers. MSP is the guaranteed ‘minimum floor price’ that farmer must get from the government in case the market price of the crops falls below the MSP. The Rationale behind MSP is to support the farmer from excess fall in the crop prices.

The MSP for various crops is announced by the central government at the beginning of every crop seasons on the recommendation of CACP. The MSP is a fixed assured price that farmers gets in case price falls heavily due to a bumper harvest. MSP in a sense work as an insurance policy for the farmers to save them from price falls.

The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In the event of glut and bumper harvest, when market prices fall below the announced MSP, the government through its agencies buys the entire stock offered by the farmers at the MSP.

MSP is currently announced for 24 commodities including

• Seven cereals: Paddy, Wheat, Jowar, Bajra, Barley, Maize and Ragi.
• Five Pulses: Gram, Arhar, Moong, Urad and Lentil.
• Eight Oilseeds: Groundnut, Rapseed/Mustard, Toria, Soyabean, Sunflower, Sesamum, Niger seed and Safflower seed.
• Cash Crops: Raw Cotton, Copra, Raw Jute and Virginia Flu Curved Tobacco.

MSP: Historical Context

The system of MSP in India was started in the mid 1960’s amid food shortages. The idea was to create a favourable environment and incentivise farmers to increase production by adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.

The adoption of the MSP Policy in India was mainly due to food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. The policy, in general, was directed towards ensuring reasonable food prices for consumers by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system.

In order to provide farmers an assured price for their crops and motivating them to adopt advanced technology to increase production the Agricultural Price Commission was setup in the year 1965 (Renamed as Commission for Agriculture Cost and Price in 1985) on the recommendation of LK JHA Committee. The role of Agriculture Price Commission is to advise government on agriculture price policy.

Calculation of MSP

The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors including the supply and demand factors of each crop.

The Initial Success of the MSP Policy

The drawbacks of the MSP Policy

The Current situation of MSP

The most important goal of any long-term agriculture development policy in India should be to promote agriculture growth along with regional equity and natural resource sustainability. The regional equity and resource sustainability is a precondition for achieving nutritional security and balanced production. However, the system of the MSP has failed to achieve this objective of sustainability.

In order to make MSP relevant and efficient, the government have to revamp the policy.

1. MSP is announced for 24 commodities after which starts the operational part of procurement of the commodities. The procurements are made at the MSP price and government has to ensure that farmers do not get the price below MSP. However, it has been found that there exists no mechanism on the ground that ensures that farmers are paid the MSP. It has been noticed that many times farmers are forced to make distress sale at a price below the MSP.
2. For instance, it does not matter for producer of pulses or oilseeds anywhere in the country or for paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a majority of the other states whether the CACP recommends Rs 500 or Rs 5,000 per quintal for their crop as there is no enforcement of the MSP in these cases. In these cases, the long exercises and recommendations made by the CACP remain only on paper.
3. To make MSPs relevant to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs and ensuring that MSPs are effectively implemented where they are meant to be implemented.
4. The CACP must consider both Demand and Supply factors while deciding the MSP. For instance, CACP main criteria in deciding the MSP is to take into account cost of production. The CACP completely ignores the demand side factors. When the demand for commodities are falling, and if at that time MSP is kept high, then it will lead to excess supplies and increase in government buffers stock which will be kept idle and will get wasted. In all such situation, it is important that MSP should be derived based on demand and supply factors.
5. Due to distorted MSP, inefficiency builds in into the system, and the farmers do not bother if growing a particular commodity on land that is unsuitable for its production will raise its cost and make land non-productive in the long run.

For instance, this is exactly what has happened in the case of extension of rice cultivation to the semi-arid regions and sandy soils in states like Punjab and Haryana, which is creating a host of environmental and natural resources problems in addition.

1. Fixing MSP for political reasons and under the pressure of the farmer leaders leads to a total neglect of societies preference for commodities. It also leads to serious imbalances where what is being demanded is not being produced and what is not being demanded is being produced in the economy. It would also require the government to buy produce all the time and everywhere if the MSP ignores demand-side factors.
2. Everyone in India including political leaders are convinced that the agrarian crisis and farmer distress are mainly because of low levels of MSP. The quick solution reached by them is therefore to increase the MSP. However, a comprehensive analysis and correct understanding of agricultural situation reveal that the problem lies elsewhere.
3. The Indian agriculture suffers from twin problems of lack of viability of practising agriculture due to the small and marginal size of land holdings and high volatility in farm sector due to monsoon failures and lack of irrigation.
4. The small size of land holdings, low productivity, increasing production costs, shrinking employment opportunities outside agriculture, and declining growth rate in agriculture are all major serious issues which cannot be simply resolved by increasing the MSP.
5. For instance, according to the 70th round survey of the NSSO (2014), the estimated number of agricultural households (AHHs) in India is 90.2 million, who constitute 57.8% of the total estimated rural households (156.14 million). Clearly, 42.2% of rural households (RHHs) are without any agricultural land.

Among the AHHs, 2.65% have only 0.01 hectares (ha) of land and are simply notional AHHs. Another 31.89% AHHs have land between 0.1 ha and 0.4 ha, and 34.9% have land between 0.41 ha and 1 ha. These three categories of AHHs account for 69.44% and are classified as marginal farmers. If we add small farmers (17.14%), the proportion of marginal and small farmers comes out to be 86.58% of the total.

The average size of the marginal holdings is only 0.41 ha (one acre), and that of smallholdings is 1.4 ha, much lower than the upper size-class limit of 2 ha. Given their economically unviable holding size, and small quantities of marketable surplus, there will be a marginal increase in the total net income of these farmers from agriculture even if they are given the higher MSP of over and above 50% of crops of production.

The relative economic conditions of the agricultural workforce (cultivators as well as labourers) have gone poorer vis-à-vis their counterparts in the non-agricultural sectors. Taking into account a large number of underemployed and those disguised unemployed workers in agriculture, MSP alone is not going to address the agrarian crisis and farmers’ distress, especially in the case of marginal and small AHHs, who account for 87% of AHHs.

If not MSP? Then where lies the problem?

Looking Beyond the MSP

The long-term fundamental solutions that has the potential to solve the agrarian crisis in India lies in the domain of.

An Alternative to MSP: Price Deficiency Payment System

The increase in the MSP irrespective of cost consideration is a second-best alternative to make farming viable. Moreover, to make MSPs effective to the country’s present situation requires changes in the criterion used by the CACP to arrive at MSPs.

The CACP mainly considers the cost of production as the main criterion to decide the level of MSPs. This is justified when there is a situation of scarcity and increasing the food supply is the primary objective. However, the country is now facing a situation where the demand is falling short of supply, and there is an increase in surplus. In the present context, it is highly recommended that the demand side factors should get primacy in determining the MSP.

There are several other problems related to cost of production used as a basis for MSPs. Wastefulness gets in-built into production process, and farmers do not have to bother if growing a particular crop on land unsuitable for its cultivation would raise cost of production

Second, fixing MSPs based on the cost of production totally neglects changes in income and society’s preference for a commodity which adversely impacts the functioning of the markets and price discovery. It also causes serious imbalances in what is being produced and what is required or demanded.

Rather than debating on the cost criterion, it is much important to ensure that the farmers do not undertake distress sale of their produce. This would require some mechanism on the ground to see that farmers are not forced to sell their produce below the MSP.

However, there exists no such mechanism on the ground except for few crops like rice and wheat in some states and in the case of sugarcane and cotton in states of Maharashtra and UP. Unfortunately, nobody seems to have raised this issue in public that implementation of the MSP is more important.

The Swaminathan Commission

The National Commission on Farmer’s headed by Dr M S Swaminathan highlighted that the main reasons of agrarian agony in India were non implementation of land reforms, water scarcity, lack of irrigation, technology exhaustion, inadequate access and availability of institutional source of finance, dependence on money lenders, weak market infrastructure, lack of opportunities for assured and remunerative marketing, low investment in research and development, low levels of education and skill, and lack of employability of surplus workforce outside agriculture.

