Policy Watch: Will Industry Now Sprout Wings?

POLICY WATCH
Will Industry Now Sprout Wings?

The government's proposed, Industries Act gets qualified approval from industry.

By Seetha and Jaya Basu

The fetters could soon go. The Government of India (GOI) is all set to replace the draconian Industries (Development and Regulation) Act (IDR Act), 1951, with an Industries Act that is meant to unshackle India Inc. and create a hassle-free operating environment. Says a senior official of the Department of Industrial Policy and Promotion (DIP&P): ''We want to promote and facilitate industry, not control it.''

The draft act not only junks terms like development and regulation, but also provides statutory backing for Foreign Direct Investment (FDI) and proposes new agencies to ensure speedy implementation of investment approvals. Approves D.H. Pai Panandikar, 67, Director, RPG Foundation: ''The message here is one of promotion. In the earlier act, it was one of regulation and restriction.''

The IDR Act, a product of India's socialist past, insisted on the licensing of all new industrial undertakings and gave the GOI overarching powers over the day-to-day functioning of industry. The 1991 Industrial Policy Statement promised to change all this by scything procedures. Since then, licensing has been abolished for all but six industries, and a mere four sectors are reserved for the public sector. But despite the IDR Act losing its relevance, the process of framing of a new act began only in 1997.

India Inc. isn't giving the draft act a standing ovation yet. Wonders T.K. Bhaumik, 51, Senior Adviser, Confederation of Indian Industry (CII): ''What is the need for an act? In a market economy, let the market forces lead the industrial development process.'' Jairam Ramesh, Secretary, Economic Affairs, All India Congress Committee, and one of the drafters of the 1991 policy, actually dubs the entire exercise ''bogus and irrelevant''.

Dubious Intentions?

The DIP&P doesn't see why industry is complaining. Sources say it was the department that had, at one point, suggested that the IDR Act be scrapped without any new law to replace it and that it was, indeed, industry that pressed for some form of regulation. ''The present draft is based on suggestions made by industry,'' a DIP&P official says.

What's worrying industry is one section that allows the GOI to take over industries in the public interest. The Cabinet note on the Industries Act argues that this will allow the government to protect the interests of domestic partners in joint ventures. Industry isn't buying that line. Sneers CII Deputy Director, K.C. Ravi, 35: ''It's just an excuse. This provision is like a sword hanging over our heads.'' Fumes Subodh Bhargava, 58, Consultant, Eicher Ltd: ''This legislation is not compatible with the spirit of liberalisation. It is arbitrary in nature.''

DIP&P officials assure that this is only an enabling provision in case the government needs to intervene. But given the strong reactions, the GOI is reported to be having second thoughts about retaining it. Admits a senior official: ''Yes, there is a possibility of misuse.''

If this one jarring note is removed, the final draft of the act will be a mellower and improved version of a 1999 draft (See Putting It Mildly) and incorporate several suggestions of industry representatives.

For foreign investors, there's some good news. The Act allows the GOI to notify the terms and conditions for FDI and foreign collaborations, a move that will bring in a measure of transparency. The DIP&P wants to end the practice of case-to-case approvals in several areas like royalty payment by wholly-owned subsidiaries to their parent companies. Such payments are banned, but exceptions are made on various grounds, allowing for a fair measure of arbitrariness.

Smoothing Glitches

Giving FDI proposals statutory backing also removes the element of caprice in government policy. The GOI wants to avoid repetitions of what happened in the case of the Dabhol power project, when the Shiv Sena-Bharatiya Janata Party government in Maharashtra cancelled Enron India's contract in 1995. Says a DIP&P official: ''There's some anxiety among foreign investors about their investments. This will be a comfort factor.'' The transnationals don't seem to know how to react. Says Amit Sharma, 47, Country Manager, Motorola India: ''We have never faced any problem so far as our investments in India are concerned.''

Industry is also happy at another new provision about the creation of specialised bodies to approve investment proposals by foreign and domestic investors so as to speed up the process of clearing investment proposals. The idea is to set up a single window for all clearances at the Central level both for domestic and foreign investors.

But getting approvals from Central ministries is the least of investors' woes. It's in the states that they face hurdles since they need to get around 30 clearances. Laments a DIP&P official: ''We've been trying to get state governments to speed things up but they are just not amenable to reason. We have to improve the overall investment climate.'' That's why the department is keen on creating a body similar to the Foreign Investment Implementation Authority for domestic investors. Beams Amit Mitra, 52, Secretary-General of the Federation of Indian Chambers of Commerce and Industry: ''It is a welcome and long-due step.''

Industry is less enthusiastic about the collection of cess from different sectors. Right now, the cement, paper, sugar, and auto industries pay 13 per cent of the value of goods produced as cess. However, the money, which was meant to be used mainly for research and development in the concerned sectors, goes into the Consolidated Fund, which means that it became part of the government's general revenues. The sector rarely got to use it, a fact much resented by industry. Laments N.C. Gupta, 58, General Manager, JK Corp.: ''We never get an account of our own money. It should be given to us in some form.''

The cement industry, for example, pays 75 paise per tonne of cement as cess, netting the GOI a cool Rs 8 crore a year. The money is to be used to fund research work at the National Council of Building Material. But, says R. Parthasarathy, 68, Secretary-General, Cement Manufacturers Association (CMA), the industry barely gets half the amount. In the paper industry, projects sanctioned in the last fiscal have still not received any grant. The sugar and auto industries narrate similar tales of woe.

The new Industries Act not only slashes the amount of cess to 5 per cent (the 1999 draft had kept it at 13 per cent), it also says that the money will be put in a public account, which means it will not go into the Consolidated Fund. Instead, says a DIP&P official, each sector will have a separate fund to be administered by the development council for that industry (the councils act as an interface between government and the industry).

The DIP&P is bracing itself to battle the finance ministry over the move. Industry is happy at the cess being reduced but is slightly cynical about the setting up of dedicated funds. cii's Ravi points out that a road fund is still to be set up with the money collected from the 1 per cent cess on diesel and petrol.

A Compromise Solution

A potential flashpoint has been averted with the GOI toning down the clause on penalties and fines. The 1999 draft had proposed a fine equivalent to a certain percentage of the erring company's total turnover, and suggesting that banks increase interest and service charges by 2 per cent over the prime lending rate (PLR)-a sort of penalty. Under the IDR Act, violations invited six months imprisonment and Rs 5,000 as fine. Heeding protests from industry that the proposed penalties were ''harsh and burdensome'', the final draft has discarded the turnover-based fine and reduced the fine banks can deduct, to 1 per cent over the PLR.

The Industries Act, for the first time, makes it compulsory for companies to provide periodical production returns. And industry isn't kicking up a fuss about this, admitting that this is necessary to get a correct picture about industrial performance. In fact, it is delayed reporting of production that caused the recent confusion over the index of industrial production when the growth rates for April, 2000, were scaled down from 12.2 per cent to 5.7 per cent. Concedes Eicher's Bhargava: ''With more investments in industry, the role of information and data has become critical.''

A few misgivings apart, industry isn't grumbling too much. Says Mitra: ''This certainly gets rid of several processes that increased transaction costs.'' But a new, reformist legislation isn't all that industry needs. Points out Pai Panandikar: ''Industry is still stifled by local laws, import regulations, and difficulty in accessing finance. Changing the IDR Act will not help unless these issues are also tackled.'' Here's hoping someone heeds that.

Issue Contents Write to us Subscriptions Syndication