Documentos de Académico
Documentos de Profesional
Documentos de Cultura
From scattered and haphazard beginnings in the late lgth century India's
stock exchanges have today developed into a respectable-sized multi-
centred stock exchange system through spells of total non-regulation, self-
regulation, half hearted government control, and in the recent past close
goYernment supervision. capital market has trvo branches, the primary or
the new issues market, and the secondary or the stock market. The second
provides to selling of existing securities,
viz. equity s or bonus. Both the primary
and the se n1 and indivisible, and one
cannot exist without the other. Indeed the capacit), of a nation to channel
savings into long-term equig, financing is central to the maintenance of a
free enterprise market economy q'stem. Stock narkets and stock exchanges
are the mechanisms for such financing. The effectiveness of these mecha-
nisms depends upon the degree to rvhich certain conditions exist : a stable
political environment; reasonable and successful
cies; reliable accounting and financial reporting
the ready availability of timely and accurate fi
tence of short and long-term financial instruments that attract household and
corporate sarrings and meet the risvreward requirements of savers and bor-
rowers: a secondary market for such instruments; and a legislative and
regulatory infrastructure that includes the means to administer in through
regulatory agencies. The last of these conditions is a major factor in deter-
mining the amount of confidence it is a major factor in determining the
extent to which investors will channel their savings into long-term equity
financing. Investor conJldence is thus the key to smooth and successful
operation of the market system.
stock exchange is an essential pillar of the private sector corporate
economy. It discharges three essential functions in the process of capital
formation and in raising resources for the corporate sector. First and most
important, the stock exchange provides a market place for purchase and sale
Regulation of the Stock Exchanges 2'71
of securities viz. shares, bonds and debentures etc. It therefore ensures the
free transferabilig'of securitics rvhich is an essential basis for thejoint stock
enterprises S'stem, Private sector economy cannot function *'ithout the as-
surance provided by the stock exchange to the otvners of shares and bonds
that thcy can be sold in the market at an1 time. At the same time those lvho
wish to inl'est their surplus funds in securities for long-term capital appre-
ciation or for speculative gain can also buv scrips of their choice in'the
market. Secondll', the stock exchange provides the linkage betl'een the
savings in the household sector and the investment in the corporate econ-
om1,. It nobilises savings and channelises them as securities into those
enterprises uirich are favoured b1'the investors on the basis ofsuch criteria
as future grou'th prospects, good returns and appreciation of capital. The
in-rportance of this function has renained undiminished in spite of the
prevalence in the Indian scene of Slrch inten'entionist factors as industrial
licensing. provision of credit to pri't'ate sector b1' public sector development
banks. price controls and foreign exchange regulations. The stock exchange
discharges this function b1' lafing dou'n a nunrber of listing regulations
u'hich have to be complied rvith uhile making public issues e.g. offering at
least the prescribed percentage of capital to the public keeping the subscrip-
tion list open for a niinimum period of three da1's, making provision for
receiving applications at least at the centres rvhere there are recognised
stock exchanges. allotting the shares against applications on a fair and
unconditional basis rvith due rveightage being given to the applicants in
lolver categories, particularl'r' those appl-""ing for shares rvorth Rs 500 or
Rs 1,0()0, etc. Members of stock exchanges also assist in the floatation of
new issues by acting as managing brokers/official brokers of nerv issues in
rvhich capacig'they, inter alia, try to sell these issues to investors spread all
over the country. Thel' also act as under-writers to new issues. In this rvay
the broker community provide an organic linkage betvveen the printary and
the secondary markets. Thirdly, by providing a market quotation of the
prices of shares and bonds a sort of collective judgement simultaneously
-
reached by manl'buyers and sellers in the market the stock exchange
-
sen'es the role of a sort of barometer not only of the state of health of
individual companies, but also of the nation's economy as a rvhole. It is
often not realised that changes in share prices are brought about by a con-
plex set of factors, all operating on the market simultaneously. Share values
as a whole are subject to sebular trends set by the economic progress of the
nation, and governed b1' lut,ott like general economic situation, hnancial
and monetary policies, tax change, political environment, international eco-
nomic and financial developments, etc. These trends are inlluenced to some
erlent by the periodical cycles of booms and depressions in the free market
economics.
As against these long-term trends, the day-to-day prices arei inJluenced
272 Government and Business
occurrence of corners in the market, and the poliry and practice of the
Association rvith regard to corners appears to us to constitute the head
and front oftheir offending.
or group ofpersons to exercise and perform all the powers and duties ofthe
governing bodl'. The securities Regulation Rules specifically for member-
It was the third tlpe of transaction which was completely banned by the
1969 Notihcation. This had a very adverse effect on the stock market.
Prices of shares in the stock Exchanges nosedived, and there was a crisis.
Surely after that the central Government appointed a committee headetl by
shri Anjiah to review the situation and recommend appropriate remedial
measures. The committee recommended the revival of fonvard trading sub-
ject to cerlain safeguards. Holever, the central Government could not take
any decision on this report, and forward trading remained ever since. This
situation u'as further aggravated by the l9?4 restriction put on paynrenl. of
dividend by companies as part of the package of anti-inflation measures.
The stock market generally remained depressed until after 1976 n,hen manl'
of the foreign companies were forced under the FERA to issue fresh capital
to the public. But it u'as eventually the boom witness from 1980 onwards
which revived the share and put it on a glorious surge-forward fron which it
has not looked back.
However, reckless speculation also revived its head and created consid-
erable problems. The diffrculty rvas that along rvith the ban on fonvard
trading. the regulatory powers rvhich the Exchange authorities had under the
Rules for checking excessile speculation and fonvard trading also remained
suspended. Initialll', under the directions of the Government, the Stock
Exchange Authorities did try to control the situation by ad-hoc measures,
such as the imposition of margins on share brokers, rvho had been reporting
unusually large volumes of activiw. But this $'as not able to control the
situation. ln 1982. the Bombal' Stock Exchange passed through three suc-
cessive payment crises the first one over Reliance shares, the second over
century and the third over TISCO. Now, a certain amount of speculative
is essential for the operation of the share market. However, the
acti'r'itJ'
volume of speculation and of the informal foru'ard trading rvhich had al-
rvays been going on must bear a relationship with the volume of actual
transfer of securities. \\'hen speculation runs riot and the actual physical
transfer ofsecurities lags far behind, there is inevitably payments crisis.
From 1974 onlards, under a scheme first evolred by Bombay Stock
Exchange and thereafter accepted bl, Calcutta, Delhi and Ahmedabad, a
certain informal g'pe of fom'ard trading had been revived. This rvas done b1'
carrying fonvard the delivery contrad beyond 14 days in an informal man-
ner by concluding the earlier contract and entering into a new contract
rvithout any actual deliverr, but merely the payment of the balance betrveen
the contracted price and market price. betrveen the buyer and the seller.
This system was being continued in an extra-legal manner without anyone -
questioning its legality. obviously, this slstemcould not stand the strain of
the excessive '.reculative activity that came about around 1982 and started -
escalating leading to payment crises one after another. The Central Govern-
Regttlation of the Stock Exchanges 279
consuming procedure are irritants not only to foreign but also to non-resi-
dent Indian inrrestors who have grown substantially in recenl 1'ears. Al1 this
militates against thc efficient functioning of the secondarl' rnarket. The
situation is very much like thq problems faced b1' a small airstrip rvhich is
accustomed to handling onll' Dakota planes being suddenly called upon to
handle Jumbo Jets *'ithout an)' necessary change in the infrastructure.