The Swaminathan commission had recommended serval path-breaking measure to resolve agrarian distress in India. These recommendations are of a more vital nature and in all likelihood will provide a long-term solution to the agrarian crisis and farmers’ distress. The National Commission on Farmer’s recommendations are mainly in the domain of land reforms, irrigation, productivity, credit, insurance, food security, bio-resources, and public investment in agriculture, human development, and the rural nonfarm sector. The Swaminathan commission has thus provided solutions to the agrarian crisis and farmers’ distress both in the domain of the agriculture sector as well as outside agriculture sector.

The Alternative

The alternative is to go for ‘deficiency price payment’ without requiring the government to purchase undesirable quantities and undesirable commodities. Deficiency price payment must be part of the difference between the actual price received by farmers and the MSP. In order to ensure that resale of produce does not take place the size of deficiency payment should be kept less than the charges involved in the first sale of produce like mandi fee, auction, labour charges, etc.

The Madhya Pradesh government has launched a ‘Price Deficiency Payment’ schemes for the farmers called ‘Bhavantar Bhugtan Yojana’ (BBY) in October 2017. The BBY currently applies eight Kharif crops; soybean, maize, urad, tur, lentil, moong, groundnut, ramtil. Under BBY, the state government credits the difference between MSP and the modal price (average price prevailing in the market) directly into the bank accounts of the beneficiaries. The farmers have to first register on a BBY portal, after which they are asked to bring their produce to the mandis at a time specified by the government. The quantity of the produce qualified for the price deficiency payment is determined by the state government on the basis of average productivity and area under cultivation for the crop.

However, the scheme has very limited success, and the scheme is not inclusive as the benefits of the BBY is limited to small number of farmers who registered under the portal. For example, only 32 percent of urad production in Madhya Pradesh got the yojana’s benefit despite the fact that ASP of urad was 42 percent below its MSP. In other words, 68 percent of urad production was sold at prices below MSP, without any compensation under BBY. In the case of soybean, the state’s prime Kharif crop, the percentage of production benefiting from this scheme is even lower — only 18.5 percent, despite its ASP being 12 percent below the MSP. And for maize, groundnut and moong, the coverage is even poorer.  

Moreover, the farmers who are not registered under the portal have to suffer big losses because traders are suppressing the market. To conclude, BBY is not inclusive and covers only 25 percent of the farmer’s losses and is prone to manipulation by the traders.

A similar Price Deficiency scheme is launched by the Government of Haryana for onion, tomatoes, potatoes and cauliflower and the Government of Telangana (on a pilot basis) where the farmers are given investment support for their working capital needs.   

In addition to these expense, there may be further distortions. The Marketed surplus for all the crops is likely to increase since farmers may find it more profitable to sell all the produce in the mandis. The BBY scheme window is likely to be open for only a couple of months and farmers will have to sell their produce within the short time frame to avail compensation. This will eventually led to decline in the market price in that period because of large supply. The scheme will be worse for the unregistered small and marginal farmers because they will be forced to sell their produce at lower prices at a lower price and will not be compensated for their loses. The scheme will give more power to the lower bureaucracy and traders as all the paper work for farmer registration and sale of produce in the mandi will go through them. Therefore, the scheme may end up helping trader more than the needy farmers.  

The government of Telangana ‘Input Support Scheme’ is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops.

In contrast, the Government of Telangana and Government of Karnataka has plan to launch the ‘Input/Income Support Scheme’ on per hectare basis for both the Kharif and Rabi season in 2018-19. The scheme is more inclusive since it does not require farmers to register their areas and crops. The scheme main aim is to save the farmer from the moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does not distort the prices of the crops. The Telangana government scheme will support investment at Rs 4000 per acre per farmer for the purchase of inputs like seeds; Fertilizer; Pesticides etc. The amount will be directly paid into the bank accounts of the farmers before the beginning of the sowing season. On similar lines, Karnataka Government also plans to implement DBT of Rs 5000 per hectre for dryland farmers in Kharif 2018.

Pricing policy for sugarcane

The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis. As this sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane. A new clause ‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an additional factor for working out FRP, and this was made effective from the 2009-10 sugar season.

Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control Order, which are

• the cost of production of sugarcane;
• the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
• the availability of sugar to the consumers at a fair price;
• the price of sugar;
• the recovery rate of sugar from sugarcane;
• the realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December 2008) and;
• Reasonable margins for growers of sugarcane on account of risk and profits (inserted in October 2009).

States also announce a price called the State Advisory Price (SAP), which is usually higher than the SMP.

Other Major Support Schemes of Government

Market Intervention Scheme

Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the request of State Governments for procurement of perishable and horticultural commodities in the event of fall in market prices.

The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the ruling rates over the previous normal year. Proposal of MIS is approved on the specific request of State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.

Under MIS, funds are not allocated to the States. Instead, the central government share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.

Price Supports Scheme (PSS)

The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds, pulses and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price (MSP) declared by the government.

NAFED undertakes procurement as and when prices fall below the MSP.

Procurement under PSS is continued till prices stabilize at or above the MSP. Losses, if any incurred by NAFED in undertaking MSP operations are reimbursed by the central Government. Profit, if any, earned in undertaking MSP operations is credited to the central government.

BUFFER STOCK

Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a policy of maintaining a minimum reserve of foodgrains (only for wheat and rice) so that food is available throughout the country at affordable prices round the year.

The main supply from the government’s buffer stock goes to the public distribution system (now TPDS) and at times goes to the open market to check the rising prices if needed.

Public sector food grain stocks are significant support of India’s food policy and food security. They have three important societal goals.

1. To provide space for effective implementation of minimum support price for rice and wheat through procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any other exigency.
3. As a source of supply for public distribution system and various other schemes to sustain food and nutrition security particularly of economically weaker sections.

The Food Corporation of India is the key agency for procurement, storage and distribution of food grains. In addition to the requirements of wheat and rice under the targeted public distribution system, the Central Pool is essential to have sufficient stocks of these in order to meet any emergencies such as drought/failures of the crop, as well as to allow open market intervention if price increases.

Major objectives of Buffer Stocks:

However, the Buffer Stock policy has raised the questions over the storage capability of the FCI and contaminated grains in the open godowns in the country. The issue of storage had also been highlighted by the Supreme Court, which recommended that government should allocate the grains free to the poor section of society. The problem is huge, but the government does not have an immediate solution. The FCI has to increase the storage capacity to accommodate the record procurement.

Current Buffer Stock Policy of Government:

1. The current buffer norms were reviewed in January 2015. According to the new norms, the central pool should have 41.1 million tonnes of rice and wheat on July 1 and 30.7 million tonnes on October 1 every year. These limits were 32 million tonnes and 21 million tonnes earlier.
2. The stocking norms for the quarters beginning January’1 and April’1 have been revised only slightly. Main drivers for increased buffer stocks were increased offtake from the targeted public distribution system and also the enactment of National Food Security Act.
3. It was observed that Food Corporation of India buys almost one-third of the total rice and wheat produced in the country at minimum support prices. It does imply that denying to any farmer who wants to sell his produce at MSP. But then it also needs to maintain an excessive, uncontrollable and monetarily troublesome food inventory.
4. Previously, once the buffer norms were met, cabinet approval was needed to sell any part of it in the open market. But in January 2015, it is revised.
5. The current policy is that Food Ministry is authorized to dispose the surplus stock into open market without seeking cabinet approval. This was a major policy decision, and it was needed to resolve the problem of burdensome inventories at Food Corporation of India and misrepresentation created in the market.
6. The maintenance of a buffer stock is also important to ensure national food security. Stocks mainly of rice and wheat are commonly maintained from year to year at a substantial cost in order to effectively take care of variations in domestic food grain production. These variations occur quite regularly due to climate and man-made factors.
7. Buffer stocks are created from the domestic food surpluses available in years of high production. They are also built and maintained through imports as and when required. The optimum size of the buffer stocks at any point of time is based on the proposals of expert committees appointed for the purpose by the government from time to time.

In the context of India, buffer stocking of food grains is theoretically seen as a mechanism to deliver strategic food and agricultural domestic support policies, but in terms of its effectiveness to accomplish its objective, there is a growing consent, both domestically and internationally, that the food stocking programme has been not just expensive but also indiscreetly wasteful.

In India, the prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to alter more than prices of manufactured products and services. This is mainly due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.

In order to manage the fluctuations in prices, it needs to operate price support schemes through the use of buffer stocks. Buffer stock schemes stabilize the market price of agricultural products by buying up supplies of the product when harvests are copious and selling stocks of the product onto the market when supplies are low.

Problems with buffer stock schemes:

• Theoretically, buffer stock schemes should be lucrative, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. Nonetheless, they do not often work well in practice. Evidently, perishable items cannot be stored for a long time and can, therefore, be immediately ruled out of buffer stock schemes.
• Cost of buying excess supply can cause a buffer stock scheme to run out of cash. A guaranteed minimum price causes over-production of rice and wheat which has its economic and environmental costs.
• There are also high administrative and storage costs to be considered.
• Open-ended Procurement policy leads to excess procurement and since FCI storage capacity of grains is limited a large amount of grain procured under buffer stock scheme is wasted and rotten.

Issues Related to Government Intervention in India’s Agriculture

Background

Government intervention in food grain marketing in India began in 1960’s. The objective of the intervention is to revamp and incentivise the agriculture sector by using HYV seeds and technological inputs with the ultimate aim of increasing food grain production.

Increasing production alone is not sufficient; the government needs to ensure that increase in production benefits the poor/ consumer. Several measures were undertaken to achieve the twin objective of ensuring food security and raising food production. The key measures were:

• Price assurance to producers using the system of Minimum Support Prices.
• Maintaining Buffer Stocks.
• Distribution of food grains at a reasonable price through a network of fair price shop under Public Distribution System.

The policy of increasing production and providing food security has been helpful to India in several ways.

The biggest disadvantage of such an interventionist policy especially since the beginning of economic reforms of 1991 are:

Why is Government intervention needed in food grain markets?

• To achieve the goal price stability at the time of bumper harvest or below normal production.
• To provide a guaranteed price to producer farmers.
• To supply food to vulnerable and poor sections at a lower price.

The government has been carrying out procurement and storage of food grains in India since 1960’s through mainly two institutions:

• The Commission for Agriculture Cost and Prices (CACP).
• The Food Corporation of India (FCI)

The CACP is entrusted with the task of suggesting the Minimum Support Prices. The FCI is entrusted the task of procurement and storage of food grains.

The critical aspect of this whole intervention is the price at which the produce is procured from farmers. Till the beginning of economic reforms MSPs for food grains were based entirely on domestic factors, mainly on the cost of production of crops. Though CACP was required to take into consideration the international price situation, this aspect was never given any weight while arriving at the level of MSPs.

The situation changed post-1991 when India embraced economic reforms.

Subsidies in Indian Agriculture

Major subsidies on Agricultural Inputs

Power and Irrigation Subsidies:

Subsidies on power and irrigation are provided by the state governments.

Power subsidy is granted on power that is used to draw on groundwater. Accordingly, it is a subsidy to privately drawing and privately-owned means of irrigation. Power subsidy is the difference between the price paid by the farmer for the usage of electricity and the actual cost of generating the electricity.

The sustainability of the power subsidies has come under a lot of stress in recent years mainly because of the bad health of State electricity boards finances. The states like Punjab and Tamil Nadu has provided electricity to the farmers free of cost which has led to its wastage and financial losses to the state electricity boards. Estimates further suggests that the average cost recovered by the SEB’s form the agriculture sector is only 10 percent of the cost of generating electricity.

Irrigation subsidy is the subsidy provided on the usage of government provided canal water. Irrigation subsidy is the difference between operating and maintenance cost of irrigation infrastructure in the state and irrigation charges recovered from farmers. This may work through provisions of public goods such as canals, dams which the government constructs and charges low prices or no prices at all for their use from the farmers. It may also be through cheap private irrigation equipment such as pump sets.

Irrigation subsidies has become unsustainable mainly because the states have failed to device a rational pricing model for the canal water. Estimates suggest that the pricing of the canal water did not cover more than 20 percent of the operational and maintenance expense of the canals.

Fertilizer Subsidies

The fertilizer subsidies are borne by the Central Government. The need for the fertilizer subsidy arises from the nature of fertilizer pricing policy of the government. The fertilizer price policy is being governed with the following two objectives:

• Making fertilizer available to farmers at a low and affordable price to encourage their use and increase production.
• Ensuring fair returns on the investment made by the fertilizer industry to attract more investment in the fertilizer industry.

To fulfil the first objective, the government has been keeping the selling prices of fertilizers static and uniformly low throughout the country.

As far as the second objective is concerned, the government had come up with the policy of “Retention Price Scheme” in the year 1977.

Retention Price Scheme: Under RPS, the government fixes a fair ex-factory retention price for various fertilizers of different manufacturers. The Government pays the manufacturers their cost of production along with a profit margin of 12 percent (post tax) if the factory utilises the 90 percent of the installed capacity.

Calculation of Fertilizer Subsidy

Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined low rate called maximum selling price. The manufacturer was paid an amount called Retention Price which is fixed at a high level so that manufacturer can cover his cost and yet leave a 12 percent profit.

Fertilizer subsidies in the Post Reform Period

1. The mounting burden of subsidies compelled the policy planners to make a serious attempt to reform the fertiliser price policy to rationalise the fertiliser subsidy. As part of economic reforms initiated in the early 1990s, the government decontrolled the import of complex fertilisers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992, and extended a flat-rate concession on these fertilisers. But, urea imports continue to be restricted and canalised.
2. Based on the recommendations of various committees including the High-Powered Fertiliser Pricing Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in a phased manner from April 2003 with an objective to bring transparency, uniformity, and efficiency, and reduce the cost of production. Similarly, based on the recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic and potassic fertilisers has been implemented.

Nutrient Based Subsidy Scheme

The Government of India implemented a Nutrient Based Scheme with effect from 2010. Under the NBS scheme, a fixed subsidy is announced on per KG based on nutrients annually. An additional subsidy is also given for micronutrients.

With the objective of providing quality fertilizer to the farmers depending on the crops and soil requirements, the government has included new grade of complex fertilizers under the NBS scheme.

Under the NBS, manufacturers are allowed to fix the MRP. The farmers pay only 50 percent of the delivered cost of Phosphate (P) and Potash (K) fertilizer and the rest is borne by the government in the form of subsidy.