Majoriw of the stock exchange members are old-fashioned lacking in
both n-rodern edpcation and spirit of sen'ice to tlre clients. Manl' of them
need to graduate front their role as pLrre stock brokers into a ncq,er role as
inrrestment counsels or investment brokers. Thel' are reluctant to pentlit
nel nembers and $'ant to retain all conlrol. There needs to be substantial
enlargement of the number of brokers in major stock exchanges, such as
Bonrbay, Calcutta and Delhi. Further, some of the cxisting brokers are
engaged in reckless speculation. For over a decade. fom'ard trading lvas not
recognised b1' law and yet permitted in the major e.\changes through extra-
legal means u,hich our lau's and regulations had no control. In the last few
years, the Bonrbal' Stock Exchange passed through several severe pa)'ment
crises large\'because of reckless speculation and overtrading rvhen deals
\t'ere entered into u'ithout even a minimum volume of scrips bring ayail-
able. Since 1983, a limited volume of fon+'ard trading upto three months has
been pcrmitted and this should partialll' solve the problems caused b1' the
absence of de jure fogard trading. But the basic question remains one of
having a hard look at the existing rules and regulations. lvhether under
Company Law or Stock Exchange Regulations or F.E.R.A., to hnd out horv
many of them have outlined their utility and are, by and large, anachronic in
the context ofthe sea changes that has taken place in the capital narket.
Time has conte u'hen Stock Exchange Boards should no longer be just
private clubs of the stock brokers but must be viewed as guardians of public
interest. Essentially the stock exchange is a public institution in which
Government, the industry and the public are vitally interested. Thus, there
should be representatives from all these interests on the Boards. Indeed,
such representatives should constitute a majority rvhich at present consists
of the elected representatives of the stock brokers who very often find it
difficult to distinguish betrveen their own private interests and the larger
public interest. There should be uniformity of working hours amongst the
stock Exchanges in India. They should be linked up with one another
through computer terminals. In fact, there is a strong case for greater com-
puterisation in our Stock Exchanges. Another consideration is that our sec-
ondary market still has very narrow base where two or three government
institutions, viz., U.T.I., L.I.C. or G.LC. have a commanding influence'
When they start buying, prices automatically go up. When they.start selling,
prices immediately go dorvn. A market can be said to exist only when there
282
Gov e rru t t e n I an d Bus i ue s"^
speculators in the markel are kept under strict control and discipline. In fact,
much of the so-called currcnt continuing boom in the market is due to the
activities of the speculators and do not necessarilv reflect the true rvorth of
sonre of the scrips. We should continue to bc vigilant to see that Lhere is
adequate disclosure b1' cornpardes, that there is no 'insidel' trading, that
thcre is free and hassleless transferabilitt, of shares by ordinary share-hold-
ers. and that genuine invcstors are not duped and in that process their
confidence in the market is not shaken.
Futurc Prospects
The series of mega issues in recent vears is a good indicator of the
possible contributions that the capital market can make in mobilising addi-
tional public savings to nreet the resourcc crunch for priorig, investrnents in
the Ninth Plan. Until the 1970s prir.ate sector companies u,ere pathcticallv
dependent on financial institutions for project fltnancing. Norv they can go to
the market for financing an1'projcct on thc strength oftheir track record and
the attractiveness of the project from the investor's point of vieu'. The srvift
grouth of the Public Sector Unils (PSUs), the bond market and the mutual
funds in recent years, have added nerv dimensions to the capital markct.
There are enormous funds available in the s.vstem. All ue need are attrac-
tive projects that promise good returns, good marketing and sound manage-
ment to implement thcse projects u'ithout anv time and cost overruns and
ensure profitabilitl'.
But, unfortunatcl)'. the secondarl' market is still to respond to the needs
of the vastl), overgrown market. It still remains primitive g'ith serious in-
frastructural bottlenecks and anachronistic lau's and procedures. The secu-
rity holders have grorvn during the 1980s from about one million to about
l5 million covering non-traditional iruestors such as farnlers, rvhite-collar
employees and non-resident lndians. Those rvishing to sell their shares have
enormous problems. Buyers are not readili' available. Brokers, after taking
delive4' of scrips, do not pay thenr for months. This cuts at the verJ, root of
the cult of the eas_v transferabiliq' of shares. Transfer documents are ver1'
complicated. The companies take an inordinatel'1, long time to register share
transfers. On the other hand, there is a serious sho(age of floating scrips in
the market. It is common experience that rvhen a buyer wants to buy some
specified shares, he has to wait indefinitell'before he can ge( the preferred
scrips in the market. And the primary objective of an investor or a seller in
growth shares is not served. For several years now, the secondary'market
has been in a state of high speculation often reaching the level of ganrbling.
A superfrcial obsewer r.r,ill notice a plethora of activities in the market, But
on closer scrutiny it is seen that the ovenvhelming majoriq' of the'so-callcd
transactions are purely speculative, just paper transactions r''ilhoul any se';-
284 Governmenl ancl Business
ous intention on the part of the so-called buyer and the so-called seller to
physically buy or sell shares. It will surprise many to learn that on an
average not more than fir,e to seven per cent of all the transactions recorded
in the Bonrbay, calcutta or Delhi stock exchanges lead to actual transfer of
scrips from the seller to the buyer. Very often, genuine investors suffer
because thev are guided by the so-called market quotations and, having
handed over their hard-earned mone)'to stock brokers, do not get the scrips
even after many months or do not get them at all.
When institutions like the UTI float an enquin for buying particular
scrips. the price of the scrip inevitably goes up b1, leaps and bounds. When
the institutions w'ant to sell a particular scrip, the market price rvill straight
arval' tumble dol'n. In the last ferv years, there has been a running battle of
rvits betl'een the institutions on the one hand and a group of spcculators on
the other. When the former enter into the market seriousb', the latter just
uithdrarr,. When the institutions adopt a passi.r,e posture, the speculators
enter into the arena in full cr1'. Needless to sa)', a genuine investor would
lose in both situations.
In recent ),ears- computerisation has made signihcant progress in our
stock markel.. Many rationalisation measures have been introduced such as
the introduction of uniform working hours in all stock exchanges. A number
of nerv institutions are also in the held, such as mutual funds. venture
capital hrms, credit rating corporations, the stockholders corporation, a cor-
poration for over-the-counter trading. offshore growth funds like the India
Fund. and hnally,, the Securig, & Exchange Board of India (SEBI) in 1987.