Neem Coated Urea Policy, 2015:

The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 per cent of their urea production (It can even go upto 100%).Earlier, there was a cap of 35% on this. The government has also allowed manufacturers to charge a small 5 per cent premium on Neem-coated urea

Aim:

Checking the excessive use of urea which is deteriorating the soil health and adversely impacting overall crop yield

Benefits:

• Reduce the subsidy outgo
• Prevent diversion of urea for industrial use

Limitations:

The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P and K

New Urea Policy, 2015:

To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)

Need for the Policy:

• India is world’s third-largest consumer of fertilizers
• India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes

Objectives:

• Maximize indigenous Urea Production to reduce import dependency and reduce subsidy burden on the government
• Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make Urea production environment-friendly. [This will be done via revised specific energy consumption norms]
• Make Urea production plant to adopt the best technology available and become globally competitive
• Rationalization of Subsidy burden
• Timely supply of Urea to farmers at the same MRP

Salient Feature:

• The government will cover the entire cost of natural gas, which is the main feedstock of urea.
• Movement plan for P&K fertilizers has also been freed to reduce monopoly of few companies in a particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidy has been decided to be given on a lump sum basis so that the companies economize on transport. This will help farmers and reduce pressure on the railway network

Proposed Outcome:

• Will cut the yearly subsidy bill
• Increase annual production by 2 million tonnes

Imbalance in Fertilizer Use Consumption

The government interventions in the fertilizer policy over the years has resulted in uneven pricing structure and nutrient usage. The result of this is distorted pattern and application of the fertilizer usage in India. The application of N-Nitrogen, P-Phosphate and K-Potash in the farms is distorted. The ideal ration of N: P: K usage IN India is 4:2:1.

However, due to inaccurate price structure, the N: P: K ratio in India has become 10:3:1 in the year 1997-98. The ratio had further deteriorated in the succeeding years. The current situation is, however, improved a little with N: P: K ratio at 8.2:3.2:1 in the year 2013-14.

The reason for such a gross mismatch is the relative cheap price of the urea (Nitrogen) as compared to the other two nutrients Phosphate and Potash. The imbalance and excessive use of urea had also resulted in the degradation of the environment and soil fertility.

Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that is less than the market price of the seeds.

Credit Subsidy: It is the difference between interest charged from farmers, and actual cost of providing credit, plus other costs such as write-offs bad loans. Availability of credit is a major problem for poor farmers. They are cash strapped and cannot approach the credit market because they do not have the collateral needed for loans. To carry out production activities, they approach the local money lenders.

Taking advantage of the helplessness of the poor farmers the lenders charge exorbitantly high rates of interest. Many times, even the farmers who have some collateral cannot avail loans because banking institutions are largely urban based and many times they do not indulge in agricultural credit operations, which is considered to be risky. (such as collateral requirements) can be relaxed for the poor.

Infrastructural Subsidy: Private efforts to construct basic infrastructure in many areas do not prove to be sufficient to improve agricultural production. Good roads, storage facilities, power, information about the market, transportation to the ports, etc. are vital for carrying out production and sale operations. These facilities are in the domain of public goods, the costs of which are huge and whose benefits accrue to all the cultivators in an area.

No individual farmer will come forward to provide these facilities because of their long gestation period and inherent problems related to revenue collections (no one can be excluded from its benefit on the ground of non-payment). Therefore, the government takes the responsibility of providing these and given the condition of Indian farmers a lower price can be charged from the poorer farmers.

Agriculture Subsidies in India

Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying quality inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all were classified as essential inputs for the development of the agriculture.

To ensure that these inputs are accessible to all farmers at all the times the government decided to subsidised these inputs.

How Subsidy Works

There are two most common ways of subsidising agriculture;

1. Firstly, governments may pay much higher prices for the agricultural products than what the farmers can obtain under free market environment, and
2. Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below at the price that would prevail in an open free trade environment.

• Higher prices for farm products can be provided mainly by insulating the domestic markets from the world economy through a restrictive trade policy.
• On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used in the agricultural sector can be supplied to the farmers at prices which are below the open market prices. The prices of these inputs, therefore, do not reflect their true value, i.e, the real cost of supplying these inputs.
• Of the above mentioned two alternatives, subsidies on inputs are normally preferred because it is believed that benefits of government expenditure can be derived by the farmers only in proportion to their use of inputs. Input subsidisation also avoids raising food and raw material prices, thus avoiding the plausible adverse effect on growing industrial sector or a large mass of poor living in the developing countries.
• However, most often, it is not just a single mechanism but a combination of both higher output prices and lower input prices which has been used to subsidise agriculture with objectives varying from the need to raise domestic production and protect incomes of the farming community.
• India also tinkered with both input and output prices, primarily to protect the poor and/or to stimulate the use of modern inputs.

Rationale for subsidising Agriculture

Negative Impacts of Agriculture Subsidies

However, the issue of agriculture subsidies is not to be examined only from the perspective of fiscal imbalances, but from a much wider perspective of ensuring food and nutritional security for Billions and ensuring that poor and marginal farmers do not get wiped out from the market.

Direct and Indirect Farm Subsidies

The entry of private sector in Agriculture Marketing

1. As a step towards liberalisation of agricultural trade, the union government issued an order on 15 February 2002, which removed licensing requirements and all restrictions on buying, stocking and transporting specified commodities, including wheat, rice, oilseeds and sugar. They were further decontrolled after this.
2. Similarly, the dairy sector was liberalised through various amendments to the Milk and Milk Product Order, beginning in 1992. The main purpose of these changes was to allow increased participation by the private sector in marketing agricultural commodities.
3. In response, private-sector investments in the dairy sector have increased, and it has a healthy competition between cooperatives and the private sector.
4. However, the experience of liberalising grain trade has not been very encouraging. The 2002 change in the ECA attracted big domestic and multinational players like ITC, Cargill, Australian Wheat Board, Britannia, Agricore, Delhi Floor Mills and Adani Enterprises to the grain trade.
5. This came after the government had accumulated excessive foodgrain during 2001-03. But soon, the domestic foodgrain demand and supply balance, particularly for wheat, turned adverse and India had to import more than 6 million tonnes of wheat in 2006-07.

Successful Alternative Models of Agriculture Marketing in India

Some other Innovative Marketing Mechanisms

Some innovative marketing mechanisms have been developed in some states, which involve the direct sale of farm produce to consumers, the sale of produce to buyers without routing it through mandis, and group marketing. Many states have attempted to promote direct contact between producers and consumers by making arrangements for sale at designated places in urban areas.

Farm producers’ organisations (FPOs) of various kinds are emerging as a new model for organised marketing and farm business. Such models include informal farmers’ groups or associations, marketing cooperatives and formal organisations like producers’ companies. Producers can benefit from getting together to sell their produce through economies of scale in the use of transport and other services, and raise their bargaining power in sales transactions, while marketing expenses get distributed. This results in a better share of net returns. Such models are particularly required for small farmers to overcome their constraints of both small size and modest marketable quantities.

Organised Retail Outlets: The direct purchase of farm produce by retailers has been steadily increasing with the growth of organised retailing in India. This is expected to accelerate if the entry of foreign direct investment (FDI) to the field is allowed further.

Food World (of the RPG group) is the leader among organised food retail chains, and there are many more such as Fab Mall, Monday to Sunday, Family Mart, More for You, Heritage, Reliance Fresh and Big Bazaar.

Most food chains are regional in nature, having one or two outlets in the main cities, but no big presence outside their states. Rapid urbanisation, urban population growth, increase in incomes and consumer spending, changing lifestyles, and access to technology have been the important factors behind the expansion of food retail chains in India. Despite several factors favouring organised retail trade, it is still in a nascent stage in the country.

Crop Insurance in India

PM Fasal Bima Yojana: An Analysis

The PMFBY is in line with the concept of the ‘one nation one scheme’ theme. The purpose of PMFBY is to remove the shortcomings of the previous agriculture insurance schemes and incorporates the best features of previous insurance schemes. The PMFBY has replaced the National Agricultural Insurance Scheme and Modified National Agricultural Scheme. The PMFBY has been introduced with the following objectives:

1. To provide insurance coverage and financial support to the farmer in the event of crop failure or any natural calamity
2. To stabilise the income of the farmers
3. To encourage farmers to undertake innovative and modern agricultural practices
4. To ensure flow of credit to farmers

Features of the scheme

1. The Scheme covers all Food & Oilseeds crops and Annual Commercial/Horticultural Crops.
2. The scheme is compulsory for loanee farmers obtaining Crop Loan /KCC account for notified crops. However, it is voluntary for other/non loanee farmers who have insurable interest in the insured crop.
3. The scheme provisions have been simplified for easy understanding and the Maximum Premium payable by the farmers will be 2% for all Kharif Food & Oilseeds crops, 1.5% for Rabi Food & Oilseeds crops and 5% for Annual Commercial/Horticultural Crops.
4. The difference between premium and the rate of insurance charges payable by farmers shall be shared equally by the Centre and State.
5. The Scheme shall be implemented on an ‘Area Approach basis’. The unit of insurance shall be Village/Village Panchayat level for major crops and for other crops it may be a unit of size above the level of Village/Village Panchayat.
6. Claims for wide spread calamities are being calculated on area approach. However, losses due to localised perils (hailstorm, landslide & inundation) and Post-Harvest losses due to specified perils, (cyclone/cyclonic rain & unseasonal rains) shall be assessed at the affected insured field of the individual insured farmer.
7. There is no upper limit on government subsidy. Even if balance premium is 90%, it will be borne by the Government.
8. Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This capping has now been removed and farmers will get claims against full sum insured without any reduction.
9. The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments.

Table 1: A Comparison of PMFBY and other Insurance Schemes

Source: Report of CAG on Performance Audit of Agricultural Crop Insurance Scheme, 2017

Table 2: Challenges faced by the MNAIS/NAIS and PMFBY

Agricultural Marketing in India

Definition:

In a very narrow sense, Agriculture marketing means delivering farm product from farmers to the final consumers. The National Commission on Agriculture defined agricultural marketing as a process which starts with a decision to produce a saleable farm commodity, and it involves all aspects of market structure of system, both functional and institutional, based on technical and economic considerations and includes pre- and post-harvest operations, assembling, grading, storage, transportation and distribution.

The Broader role of Agriculture Marketing in India.

The prerequisites to attain these goals are:

These conditions cannot come up on their own, particularly in a developing country like India. Therefore, agricultural market policies are treated as an integral part of development policies and their functioning has remained an important part of public policy in India.

Government Intervention in Agriculture Markets

Policy interventions in agricultural markets in India have a long history. Till the mid-1960s, it was mainly meant to facilitate the smooth functioning of markets and to keep a check on hoarding activities that were considered unfriendly to producers and/or consumers.

Subsequently, the country opted for a package of direct and indirect interventions in agricultural markets and prices, initially targeted at procuring and distributing wheat and paddy. This gradually expanded to cover several other crops/products and aspects of domestic trade in agriculture.

The present policy framework for intervention in agricultural markets and prices can be broadly grouped under three categories –

(a) regulatory measures;

(b) market infrastructure and institutions; and

(c) agricultural price policy.

Regulatory Measures

Regulatory measures include development and regulation of wholesale markets in Indian; and, adoption of legal instruments for regulation of agriculture marketing and trade.

Agriculture Produce Marketing Committee Regulation (APMC) Act.

All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”. With the exception of Kerala, J & K, and Manipur, all other states have enacted APMC Act.

The working of the APMC

The Act is implemented and enforced by APMCs established under it.

1. It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for sale of farmers’ produce.
2. Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
3. Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers. Market charges, costs, and taxes vary across states and commodities.

The Advantages of APMC Act

Besides improving the way markets functioned, the Acts created an environment that freed producers-sellers from exploitation by traders and mercantile capital.

The APMC act in recent years have developed certain inefficiencies, and the opponents have strongly argued to revamp the act as per the needs of the current situations. The main argument for the changes are:

Because of all this, the Inter-Ministerial Task Force on Agricultural Marketing Reforms (2002) recommended that the APMC Acts be amended to allow for direct marketing and the establishment of agricultural markets in the private and cooperative sectors.

The rationale behind direct marketing is that farmers should have the option to sell their produce directly to agribusiness firms, such as processors or bulk buyers, at a lower transaction cost and in the quality/form required by the buyers.

On the recommendation of the committee, the government had come up with a Model APMC Act in 2003.

Model APMC Act, 2003

1. Under the model APMC Act, the private sector and cooperatives can be licensed to set up markets.
2. The model act also provides for contract farming and direct marketing by the private players.
3. Except for few states, all the States and UTs have either fully or partly adopted the model APMC Act.
4. As a result of the model act, the proportion of private trade and contract farming had increased manifold in some part of the country.
5. However, The Model Act, so far, has not succeeded in persuading the private sector or cooperatives to set up agricultural marketing infrastructure as an alternative to the state-owned mandi system.

How the APMC act started benefiting Middleman

Initial situation: When the APMC Act was enacted by various states in the mid-1960s, the country was facing a serious food shortage and desperately seeking to achieve a breakthrough in food production. It was strongly felt that it would not be possible to attain and sustain food security without incentivising farmers to adopt new technology and make investments in modern inputs.

Therefore, high priority was attached to enabling farmers to realise a reasonable price for their produce by eradicating malpractices from markets, protecting them from exploitation by middlemen, and creating a competitive pricing environment. Simultaneously, the hold traders and commission agents had over them by providing credit was diluted by increasing the supply of institutional credit. This, along with technology-led output growth, resulted in increased farm incomes, making farmers less dependent on the trading class for credit and cash requirements. It also gave farmers the freedom to choose markets and buyers for their produce.

The Green Revolution Era: The spread and success of the green revolution during the 1970s and 1980s led to an increase in the political power of the farming class and their clout in policymaking. This was reflected in the creation and strengthening of farmer-friendly institutions and a policy environment favourable to farmers.

Marketing institutions like market committees, state-level agricultural marketing boards and many others in the public and cooperative sectors served the interests of the farming community.

The entry of Middlemen’s Post 1991: Over time, as the country moved closer to food self-sufficiency, public policy began losing its focus. The marketing system and marketing institutions were plagued by inefficiencies, bureaucratic control, and politicisation.

The growth in market facilities did not keep pace with the growth in market arrivals, forcing producers to seek the help of middlemen in the market, which, in turn, led to dependence on them.

There was also a reversal of the credit situation after 1991, making farmers more dependent on commission agents and traders for loans. The trading class quickly regained its marketing power over farmers by meeting their credit requirements with interlocked transactions, robbing producers of the freedom to decide where they would sell and whom they would sell to. Taking advantage of the lax attitude of state governments towards marketing, the trading class consolidated their power in mandis.

Middlemen successfully turned marketing policies to their benefit, dictating terms to producers, and thwarting modern capital from entering agricultural marketing.

Some examples of this are:

1. increasing the commission rates of arhtiyas without any justification;
2. Rejecting direct payment to producers, which would bypass commission agents; and
3. Determining prices through non-transparent methods.

The various problems facing the agricultural marketing system were summarised by the Twelfth Plan Working Group on Agricultural Marketing (Planning Commission 2011).

• Too many intermediaries, resulting in high cost of goods and services;
• Inadequate infrastructure for storage, sorting, grading, and post-harvest management;
• Private sector unwilling to invest in logistics or infrastructure under prevailing conditions;
• Price-setting mechanism not transparent;
• Ill-equipped and untrained mandi staff;
• Market information not easily accessible; and
• Essential Commodities Act (ECA) impedes free movement, storage and transport of produce.

Laws regulating agriculture marketing in India

Essential Commodity Act: Almost all agricultural commodities, such as cereals, pulses, edible oilseeds, oilcakes, edible oils, raw cotton, sugar, gur, and jute, are included in the list of essential commodities.

The Act provides for instruments like licences, permits, regulations and orders for

(a) price control,

(b) storage,

(c) stocking limits,

(d) movement of produce,

(e) distribution,

(f) disposal,

(g) sale,

(h) compulsory purchase by the government, and

(i) sale (levy) to the government.

Agriculture Produce Grading and Marketing Act: The act defines standards of quality and prescribes grade specifications for a number of products. The Act authorises an agricultural marketing adviser in each state to grant a certificate of authorisation to persons or corporate bodies who agree to grade agricultural produces as prescribed by it.