For the first four I'ears, SEBI l'as onh' an ad hoc body rvithout anv legisla-
tive or executive pou,er and comprised onl1, a Chairman appointed b1' a
government notification. Il r.vas therefore a non-starter during the first four
)'ears of its operation primarill' because of its insistence on having a com-
prchensive larv first before it could start ftinctioning. Nothing prevented the
government from doing the most sensible thing of transferring to this Board
all its pou,ers under the Securit5' Contracts Act and under the by-larvs of the
stock exchanges. That would at least have enabled this body to start its
policing role in a vigorous manner. It is not ilear rvhy a separate law was
necessary when there was already a law specihcally dealing rvith stock
exchanges rvhich could have been easill' amended, delegating authorit_v to
the SEBI and laying dorvn its functions. Much valuable time was lost in
infructuous exercises about passing a nerv law which would take away even
some of the functions of such bodies as the Company Larv Board and the
Reserve Bank, to which they u'ould in no circumstances readily agree. The
long-awaited legislation came in January, 1992 when the Central Govern-
ment passed the Securities and Exchange Board of India Ordinance (1992)
constituting the SEBI (see Annexure to this Chapter). The recent decision
to permit overseas institutional investors to make portfolio investnent in
Indian companies subject to registration with the S.E.B.I. is a welco- :
Regulaion ofthe Stock Exchanges 285
institutions hold
object should be
negotiated prices
res0urces elsetvhc
, In recent 'r'ears, the Indian capital market has shown signs of consider-
able sophistication. Some ofthe sophistications introduced aie:
i) the inter-market service (prl's, stock scan) rvhich covers fir,e ma-
jor stock exchanges and provides a minute-b1-minute account of
prices in these elxchanges. This constitutes a major step towards a
national stock market;
ii) the setting up of GRISIL, ICRA and cARE public sector profes-
sional bodies for rar.ing debt instruments: b1'the ICICI, the IFc and
the IDBI respectively.
iii) the advent oforc (over-the-counter buying and selling) Exchange
Ltd i'troduced b1, the ICICI, along with ser,eral otherlnstitutioni,
an important step to market segregation;
i\) the gro*lh of a mutual fund industn demonstratin E grear
'igorous
success in attracting huge funds;
\') the gro*th of'enture capital funds folrorving the verture capital
fund guidelines announced in 1989:
\i) the sctting up of the Stock Holding Corporation by, the Unit Trust
of India (url): in ordcr to pro..ide custodial se.vices to the share
portfolio held b-v the public financial institutions:
vii) the phenomenal grouth of merchant banking, both public sector
and private sector during the decade of the I 9g0s; and t llOs;
viii) some sure steps touards lhe opening up of the Indian market to
international investors, namely, the setting up of the India Growth
Fund in the UK and India Fund in USA by UTI and Merill Lynch
and selting up of sevcral offshore funds b,v other banks and invest-
ntent institutions;
ix) the setting up of the Securities Exchange Board of India (SEBI)
through an ordcr in 1989, and b1' law in 1992;
x) in the stock exchanges b1,-laws
n the lines of the city take over
ened by the take-over guidelines
tional Development Council and the Union Bridgets from 1992 onwards
envisaged substantial reliance on the capital market for raising resouroes
originating from the household sector. The former document assumes a Rs
1,48,000 crore investment by the private corporate sector of which Rs
63,'720 crore is to come from savilgs of households during the period 1992-
98 for achieving the planned objectives. The fact that during the year 1993-
94 companies raised around Rs 30000 crores from the market indicates that
the market is able to match these expectations. But the problem of serious
mismatch between the primary and secondary market remains. Unless this is
removed and the availability of enough scrips in the market and their easy
transferability assured globilisation of Indian security market will remain a
distant dream. The capital market is to be geared up to meet this expecta-
tion. The recent Union Budgets have given a tremendous boost to the capi-
tal market by a variety of measutes, important among which are the follow-
ing: excluding investment in shares/debentures from computation of assets
for wealth tax purposes: the favourable tax treatment to mutual funds in-
cluding private sector mutual funds and offshore investment funds, permit-
ting overseas pension funds and trusts to invest in Indian companies, permit-
ting selected Indian companies to raise capital from abroad, introducing
current account convertibility of rupee, abolition of the offrce of Controller
of Capital Issues (CCD and giving the authority to fix premia, etc., for fresh
issues to companies subject to announced guidelines, the general lowering
of income tax: continuing and accelerating the policy of disinvestment of
Government stocks in public sector enterprises to mutual funds and the
public. A11 these have been reflected in a phenomenal rise of the share price
index in the stock market. But the continuing problem of inadequacy of
floating stocks vis-a-vis the huge funds being attracted to the stock market
still remains. Concerted effort must be made to increase the floating stock.
Finally there is the issue of revival of legitimate forward trading, and the
related issue of whether or not to permit what is popularly called badla
trading. Badla trading, which evolved as an extra-legal substitute for forward
trading after the l969ban, and which is capable of serious abuse was banned
by the SEBI in 1993 following serious allegations of malpractices and
excessive speculation. This led to severe depression in the market which has
not yet recovered in spite of excellent corporate results. The SEBI set up a
working group (1995) to report on this. This group recommended the rwival
of carry-forward deals subject to safeguards while ruling out the revival of
'badla' ds such. This has now been accepted by the SEBI on principle.
Permitting some kind of legitimate forward trading with proper checks seems
unavoidable if we were to remove the current spell of depression which
should hurt long-term investment if it is allowed to persist. Also, we need to
take quick action in improving share transfer, custodial services and ensuring
liquidity or easy transferability of shares in the market. The recent legislation
enabling the setting up ofdepositories for carryrng on shares'custodial work
has been a timely step in the right direction.
Chapter Ten
Government Control over the price and the distribution of essential com-
modilies lus cmcrged as a ver,' intportant sector of India's econonry, and
the performance of tlre public agencies rvill be a critical factor in the future
overall industrial grouth. Production, horvever efficient becomes purpose-
less if the goods produced are not dclit,ered to the final user at the right
time. in right quantitl', and at the right price b1' an equally eflicienL distribu-
tion net-rvork. Unfo(unatelv. thc existing private sector trade channels in
India, although claiming to operate. on a very lorv margin. one of the most
cconomical distribution S'stems in the u'orld, have also acquired in public
estimation a cenain notorieg' on account of their rvell-krtou'n malpractices
and a gcneral proneness to take advantagc of scarciq' situatious Adultera-
tion, short-u'eiglrt of goods, hoarding, nranipulated scarcitt, prohteering.
black-marketing. undull' excessive rates of credit and other anti-social and
unethical practices not only create public disaffection. but also saddle the
econom)r rvith verl' high costs. It is said that consuners in India pay set'eral
hundred crores of rupees every ,\'ear on account, of short-rveighted goods
alone. While public dislribution system is an anslver, it has its littftations
and cannot in an1' case hll the vacuum caused by the dismantling of the
traditional retail and rvholesale trading slstem or,er the lcngth and the
breadth of our last countrJ,. Thus there is need on the one hand for greater
vigilance over the existing distribution net-*'ork, and on the other hand for
organising public distribution agencies in the more wlnerable sectors. and
nore encouragement to consumers' cooperatires in other areas to provide
growing competition and the effcct of demonstration to private business.
Apart from its relevance to the society as a whole, distribution also acquires
a great importance in a developing economy like India on account of its
employmen\ potential, and also for the fact that a substantial number of
industrial raw materials are in short supply and need to be distributed fairly
and equitably among competing users.
Government Control Over Distribution and price 305
exercise man)' of these controls, there was some hesitation about giving
them a permanent statutory base. It was only in 1954 that Entry 33 in List
III of the constitution was amplified into its present shape by the Third
Amendment bringing within the purvierv of central legislation, in addition
to Lhe products of 'scheduled' industries a's defined in the Industrial @ev.
and Reg.) Act, such other commodities Uke imported goods, foodstuffs,
cattle fodder, raw cotton and raw jute etc. as rvould be necessary. Thus
Parliament rlas enporvered to make larvs controlling production supply or
distribution of any or all of these conunodities. The basic legal frame for
commodities control is provided by:
(i) the Essential Commodities Act, 1955, and
(ii) Section l8(g) of the Ind. (Dev and Reg.) Act, t95l relaring to rhe
products of 'scheduled' industries.
There are also a number of other specific laws cor.ering specific industries
in the field of commodifi'control, e.g. rhe Coffee Act, 1952. the Tea AcL
l9-53: the Rubber Act,l94'l'. the Coir Industries Act, 1953.
The Essential commodities Act provides in the interest of the general
public for Government control over the production. supply and distribution
of or trade and commerce in certain essential commodities which are listed.
These commodities fall jnto three broad categories:
This list of commoditips is not exhaustive and Central Government has the
power to declare any commodig' as an essential commodity for purposes of
the Act, if it is a commodity with respect to rvhich parliament has power to
make lav' under Entry 33 of List III. Hence the list is changed from time to
time according to the exigencies of the situation.
section 3 of this Act confers wide powers on the central Government to
issue orders regulating or prohibiting the production, suppl.v or distribution
of any essential commodiq' if it is of the opinion that it is necessary or
expedient to do so for maintaining or increasing supply of an essential
306 Gove n unen I and B u sin ess
DISTRJBUTION OF FOODGRAINS
pnce.
The prices at which Government agencies will purchase rice and wheat
respectively are announced every year by the central Government on the
basis of the recommendations made by the Agricultural prices commission,
a quasi-government but autonomous bod1, appointed by the central Govern-
ment. There are always heated controversies on this issue on account of the
powerful farmers lobby from states like punjab and Haryana seeking to get
enhanced prices, and the deficit states seeking to push down the pirrchase
price to protect consumers' interests. The Central Government hai to bat-
ance these two conJlicting interests in announcing the price.
rn 1972 the central Government took a decision to nationalise u'holesale
trading in foodgrains all over the country. But this policy was abandoned
after a rvhile in 1973 largely on the ground of the administrative constraints
and financial strains and also partly under severe pressure from private
business. The wheat policy of lg77-'78 sought to place considerable .elionce
on the private trade to
The Government agen
sure of a huge buffer
of a sizeable quantity
inllexible giant sized Food corporation is also likely to be rvelcomed by tle
Government Control Over Distribution and Price 309
'
small and middle farmers. As the new single-zone wheat poliry for the first
time makes a distinction between average and superior quallty wheat, pri-
vate trade can also play a role by supplying high income urban consumers
with superior quality wheat rvhere the margin of proht is higher, and rvhich
is not usually offered b),the public distribution system.
poor in rural and remote areas of the countr1,. This nerv scheme was inaugu-
rated b1' Prime Minisler Rao on ls( Januar1,. 1992.lts main features are :-
* Launched on lst January 1992. Centrc and lhe State Governments
jointll' move to implement the revamped public distribution system
as an effective food security system to reach food at allordable prices
to Lhe poor in rural and remote areas.
+ Target bencficiaries are sixteen crore people living in 1700 blocks of
tribal. deser(. drought prone and hillv areas. Urban poor are also to be
covered.
* 11.000 more Fair Price Shops in the selected blocks to be added to
the more than 7tl.([X) existing shops.
* Issue of over 23 Lakh nrore ration cards taking the total to 280 lakh
ration cards holders in these blocks.
* Additional storage capaciq, of 3.2 lakh rnetnc tonnes of foodgrains to
be created making a total of 40 lakh metric tonnes and also bringing
godou'ns nearer to the shops.
* Tea. iodised salt- pulses and soaps also to be sold through FpS ac-
cording to the needs. This is in addition to six most essential food
items like grains (l'heat & rice), sugar, edible oil, kerosene, soft coke
that are alreadl' being supplicd at lou' prices through Fair price
Shops.
* While the onus of supply is on ollicial agencies, vigilance commit-
tees to be formed of ration card holciers. local MPs. MLAs, consumer
organisations and lvomen's groups to oversee rvorking,of Fair price
Shops, suppll' of essential cornmodities to the benefiiiaries and to
detect bogus ration cards.
* Aimed to control prices, reduce supply uncertainty and to ensure
equitable distribution of essential items.
* This PDS rvill be linked up l,ith various income generating program-
nes (DPAP. ITDP, etc). This will be complemented by nutritional
inputs by providing lorv priced essential items. This pDS will be
essentially poor-oriented.
* Intensit,e interaction rvith CMs of States from August. l99l onwards
to ensure fail-safe arrangements at grass root levels.
* PDS in othcr areas being streamlined to make it more effective.
This issue of subsidising the suppll, of food grains and several other
essential commodities has been gaining more and more prominence in re-
cent )'ears. Politicians of nearly all shades are lrying with one another in
promising this as election issues oblivious of the severe constraints on the
budgetary resources of the Central and State Governments. A full-fledged
Ministry of Civil Supplies & Consumers' Affairs has been set up in the
central Government. It is important that in all such promised schenres there
is proper targetting of the truly poor, and that resources are not given away
to those who do not strictly need such subsidised support.
312 Governmenl and Business
Some of the State Governments have also been handling through their Civil
Supplies Departments commodities like cernent. kerosene, edible oil and
sugar. From the 60's there was much public clamour to which Governmenl
could not be unresponsive that it should organise an efFrcient public distri-
bution system to ensure that the common man, the vulnerable one, was able
to get minimum of goods of everyday need at reasonable prices. The Mohan
Dharia Committee on Essential Commodities and Articlcs, 1973 recom-
mended that the follou'ing l0 mass consumption items should be brought
under public distribution system:
Coarse, cereals. pulses, sugar, \/anaspati and processed edible oil, milk.
common clothing, standard footwear, kerosene and comnrercial domestic
fuel, standard rvashing materials, and school te.xt-books.
It is certain that during the coning vears the Government rvill pa1, more
and more attention to extending the coverage of public distribution in these
essential items, and to subjecting private trade u'here it is allowed to erist to
disciplining and regulation.
In considering the options for distribution ofessential articles lve have to
bear in mind a few very important factors, viz.,
(i) The malpractices and deficiencies which were found in the past in the
distribution of essential articles were a result of shortages in supplies and
are not inherent features of the existing distribution q'stem. In fact this has
been rvell proven b1, the fact that u'ith the restoration of supplies the mal-
practices have disappeared. Soap. r'anaspati, cars, tYres, battery cells and a
host of other products have all become competitivell' available and the trade
is not only unable to charge an1'premium but has to rvork hard to get sales.
Therefore, the real remedy is to improve supplies so that distribution be-
comes a competitive activify.
(ii) In designing a Distribution System for essential articles rve should be
clear about the group it is aimed for. It is no use producing Janata cloth for
the masses rvithout finding out l'hat the masses need or uhether the masses
can afford it. Therefore, rve should realise that the Distribution Sl,stem
everyone is so concerned about it at present meant for the urban population
(i.e., people living in torvns rvith population over 5,000) rvhich constitutes
about 20 per cent ofour total population.
(iii) The existing Indian trade channels provide one of the most effrcient
and economical Distribution Systems in the lvorld because it is able to
operate on very lolv margins (provided the product is adequately supplied
and temptations are not placed in its way). If it is to be displaced by.a
bureaucracy the steep increase in cost to the consumer has to be reckoned
with.
Against this background let us examine the options open for distribution
of essential con:modities to the urban population.