There are AGMARK grade specifications for 212 agricultural products, but the use and awareness of it have remained low despite a better understanding of quality attributes among consumers.

Cropping Systems/ Combinations 

Monocropping: Example Planting Wheat year after year in the same field. Monocropping is when the field is used to grow only one crop season after season.

Disadvantages: it is difficult to maintain cover on the soil; it encourages pests, diseases and weeds; and it can reduce the soil fertility and damage the soil structure.

Crop Rotation: Example Planting maize one year, and beans the next. Crop Rotation means changing the type of crops grown in the field each season or each year (or changing from crops to fallow).

Crop rotation is a key principle of agriculture conservation because it improves the soil structure and fertility, and because it helps control weeds, pests and diseases.

Sequential Cropping: Example- Planting maize in the long rains, then beans during the short rains. Sequential Cropping involves growing two crops in the same field, one after the other in the same year.

In some places, the rainy season is long enough to grow two crops: either two main crops, or one main crop followed by a cover crop.

Growing Crops two crops may also be possible if there are two rainy seasons, or if there is enough moisture left in the soil to grow a second crop.

Intercropping: Examples- Planting alternating rows of maize and beans, or growing a cover crop in between the cereal rows. Intercropping means growing two or more crops in the same field at the same time.

Mixed Intercropping: Distribution of the seeds of both the crops, or dibbling the seeds without any row arrangement. This process is called mixed intercropping. It is easy to do but makes weeding, fertilization and harvesting difficult. Individual plants may compete with each other because they are too close together.

Planting the main crop in rows and then spreading the seeds of the intercrop (such as a cover crop).

Row Intercropping: Planting both the main crop and the intercrop in rows. This is called row intercropping. The rows make weeding and harvesting easier than with mixed intercropping.

Stir Cropping: Example Planting alternating strips of maize, soybean and finger millet. Stir Cropping involves planting broad strips of several crops in the field. Each strip is 3–9 m wide. On slopes, the strips can be laid out along the contour to prevent erosion. The next year, the farmer can rotate crops by planting each strip with a different crop.

Advantages:

• It produces a variety of crops, the legume improves the soil fertility, and rotation helps reduce pest and weed problems.
• The residues from one strip can be used as soil cover for neighbouring strips.
• At the same time, strip cropping avoids some of the disadvantages of intercropping: managing the single crop within the strip is easy, and competition between the crops is reduced.

Relay Cropping: Example- Planting maize, then sowing beans between the maize rows four weeks later.

Relay Cropping the process of growing one crop, then planting another crop (usually a cover crop) in the same field before harvesting the first. This helps avoid competition between the main crop and the intercrop. It also uses the field for a longer time, since the cover crop usually continues to grow after the main crop is harvested.

Cropping Pattern in India

Back to Basics: Cropping Pattern mean the proportion of area under different crops at a point of time, changes in this distribution overtime and factors determining these changes.

Cropping pattern in India is determined mainly by rainfall, climate, temperature and soil type.

Technology also plays a pivotal role in determining crop pattern. Example, the adoption of High Yield Varieties Seeds along with fertilisers in the mid 1960’s in the regions of Punjab, Haryana and Western Uttar Pradesh increased wheat production significantly.

The multiplicity of cropping systems has been one of the main features of Indian agriculture. This may be attributed to following two major factors:

1. Rainfed agriculture still accounts for over 92.8 million hectares or 65 percent of the cropped area. A large diversity of cropping systems exists under rainfed and dryland areas with an overriding practice of intercropping, due to greater risks involved in cultivating larger area under a particular crop.
2. Due to prevailing socio-economic situations (such as; dependency of large population on agriculture, small land-holding size, very high population pressure on land resource etc.), improving household food security has been an issue of supreme importance to many million farmers of India, who constitute 56.15 million marginal (<1.0 hectare), 17.92 million small (1.0-2.0 hectare) and 13.25 million semi-medium (2.0-4.0 hectare) farm holdings, making together 90 percent of 97.15 million operational holdings.
3. An important consequence of this has been that crop production in India remained to be considered, by and large, a subsistence rather than commercial activity.

Factors Determining Cropping Pattern in India

Cropping Pattern in India

30 most important cropping patterns in India

Specific Issues Related to the Cropping Pattern

Horticulture Crops in India

India has made a good place for itself on the Horticulture Map of the World with a total annual production of horticultural crops touching over 1490 million tones during 1999-00.

The horticultural crops cover about 9 percent of the total area contributing about 24.5 percent of the gross agricultural output in the country. However, the productivity of fruits and vegetables grown in the country is low as compared to developed countries.

Vegetable Crops

Vegetable crops in India are grown from the sea level to the snowline. The entire country can broadly be divided into six vegetable growing zones:

Low productivity is the main feature of vegetable cultivation in India as farm yields of most of the vegetables in India are much lower than the average yield of the world and developed countries.

The productivity gap is more conspicuous in tomato, cabbage, onion, chilli and peas. The preponderance of hybrid varieties and protected cultivation are mainly responsible for high productivity in the developed countries.

Constraints in vegetable production:

1. Lack of planning in Production

2. Non-availability of seeds of improved varieties.

3. High cost of basic production elements

4. Inadequate plant protection measures and non-availability of resistant varieties.

5. Weak marketing facilities

6. Transportation limits

7. Post-harvest losses

8. Abiotic stresses.

Indian Agriculture: A brief Outlook

1. Agriculture accounted for 14% of India’s GDP in 2016-17 and provided employment to more than half a billion people. The share of Agriculture in employment is close to 54% as on 2016-17.
2. Indian Agriculture is dominated by the small-scale farming and is characterised by low productivity.
3. The average size of land holding in Indian Agriculture is less than 2 hectares.
4. The low land holding size means that most of the Indian farmer practices subsistence farming, where they consume the majority of what they produce and sell whatever is left.
5. The Indian Agriculture remains the largest employer of the female labour force in India. The share of women labour force out of total women labour force employed in agriculture is close to 65%.
6. The Indian agriculture suffers from the twin problem of low productivity and excess workforce employed in it. Due to which the per capita productivity of workforce is very low.
7. The low productivity results in depressing the wages in the agriculture sector leading to high level of poverty.
8. Agriculture’s importance in India’s Trade is declining, but it still has a share of about 10% in India’s total exports.
9. Compare to the high growth in other sectors of the Indian economy, the performance of the Indian agriculture remains poor due to slow and erratic growth rates. The average growth rate of India’s agriculture over the past decades remains low at less than 2%.
10. At such a low growth rate of the agriculture sector, it is impossible to uplift millions of rural poor out of poverty.
11. The agriculture sector in India has undergone very limited liberalisation. The state still plays a predominant role in the Indian agriculture.
12. Concerns about food security and poverty with respect to the second largest population in the world lead the government to remain strongly involved in regulating India’s agriculture through fixing prices for key agricultural products at the farm and consumer levels, high border protection, bans on or support for exports, and massive subsidies for key inputs such as fertilisers, water and electricity.
13. The Indian agriculture remains one of highly subsidised sector of the economy.
14. Total foodgrains production in India is estimated to be 272 million tonnes in the year 2016-17.
15. The estimated production of key cereals like wheat, rice and pulses will be 96.6 million tonnes, 106.7 million tonnes and 22.1 million tonnes respectively in the year 2016-17.
16. The other major crops grown in India are oilseeds with an estimated production of 33.6 million tonnes, sugarcane at 309 million tonnes, cotton at 32.5 million bales.
17. As per the land use statistics 2013-14, the total geographical area of the country is 328.7 million hectares, of which 141.4 million hectares is the reported net sown area and 200.9 million hectares is the gross cropped area with a cropping intensity of 142 %.
18. The net sown area works out to be 43% of the total geographical area. The net irrigated area is 68.2 million hectares.
19. The sharp deceleration in the growth of the agricultural sector against the backdrop of an impressive growth of the larger economy is widening disparities between the incomes of workers in non-agricultural and agricultural activities.