Government Conlrol Over Distribution and price 3t3
1. State Owned Stores
2. Consumer Co-operativcs
The apex Federarion n1aily provides part of the capital through equrty
participation in the central wholesale soiieties. These wholesaleiocieties
act as procurement agencies for the consumer co-operatives which are
fi-
nanced through loans from district co-operative banki.
3t4 Governrnent and Bu,si ness
Strength.r
ll'eaknesses
(i) High or,crheads perhaps constitute the biggest burden on co-opera-
tives rvhen they haye to competc with the normal trade in a situation of
tree
supplies.
(il) Deficienq' in financial management is a common lleakness of con-
Government Control Over Distribution and price 315
authorities for necessary checking and regulation. This will be far simpler
and less expensive than attempting to set up parallel and alternative chan-
ncls for distribution rvhich will have their ovyn deficiencies as outlined
already in any case the real remedy in such a situation of shortages is to
increase supplies and not to concentrate on distribution alone.
At the same time all efforts should be made to modernise the traditional
channels oflrade by providing managerial inputs and training.
The general expcriencc in our couutrv is that the trading communitics
indulge in nralpractices and that their behaviour during sho(ages terd to be
manipulatir,e. Having regard to the vast size of the Indian market and its
manl' complexities an ideal distribution s)'steln rvill have to be a combina-
tion of all three options, viz. government stores, co-operatives, and private
stores operating under government supen'ision.
Under the present public distribution s1'stem, the essential goods of daily
use are distributed through fair price shops. consumer cooperatives and
private retailers lvho are issued licences for the purpose. There are at pres-
ent about 2,33,000 fair price shops carrying a load of I I crore cards. The
Ministry of Agriculture apart from handling foodgrains procurement and
distribution. also deals with allied items like sugar and edible oil. The
Centre has set up its ou'n Civil Supplies Ministrl' and the State Govern-
ments have their orvn cit'il supplies departments to look after the distribu-
tion of essential commodities in their respective jurisdictions. The Ministrl'
of Civil Supplies has nou' been entrusted rvith the overall responsibilig' for
distribution ofessential goods other than foodgrains.
Thus the order lvas intended to protect thc interest of the consumers.
prevent malpractices and abuses by trade, and also to ensure qualitl,control.
But its enforcement nay be diffrcult in of the le'er of iiteraq, in our
'ierv
country, and the large humber of retail points.
PRICE CONTROL
Price control, usualll, under the Essential commodities Act but at tirues
even under infornral arrangemcnt urade b1, the Governrnent, pla_t,s
an inrpor-
tant rolein the regulation, of the entire spectrun of cconomic acti'itics
including production. distribution and consunlption. price controls fall into
two categories: statuton' and informal. Statutory price control exists in
ations in the form of control, each more conrplex and sophisticated than
the
othcr' requiring at every step an elaborate administrative structure to imple-
ment them.
Prices are also determined b1'the changes announced from time to time
Government Conlrol Over l)i,stribution and ]'rice 319
the food requirements of our population. Price control would have discour-
aged the producers. There would have been no Green Revolution and rve
would have had to import foodgrains rvhich in turn lvould have made it even
nrore expensive. It rvas through a lvell conceived Price Support system (the
opposite of price control) that India became self suffrcient in foodgrains.
Having thus assured adequate availability through incentives to the pro-
ducer, Lhe best rvat' to ensure supplies at affordable prices to r,ulnerable
sectjons is through a subsidised public distribution programme based on
incourc of thc rccipient.
In trying to appreciate the background behind some of the recent price
control measures u,e should note that the recent past has been characterized
bt, (l) rapid international price rises: (ll) domestic price inflation and (ilt)
stagnation of investment. All the threc phenonrena have had an impact on
the formulation and revision of price controls. Whereas price controls tend
to perpetuate thernselves and be forgotten like spidenvebs in dirty corners
u'hen the overall price level is reasonably stable, this is no longer so under
conditions of rapidlf increasing prices. When inJlation sets in, price revi-
sions have to be undertaken more and more frequently, espcciallf in a
system like India uhere onh' a fairll, limitcd number of products have
regulated prices. Under these conditions prices of imported or domestic rarv
materials and inputs increase, invcstment costs go up. profitabiliq goes
dorvn. production stagnates or is dir.erted into non-controlled generally less
essential lines of product (such as the more expensivc r.arieties of products
luxury soaps. \'anaspati, art paper. etc ) and investmen( levels fall off.
- Spurred b1'these circumstances the price control system has come under
severe attacks in recent times. First of all, the level of controlled prices has
had to be relised upl'ards for most products from time to time, in particular
for those items lhose prices have fluctuated u'idely in the international
markets. No complete list of these revisions is available. But on a rough
estinrate it appears that price adjustments have ranged from 3 per cent to
over 100 per cent, and were justified either by the increase in domestic
inputs or by the rise in international rarv materials (oil, fcrtilizer. steel, and
non-ferrous metals). In the case of fertilizer, the increase in the domestic
sales price u,as only in part passed on to the domestic producers: the re-
mainder was mopped up to compensate for the even larger price increases,
and the losses suffered on the imported fertilizer.
But the recent changes went further than a simple raising of price levels.
Because of the widespread and rapid rise in prices, and probably because of
the stagnant investment levels as well, the process of rethinking on the price
control systen rvhich had already set in before, was accelerated and carried
further. Having had to adjust the price levels more and more frequently
because of inJlation, in manl' cases in the face of a shrunken level of
Governntent Control Over Distribution and Price 321
domestic dernand and consequent$ with a largely reduced, and often elimi-
nated, gap between supply and demand, the responsible authorities were
forced into wondering whether the game was still worth the candle, and
whether it rvould not be better to get rid of some of the controls altogether.
In fact that is what they decided to do. In some ofthese cases the decontrol
was brought about after some previous price rises had been granted. In
others the decontrol was effected right away.
In fact "decontrol" is often the rvrong rvord for what happened. Al-
though in some cases there has been pure and simple decontrol and produc-
ers are now authorized to set prices as they please (although the Damocles'
ss'ord of renewed control is alwal's hanging about their head), in some
cases the decontrol is accompanied by a number of (often unpublished)
riders and guidelines partly circumscribing the freedom of action of the
producers. These riders may include the obligation to produce a certain
percentage of cheaper varieties (e.9. the "Janath" soap) or to use only a
certain percentage of raw materials input (e.g. groundnut in the case of
Vanaspati), in which cases we are really dealing with a kind of production
control. In a number of other instances a dual pricing system has been set
up, forcing the producer to sell a certain quantity or percentage of his
production to Gorernment procurement agencies ( as for the steel, paper,
sugar and foodgrains) in which case u'e are in effect dealing with a form of
distribution control. In other instances still, the product has been decon-
trolled, but only afler obtaining a promise from the producers that they will
distribute their production over the country according to a predetermined
demand pattern (as in the case of truck-tyres). Finally, in some other in-
stances (kept very hush-hush) the Government has let the producers free to
set their own prices provided (a) capacity utilization lwels are satisfactory,
and (D) profit levels remain rvithin certain specified limits.