Role of Agriculture in Indian Economy

• A growing agriculture sector is a prerequisite for the development of India.
• The growing surplus form the agriculture sector is needed to feed the millions of people who live below poverty line and can hardly sustain themselves.
• The agriculture sector has to maintain a very high growth rate of above 4% in order to sustain the pressure of rising population.
• A growing agriculture sector controls inflation because increased food supplies and agricultural raw materials keep the prices down and stable.
• The agriculture sector has an important backward linkage with the industrial sector. The rural consumers are an important source of demand for the industrial goods.

Privatisation of Public Sector Enterprises in India

Privatisation is a process by which the government transfers the productive activity from the public sector to the private sector.

Privatisation offers many advantages.

Methods of Privatisation adopted in India.

Initial Public Offers (IPO).

IPOs are the most favoured method of privatisation followed in the developed countries of Europe and OECD. Under this method, the shares/equity holdings of the PSUs are sold to the private retail investors and institutions like Mutual Fund houses, Pension Funds and Insurance Companies etc.

The prerequisite for the IPOs to be successful is that a country must have a well-developed and well-functioning Capital Market.

The main advantages of the IPO method are:

• It ensures wide participation of retail investors.
• It is likely to face less resistance from the PSUs stakeholders like employees, as the method involves only selling of PSUs shares without any change in the management and policies.
• It can be used to offer shares to the employees.
• The method is best suited when the government wanted to raise financial resources without losing on the management and control of the PSU.

Strategic Sale.

Strategic Sale is a method in which the government decides to sell PSU shares to a strategic partner. The management in all such cases passes to the strategic buyer.

The various advantages of the method are:

• The performance of the PSU is expected to improve as the private player selected will already have an expertise in the management and operation of the PSU.
• The strategic partner will be willing to pay a better price for the PSU as his business interest lies in combining his own business with that of PSU.
• The method helps in infusion of capital and modernisation of the PSUs.
• The method also helps the government in transferring the loss making PSU which could not have been attractive to retail buyers otherwise. The strategic partner will acquire such business as he has the prerequisite skills to turnaround the PSU.
• The method is very important for countries having less developed capital market.

Disadvantages:

Sale to Foreign Firms.

The method is a variant of the strategic sales method where the government decides to sell the PSUs to the foreign firms.

Management and Employees Buy outs.

In this route, management and employees come forward to but the shares and equities of the PSUs.

Disinvestment.

The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.

Methods of Disinvestment

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

• Minority Disinvestment

• Majority Disinvestment

• Complete Privatisation

1. The Role of Public Sector Enterprises in the Indian Economy.
2. Disinvestment Policy in India.
3. Categories of Public Sector Enterprises: Maharatnas; Navratnas; Miniratnas.

Navratnas, Maharatnas and Miniratnas

The Public Sector Enterprises are run by the Government under the Department of Public Enterprises of Ministry of Heavy Industries and Public Enterprises. The government grants the status of Navratna, Miniratna and Maharatna to Central Public Sector Enterprises based upon the profit made by these CPSEs. The Maharatna category has been the most recent one since 2009, other two have been in function since 1997.

The Maharatna Status

The Maharatna PSUs are chosen from those PSUs who holds the status of Navratnas and must be listed on the Indian stock exchange fulfilling the minimum prescribed public shareholding according to the SEBI regulations. The following conditions must be satisfied in order to get Maharatna status:

• The Average annual turnover of the PSU during the last 3 years is more than Rs. 25,000 crore.
• The Average annual net worth during the last 3 years is more than Rs. 15,000 crore.
• The Average annual net profit after tax during the last 3 years is more than Rs. 5,000 crore.
• The company should have the significant global presence or international operations.

There are 7 Maharatna CPSEs currently, namely:

1. Bharat Heavy Electricals Limited
2. Coal India Limited
3. GAIL (India) Limited
4. Indian Oil Corporation Limited
5. NTPC Limited
6. Oil & Natural Gas Corporation Limited
7. Steel Authority of India Limited

The Navratne Status

• The company must have ‘Miniratna Category – I‘ status along with a Schedule ‘A’ listing.
• It should have at least 3 ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) during the last five years.
• Along with the above, it should also have a composite score of 60 or above out of possible 100 marks in the 6 selected performance parameters:-
  1. Net Profit to Net Worth (Maximum: 25)
  2. Manpower cost to cost of production or services (Maximum: 15)
  3. Gross margin as capital employed (Maximum: 15)
  4. Gross profit as Turnover (Maximum: 15)
  5. Earnings per Share (Maximum: 10)
  6. Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)
  7. There are 17 Navratna CPSEs in the country

The Miniratnas Status

• The CPSEs that have shown profits in the last continuous three years and have positive net worth can be considered eligible for grant of Miniratna status.
• Presently, there are 71 Miniratnas in total.
• The Miniratnas are divided into two categories (I and II).

Category One: The PSUs that have made profits in the previous three years or have generated a profit RS 30 crore or more in one of the preceding three years.

Category Two: The PSUs that have made profits in the preceding three years and have a positive net worth in all three preceding years.

The Disinvestment Program in India

Disinvestment of the Shares/Equity of Public Sector Enterprises

• The government of India has decided to withdraw from the Industrial sector, and in accordance with this decision, it decided to privatize the Public sector enterprises in a gradual and phased manner.
• The approach adopted by the government in this regard is to bring down its equity shares in all non-strategic Public sector enterprises to 26 percent or lower.
• For the purpose of privatization, the government has adopted route of disinvestment which involves the sale of the public sector equity to the private sector.
• In the first round of dis‑investment it was decided to (a) offer a randomly structured portfolio of shares each with notional reserve price based on a complex valuation procedure and (b) to off‑load the shares to institutional investors as a buffer between the Government and the stock market.
• Financial institutions and mutual funds were offered the opportunity to bid for the bundles. Later, the bidding process was opened up to foreign institutional investors and to the public at large with the stipulation of a certain minimum bid. Almost all the bidding so far has been done by financial institutions or mutual funds.
• There have been the inevitable controversies about the prices at which some of the initial shares were sold, even though all the disinvestment has been done through an auction process.
• The Government has decided to permit up to 49% disinvestment of equity so that the government would continue to hold 51%. A firm is legally regarded as a public sector firm in India if the Government holds more than 50% of equity. A company so classified is then subject to all the rules, regulations, procedures etc. connected with government ownership. Thus, a firm in which government ownership goes below 50% can be effectively regarded as being in the private sector even if the government has a dominant share holding.
• One criticism of this disinvestment process has been that it has essentially been seen as resource raising exercise by the government.
• A second and, perhaps, more valid criticism is that the valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent. With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector. Thus, there is a lack of clarity on future corporate plans and prospects of these enterprises. Consequently, it is expected that share bids would be lower than they would otherwise be if there was a clear announcement of eventual disinvestment of greater than 51 per cent.

Types of Disinvestment Methods in India

The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.

Methods of Disinvestment

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.

Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.

Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

Majority Disinvestment

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.

Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatisation

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.

Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

The Way Ahead: What should be the Objectives of Public Sector Enterprises Disinvestment and Restructuring?

The means of achieving these objectives involve considerations such as the injection of greater competition into the industrial economy in order to foster a healthier market structure.

Public Sector in the India Economy

What is Public Sector: A Brief Profile

The public sector in India is composed of a number of segments

The Importance/Presence of the Public Sector in the Indian Economy

Role of the Public Sector in the Indian Economy

Problems Associated with Public Sector

Public Sector Reforms in India, 1991

The Statement on Industrial Policy, of July 24, 1991, recognised the many problems that have manifested themselves in many of the public enterprises and sought to rectify these problems. It noted that many public enterprises have become a burden rather than being an asset to the Government. The statement proposed “it is time therefore that the Government adopt a new approach to public enterprises”.