An efficient and trust$'orthy distribution system is essential in an econ-
omy like ours where marginal shortages can sometimes lead to very dispro-
portionate distortion in prices thereby benefiting only the more privileged
sections of the population. In recent years the public distribution system in
India has gone on expanding fast and it will, according to all indications,
continue to grow. However, in view of the country's vast size and com-
plexities it may not be possible to rely completely on Government agencies
and dispense with retail private sector channels altogether. The problem of
distribution of essential goods is going to receive an enonnous amount of
attention from both the Government and the consumers. Distribution em-
ploys and has the potentiality of employing a very significant percentage of
our population with comparatively much less investment. In view of this,
the chronic shortages of essential goods of mass consumption.and their
rising prices the Government should come forward with a long term distri-
322 Governntenl and Bu.siness
This is the latest piece of legislation in an area where there are already
several overlapping larvs, and yet there is no significant impact on the life
of the ordinary people lvho continue to be exploited b1, unscruplous traders.
The justification for this legislation is that the earlier legislative mea-
sures have been successful to some exlent in creating and maintaining com-
petition and protecting the consumers against false or misleading adi,ertise-
ments, bargain sales, bait and switch selling, and other similar unfair trade
practices but consumers need to be protected not only from the effects of
restrictive and defective goods or defi_.
cient services. ulous exploitation. Fur_
ther, ignorance of consumer movement
and lack of due recognition to the consumer organisations have also been
some important factors rvhich led to the enactment of the consumer protec-
tion AcL 1986,' (hereinafter referred to as the Act). The Act is a compre-
hensive legislation with its main thrust on giving speedy redressal and
compensation to the consumers. The Act (except chapter III) came into
force on April 15, 1987.2 However, the provisions of chapter III of the Act
came in operation from Ju.ly l, 1987.
This Act, extends to the whole of India except the State of Jammu and =
Kashmir.3 The provisions of the Act are in addition to and not in derogation
of the provisions of any other law for the time being in force.j The Act
applies to all goods and services unless specihcally exempted by the central
Government Control Over Distribution and Price 323
Government by notification.s For the first time in the history of the socio-
economic legislation of our country, the role of the consumer organisations
has been recognised in this AcL and other Acts6 like the Stindards of
weights and l{easures Act, the Drugs and cosmetics Act, tlrc prevention of
Adulteration Act, the Essential commodities Act, the Agricultural produce
(Grading and Marking) Act, etc. The Act provides for setting up of Con-
sumer Protection councils at the central and state levelsT to promote and
protect the rights of the consumers and a three-tier quasi-judicial machinery
for redressal of consumer grievances.E State includes union territories also.e
Though the union territories may have their own state council, District
Forum and State commission. The administrators of the union territories of
Andaman arid Nicobar Islands, Chandigarh, Delhi, Goa, Daman and Diu,
Lakshadweep and Pondicherry, and Dadar and Nagar Haveli have been
authorised to exercise powers and discharge functions of State Government.
The Act, has envisaged the setting up of the consumer protection coun-
cils at the central and state levels, namely, the central consumer protec-
tion Council and the State Consumer Protection Councils.
A. District Forum
A consumer Disputes Redressal Forum to be known as the "District
Forum" is required to be established by the State Government with the prior
approval of the Central Government in each district of the State.22
(a) the opposite party or each of the opposite parties, where there are
more than one, at the time of the institution of the complaint,
actually and voluntarily resides or carries on business, or personal-
ly works for gain, or
(b) any of the opposite pades, where there are more than one at the
time of the institution of the complaint, actually and voluntarily
resides, or carries on business, or personally works for gain, pro-
vided that in such case either the permission of the District Forum
is given, or the opposite parties who do not reside, or carry on
business, or personally work for gain, as the case may be, acqui-
esce in such institution, or
(c) the cause ofaction, wholly or in part, arises.
(a) the consumer to whom such goods are sold or delivered or such
services provided;
Government Control Over Distribution and Price 32i
(b) any recognised consumer association, whether the consumer to
whom the goods sold or delivered or service provided is a member
ofsuch association or not; or
(c) the Central or the State Government.
It is evident from the aforesaid provisions that the complaint may be
filed by the affected consumer himself or by any recognised consumer
association even if that consumer is not the menrber of such association.
The recognised consumei association means any voluntary consumer asso-
ciation registered under the cornpanies Act, 1956, or any other law for the
time being in force.32
Further, the central and State Governments have also been vested with
wide powers to file complaint in relation to any goods sold or delivered or
any sen,ices provided. The Governments may file the complaint of their
own, lvhenevef they find that the goods sold are defective, or services
provided are deficient; or prices are over-charged.
(iii) Contplainant
clause (b) of section 2(l) of the consumer protection Act dehnes the
term complainant which means
(i) a consumer; or -
(ii) any voluntary consumer association registered under the Compa-
nies Act, 1956 (lof 1956) or under any other law for the time being
in force: or
(iii) the Central Governmenl or any State Government, who or which
makes a complaint.
For the first time, the registered consumers' associations hale been
recognised and have been assigned important role of protecting the consum-
ers. clause (n) of section 2 of the Monopolies and Restrictive Trade prac-
tices Act also defines "registered consumers' association".33 It means a
voluntary association of persons registered under the Companies Act, 1956
(l of 1956) or any other law for the time being in force which is formed for
the purpose ofprotecting the interests of consumers generally and is recog-
nised by the central Government as such association on an application
made in this behalf in such form and such manner as may be prescribed.
The Central Government has made the rules namely, the M.R.T.p. (Recog-
nition of Consumer Associadon) Rules, l987ra for the purpose. According
to these rules, every consumer association which is desirous of being recog-
nised as a registered consumer's association, must have not less than ten
consumers as its members and shall make an application on the prescribed
form with a requisite fee of Rs.. 500/- to the central Government in the
Department of Company Affairs. The Department of Company Affairs may
after scrutiny, issue a certificate of recognition or may refuse to issue such
328 Government and Business
certificate. The applicant shall be informed of the reasons for such refusal.
Howevet, applicant may be
required t e called for. Every
registered copy ofthe certifi_
cate of recognition to the concerned consumer Disputes Redressal commis-
sion established under the Consumer Protection Act.
(iv) Consumer
The term 'consumer' has been defined in clause (d) of section 2(l) of
the consumer Protection Act, 1986. 'consumer' means any person lvho,
-
(i) buys any goods for a consideration which has been paid or prom_
ised or partly paid and partly promised or under any system of
deferred payment and includes an)/ user of such goods other than
the person rvho buys such goods for consideration paid or promised
or partly paid or partly promised or under any system of deferred
payment when such use is made with the approval of such person.
but does not include a person who obtains such goods for resale or
for any commercial purpose, or
(iD hires any seryices for a consideration which has been paid or prom-
ised or partly paid and partly promised, or under an1, system of
deferred payment and includes any beneficiary of such services
other than the person rvho hires the sen,ices for consideration paid
or promised, or partll' paid and partly promised, or under any
system of deferred payment, when such services are availed of with
the approval ofthe first mentioned person.
(v) Complaint
clause (c) of section 2(l) of the consumer protection Act defines 'com-
plaint' which means any allegation in writing made by a complaint that _
(i) as a result of any unfair trade practice adopted by any trader, the =
complainant has suffered loss or damage;
(ii) the goods mentioned in the complaint suffer from one or more
defects;
Government Control Over Distribution and Price 329
the ground that the principles of natural justice have not been complied
with. It may be noted that the requirements of natural justice do not remain
fixed nor they remain the same in every case and in all circumstances.sa The
applicability of the principles of natural justice depends on55-(i) the
scheme and policy ofthe statute; (ii) nature ofjurisdiction conferred on the
authorit]'; (iii) character of rights of the persons affected; and (ir) relevant
circumstances disclosed in a particular case. Under the Consumer Protection
Act, the procedure to be follorved requires-rcferring of complaint to the
opposite part)': providing him an opportunity to give his version of the case;
analysis or testing of the goods b1, appropriate laboratory: and considering
the el'idence produced by the complainant and the opposite partl'. This
procedure seems to be on the lines of the principles of natural justice.
(a) to renove the defect pointed out by the appropriate ldboratory from
the goods in question;
Governrhent Control Over Distribution and Price 335
Eve4, order made by the Forum shall be signed by all the mernbers
constituting it, and, if there is any difference of opinion, the order of the
rnajority of the members constituting it shall be the order of the Forum.65
B. State Commission
sen'ices and compensation claimed exceeds rupees one lakh but not more
than rupees ten lakhs) may prefer an appeal against such order to the Na-
tional commission within a period of thirty days from the date of the order.
However, the National commission may entertain an appeal after the expiry
of the said period of thirty days if it is satisfied thal there was suffrcient
cause for not filing it within that period.T?
It ma1, be noted that an order rnade by' the State Commission on an
appeal against the orders of the District Forun, is not appealable to 1he
National comnission. Thus, the provision exists only for a single appeal to
the State commission fronr the orders of the District Forum and no further
appcal will lie from the orders of the State commission to the National
Commission.
An appeal under section l9 ofthe Act can be preferred only b1, a .person
aggrieved'. The expression 'person aggrieved' does not mean a person u,ho
is disappointed or annol'ed at a decision. The lvord 'aggrieved' connotes
some legal grievance. e.g., deprivation of something an adverse effect on
the title of something and so on.73 He must show that the order affects his
orvn right or is not in accordance u'ith lavy or confers a right on a person to
n'hich he is not entitled.Te The expression 'aggrieved person' does not in-
clude a nere busybodl 'w'ho is interfering in things rvhich does not concern
him.80 Since the Consumer Protection Act deals rvith the matters of great
public importance. it is subnritted that the u'ord 'aggrieved person' should
be given a rvider neaning and not a narro\\, construction.
C. National Commission
The highest authorit]'to settle the consumer disputes under the Act is an
independent statutory bod1,- the National Commission.
ment should refer such an inquiry to the supreme court and then it should
proceed for the removal on the basis of the report of that inquiry. It is hoped
that this procedure, if follor,ved, will help to secure the independence of the
Commission.
It may be noted that the State Governments have yet to make rules in
this regard, under the consumer Protection Act.e3 It is submitted that the
state Governments may adopt the aforesaid rules with necessary modifica-
tions for the removal of the President and members of their respective State
Commissions and District Forums.
(iv) Tcrm of Office and Remuneration
The salary, honorarium and other allowances payable to and the other
terms and conditions of sen'ice of the menrbers of the National commission
shall be such as may be prescribed by the Central Governnent.ea In this
connection the central Government has laid down the relevant provisions in
the consumer Protection Rules, 1987. According to rule l2(2),the president
and the menrbers shall hold office for such period, not exceeding five years
as may be specified by the central Government in the notihcation, but shall
be eligible for re-appointment. Horvever, no President or a member shall
hold office as such for a total period exceeding ten years or after he has
attained the age of 65 years, whichever is earlier.e5
The terms and conditions of sen,ice of the President and the members
shall not be varied to their disadvantage during their terms of ofIice.e6
Rule I I of the Consumer Protection Rules, lays dorvn the salaries- hono-
rarium and other allowances payable to the President and Members of the
National commission. According to these rules, rvhere the president of the
National Commission is a sitting judge of the Supreme Court, he shall enjoy
all the benefits which he should have enjoyed as sitting judge of the Su-
preme Court. Where the President is not a sitting judge of the Supreme
Court, he shall receive a consolidated honorarium of Rs. 8000 per month.
other members, if sitting on rvhole-time basis shall receive a consolidated
honorarium of Rs. 6000 per month or if sitting on part-time basis a consoli-
dated honorarium of Rs. 300 per day for sitting.e? The president and other
members shall also be entitled to travelling and daily allorvance on offrcial
tours at the same rates as are admissible to Group 'A' oflicer of the central
Government.es The salary, honorarium and other allowances shall be de-
frayed out ofthe Consolidated Fund oflndia.
to take an undertaking that they do not and will not have any such financial
or other interests as is likell' to effect prejudicially their functions as such
members.roo Further, the procedure for the removal of the President and
members as laid down under rule 13 of the Consumer Protection Rules is
such that it prevents the Central Government from acting on any extraneous
ground or arbitrarily. In order to ensure the impartial rvorking of the Presi-
dent and members, they are prohibited from taking any appointment in or
being connected rvith the mattagement or administration of anl organisatior
rvhich have been the subjcct of anl proceeding under the Act during their
tenure.ror The prohibition is for a period of ltve vears from tlte date on
l,hich they, ceases to hold such oflice. It ma1'be noicd that the contrat'en-
tion of these provisions has not becn made an offenca.ro? A person ulto
contravenes can. at the 1'orst. be onll' prevented b-'1' an injunction b1' a civil
court.
To secure a similar independence of the State Comn-rission and the
District Forums. it is srrbnritted that the State Governnents (*'hich haye I'et
to frame the rules under the Act) mav also adopt the similar rules for the
sake of convenience and uniformiq' in all over the country.
published in the Offrcial Gazette or through any other media and no legal
proceedings shall lie'against the Commission or any media for such publica-
tion.rrs
lmport Control
Import control has now lost some of its relevance after the massive
liberalisation from l99l onwards, but still continues to be an important tool
in the government's armoury of economic controls. Import tariffs in some
form or other constituted an essential feature of mer-cantilist economic
policy during the greater part of the l6th and lTth centudes. From about
1860 this policy was discouraged with the spread of the free trade move-
ment, sponsored largely by Britain which had an industrial monopoly in the
world. However towards the end of the century, tlere was once again a
growing move away from free trade spearheaded by Frederick List in Ger-
many who sought to establish protected zones Zollvereins to shelter
- -
and stimulate nascent domestic industry. This took the form of a general
movement in most countries towards protection of the country's own indus-
trial and agricultural interests from foreign competition and this tendency
has prevailed ever since, assisted by special circumstances from time to
time, e.g. the two world wars which intemrpted international trade and led
to new crops ofrestrictions. The great depressions ofthe 1930s also acceler-
ated this movement, and many countries took to a policy of ..export of
unemployment" by obliging the citizens to buy home-produced goods in-
stead of imported ones.
It has also been seen that development and rising national income al-
ri'ays produce a strong tendency for imports to rise rap=idly in tlre absence of
special measures to the contrary. A higher income in any corintry calls for
an increased supply of the goods and services which are traditionally im-
ported. In India this rise has been more than proportional to the rise in
national income on account of the consumer's preference for spending a
bigger proportion of his income on manufactures of more advanced type
(automobiles and electrical goods, etc.) and the higher proportion of im-
ported machinery in the overall ratio of imports to income. The resultant
strain on foreign exchange also makes import and exchange control a neces-
sary tool for a country's economic development. The old controversy be-
tween free trade and protection hhs bec-ome largely unreal today. protection
and import control are everywheie regfoded as essential parti of national
346 Government and Business
To. sum up, import control can be said to have the following
_. general
objectives:
LEGAL FRAMEWORI(
Recent Liberalisations
This process was helped by the devastating effect of the second oil price
hike (1979-80) over India's oil import bills ind led to adverse balance of
products for which suf,hcient capacity had already been established in tho
country. This policy served to hurt Indian industry in a manner which could
have been avoided.