1. The areas reserved for the public sector were reduced drastically from 17 to 8(and later to 6). In manufacturing, the only areas which continue to be reserved for the public sector are those related to defence, strategic concerns and petroleum. Even, here there is no bar to the Government inviting the private sector to participate.
2. Specific attention was given to the issue of industrial sickness in public enterprises and a commitment was made to refer all sick public enterprises to the Board of Industrial and Financial Reconstruction (BIFR) or similar body so that appropriate decisions could be taken on the rehabilitation of these enterprises after examination on a case by case basis.
3. A commitment was made to provide greater autonomy to remaining public enterprises through the strengthening of the MOU (Memorandum of Understanding) system and by providing greater professional expertise in the Boards of these enterprises.
4. The decision to dis‑invest equity in the public sector enterprises was also announced in the Statement on Industrial Policy.
5. To sum up, the intention behind the announcements made in the Statement of Industrial Policy was to undertake a wide ranging public sector reform. The objective was to induce greater efficiency, productivity and competitiveness in the public sector. The enterprises currently in the public sector were to be strengthened so that they are enabled to participate profitably in the new competitive environment that now exists in both the domestic and international economy. If this involves disinvestment or privatisation, it must be accomplished purposively and quickly.

The Reforms Done so far

1. De-reservation:

• In the manufacturing sector, the reserved areas for the public sector now only include defence production and mineral oils.
• In the case of mineral oils (petroleum exploration, petroleum refining, etc.), however, private investment including foreign investment is being actively invited, but on a discretionary basis.
• The other reserved areas are in respect of atomic energy, minerals related to atomic energy, coal and lignite, and railway transport. Mining of iron ore, manganese ore, chrome ore, etc., and mining of non‑ferrous metals, which was earlier reserved for the public sector was further dereserved in 1993.
• Thus, from the original list of 17 (see Annex III) now only 6 areas still remain reserved for the public sector.
• The public sector enterprises are now open to competition from new entry in all areas of manufacturing except in defence production.

Revamping of SICK PSU’s

• The Sick Industrial Companies Act (SICA) has been amended to make mandatory the referral of sick public sector enterprises to the BIFR.
• Hence, all sick (bankrupt) public sector industrial firms now have to be restructured through revival, rehabilitation, or closure if found to be unviable. Once the bankrupt public sector firms are referred to the BIFR, the government has, by necessity, to make decisions that result from the orders of this Board.
• After referral to the BIFR the Board first has to decide whether a firm has been correctly referred to them in terms of the definition of sickness (a firm is defined as sick if its net worth has been totally eroded, if it has made losses for two consecutive years and if it has been in existence for more than five years).
• Once a firm is accepted by the Board for further enquiry, the firm itself is usually asked to put forward its own proposal for a restructuring programme. If this is not found to be satisfactory an operating agency (OA) is usually appointed in order to examine its viability or otherwise.

Establishment of the National Renewal Fund.

The National Renewal Fund was established in 1992 to provide a social safety net for workers affected by industrial restructuring. As various enterprises (in both the public and private sectors) undertake a restructuring process, workers would need focused assistance for re‑training, re‑deployment, skill upgradation and other kinds of employment counselling.

The intention behind the NRF was

1. to provide compensation to workers who would be affected by industrial restructuring;
2. to assist such workers in re‑training and re‑deployment;
3. to provide resources for employment generation in areas affected by industrial restructuring. It also had provision for compensating workers who opt to take voluntary retirement from existing public sector enterprises.

Greater Autonomy to Public Enterprises

In the statement on Industrial Policy, a commitment had been made to provide greater autonomy to remaining public enterprises through the strengthening of the Memorandum of Understanding (MOU) system and by providing greater professional expertise in the boards of these enterprises.

Industrial Policy in India: Post 1991 Reforms, Period

New Industrial Policy, 1991

In the backdrop of severe Balance of Payment Crisis of 1991, the Government in continuation of the measured announced during the 1980s announced a New Industrial Policy on July 24, 1991.

The new industrial policy was a major structural break for the Indian economy. The policy has deregulated the Industrial sector in a substantial manner. The major aims of the new policy were; to carry forward the gains already made in the industrial sector; Correct the existing market distortion from the industrial sector; to provide gainful and productive employment; to attain global competitiveness.

The Government announced series of Initiative in respect of the following areas:

Abolishment of Industrial Licensing

Role of Public Sector Reduced Substantially

Entry of Foreign Firms and Investments

Other Important Liberalisation Measures

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Objectives of the National Manufacturing Policy

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones(NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).
4. No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).
5. The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.
8. The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.
10. Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;

• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;

• Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;

• Strengthening IPR infrastructure to nurture innovation; and

• Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

What more should be done to make India an attractive destination for Global Firms?

The Sectors:

Industrial Policy in India

A brief outline of Industrial Policy.

After Independence, the Government of India adopted an approach to develop Industrial sector of India. India adopted several Industrial Policy resolution to develop the Industrial sector.

Industrial Policy Prior to 1991.

Industrial Policy Resolution, 1948.

The resolution was issued on April 6, 1948. The resolution accepted the importance of both private and public sectors for the development of the industrial sector.

The 1948 Resolution also accepted the importance of the small and cottage industries as they are suited for the utilisation of local resources and are highly labour intensive.

The 1948 Resolution divided the Industries into following four categories.

Industrial Policy Resolution, 1956.

The Policy Resolution of 1956, laid the following objectives for the growth of the Industrial sector:

1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To Prevent concentration of Business in few hands and Restriction in Creation of Monopolies.

The objectives were chosen carefully with the aim of creating employment and reducing poverty.

The 1956 Resolution further divided the Industries into three Categories.

To sum up, the 1956 Resolution, emphasised on the mutual dependence and existence of the public and private sectors. The only 4 industries in which private sector are not allowed were Arms & Ammunition, Railways, Air Transport and Atomic Energy. In all other sector, either private sector was allowed to operate freely or will provide help to the government sector as and when needed.

Industries (Development & Regulation) Act, 1951.

The Industries Act was passed by the Parliament on October 1951 to control and regulate the process of Industrial development in the country. The Acts main task was to regulate the Industrial sector.

The specific objectives of the Act were:

1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.
4. Balanced Growth and Equitable development of all the regions.
5. It was also believed that the State is best suited to promote balanced growth by; channelizing investment in the most important sectors; Correlate supply and demand; eliminate competition; ensure optimum utilisation of social capital.

Major Provisions of the Act

Restrictive Provisions: It contains all measure provision to curb unfair trade practices.

Registration: The provisions make registration of industries mandatory irrespective of whether they are private or public in nature. The expansion of the existing business also required licencing and permission.

Examination and Monitoring of the Industries: After granting of license, it is the responsibility of the state to monitor the performance of the industries. If at any point in time, the industrial unit was found not up to the mark, underutilising its resources or charging excessive prices, the government could set up an enquiry against the unit.

Cancellation of the Licence: The government has the power to cancel the licence granted to the industrial unit if found, engaging in wrongful behaviour.

Reformative Provisions:

The category involved following provisions.

Direct Control by the Government: Under this provision, the government could set up an enquiry against the industrial unit and can order reform process, if it was not being run properly.

Control on Price, Distribution and Supply: The Government was empowered by the act to control and regulate the prices, supply and distribution of the goods produced.

Problems of the Excessive Restrictions imposed by the Government.

Liberalisation measures adopted in the 1980s

1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who successfully achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into broad categories. For example; cars, jeeps, tractors, light and heavy commercial vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.
9. Promotion of Small Scale Industries by increasing their Investment limits.
10. New Industrial Policy, 1991.