But it must be said to the credit of the I.M.F. loan that it provided India
a cushion to carry into effect certain necessary structural adjustment meas-
ures in her economy which showed their import in several years. These
measures rvhich formed part of the Sixth Plan included massive investment
in key import-saving sectors such as petroleum, vigorous export efforts,
strengthening the industrial base through import oftechnology and capital
goods, and efforts to mobilise iruvard remittance by non-resident Indians.
These measures bore fruit. As a result of increase in the domestic produc-
tion of crude oil (11.8 million.tonnes in 1977-80 to 27 million tonnes in
1984-85), import of oil as per cent of consumption declined from over 70
per cent in 1980-81 to about 34 per cent in 1984-85. (Rs 5,239 crores in
1980-81 to Rs 3,237 crores in 1983-84). During the earl-y 1981, there was a
declining trend in trade deficit despite the continued imports of foodgrains,
iron and steel and edible oil. On the whole, there was also a favourable
balance of trends and increase in foreign exchange resewes. The rate of
growth of imports which had touched 31 .3 per cent in 1980-8 I slowed down
to 8.4 per cent in l98l-82, 5.5 per cent in 1982-83 and 9.8 per cent in
1983-84. In fact a comfortable balance of payments position enabled India
to decide not to draw the last tranche of the IMF loan. But by 1985-86 with
exports growth slowing down and imports showing a sign of coming down
(an increase of 25 per cent in imports against a 0.? per cent decline in
exports). Indian trade deficit was once again become a matter of serious
concern. The balance of payment diffrculty reached a crisis by 1990-91
forcing India to once again approach the IMF for massive loan. This once
w govemment (June,
import control regime
on Trade Policy was
ation. Obviously crude and fertilizers must have the pride of place in any
such long-term scheme of imports. Similarly, it should be necessary to plan
in advarce the import of sensitive items like edible oils and cotton whose
scarcity, depending on crop conditions does not create price rise and general
irstability from time to time. These should, therefore, have a prior claim on
the foreign exchange resources of the country. But as regards import re-
quirements of industries, Government must review the concept of essential
and non-essential imports. The main scope for import substitution may be in
agriculture and related products, edible oils, sugar and fertilizers. There is
need for a long-term plan of importing components, spres, balancing
equipments and capital goods and machinery for replacing and modernizing
many of the units in textile, sugar, jute and engineering industries. We
cannot afford to hurt the interests of Indian manufacturels of plants and
machinery in these areas, nor harm the development of labour-intensive
technology relevant to Indian conditions. But from a long-term view-point
the weight of advantage may be in speedy modernization, and technology
replacement and upgradation in these industries which have suffered from
obsolescence rather than in waiting indefinitely to have the process com-
pleted entirely by means of plant and equipment manufactured indi-
genously. Before allowing import of foreign industrial machinery the Gov-
ernment should make an assessment of the tlpe and the strength of the
technology available in the industry in question and make sure that such
imports will not hurt the growth of indigenous technology when it is capa-
ble of seH-sustained growth. The thrust should be towards achieving some
long-term gains for our economy with a view to building up export capabili-
ty and export oriented production, agricultural self-sufficienry, and long-
term import-substitution in capital and essential consumer's goods. Above
all the import policy should be based on a reasonably long-time horizon
rather than just one year. Happily there are some indications to this effect in
the tmde policy announcements of 1991 and 1.992.
A copy of this statement is arnexed.to this chapter. There were several
other key liberalisations such as the partial convertibility of nrpee on trade
account (replacing the short-lived export-import script experiment) and
wentually firll convertibility on trade account in 1994. The copy of the
Export and Import Policy (1992-97) annexed to Chapter 12 is also signifr-
cant.
References
The Janata Govemment changed the colour of this book for 1977-78 from
ttre usual red to green with a red band But this was shortlived.
Aithough the qiestion whether the Red Book and the Handbook have
statutory force is not clearly settled, it can be safely asserted in the light
TI
'l
Import Control 359
of over two decades of experience that they have oome to acquire some
kind of near-stafutory foroe, There is a conflict of opinion among the
High Courts on this point. The Calcutta and the Punjab High Coruts have
held that these two documents do not have statutory force. The Madras
High Court, on the other hand, has consistently held otherwise. The Su-
preme Court has not pronounced directly on this point, but held in its
landmark decisions in Union of India vs. Indo-Afghan Agencies Ltd. that
in exceptional cases the courts may enlbrce the provisions ofthese books
even ifthey are not regarded as having statutory force.
3. AIR 1957 Cal83.
4. P. Desai Substitution in the Indian Economy I95I-62, Chapter
-bnport
2. AIso see B.J. Ahmed Import Substitution and Structural Changes
in
-
Indian Manufacturing Industry 1950-1966, Journal of Developmental
Studies, Vol. 4, 1968.
5l See Desai op. cit.
6. For a good discussion on the economic impact of quantitative import
controls in India see Bhagawati and Srinivasa4 Foreign Trade Regimes
and Economic Development in India, Macmillan, Chapters lZ, 13,lS,16
and Part V.
7. Bhagauratr and Srinivasaq ,op. cit.,p. 40.
8. Bhagawati and Srinivasarl op.cit.,pp. 42-43.
9. J.Bhagawati, "Indian Balqtce of Payment Policy md Exchwrge Auc-
lions'. Oxford Economic Papers, F'ebruary, 1962.
10. Bhagawati and Srinivasary op. cit.,p. 51.
Chapter Twelve
procedural constraints.
The growth of India's exports in spite of the spectacular increases in
recent yearsr has been siow over a period of three decades. our exports
constitute only about 60/, of our GNp. A comparison of the volume indices
of world's and India's exports as shown in the following table reveals the
continuous decline of India's share in the world trade.
Taels 12.l
India's Share in World Trade
(US dollars in millions)
and that growth has not been as impressive as it could have been except
rvhen the base is markedly lorver than that of those competitors. Thus there
is no ground for complacenry, and we should seriously examine the poliry
system, the variable which are rvithin India's control as distinct from those
rvhich are no1, and the effectiveness of the incentives and promotional
structure.
Expanding exports depend both on factors rvhich are rvi(hin India's
control (e.g. r'olume of exports) and those u'hich are outsidc (e.g. market
access, e.rport prices, import prices). We are onlv concerned with the for-
mer. The volume of expo( is the most important factor u'hich India can
influence lith least difficulty. A I per cent per annum rate of grolth of the
volume of export can have the same effect on the actual capacity to import
as an equivalent rate of improvement in the term of trade which is much
more difficult to achieve. The volume of exports is determined by several
key factors, viz. demand, price, qualitv and availability. These u'ill vary
from product to product.
BASIC CONSTRAINTS
INCENTIVES SYSTEM
This brings us to the incentives given by the Government till recently for
encouraging export. The export incentives which were adopted in the past
took three broad forms: (l) fiscal measures such as outright cash subsidy,
exemption from sales tax on final sales, refund of indirect taxes, direct tax
concessions through duty drawbacks, rail freight concessions for offsetting
the transport disadvantage; (2) import entitlement schemes; and (3) conces-
sional credit. These also include other miscellaneous things such as assis-
tance in market research, award for outstanding export performance, release
of foreign exchange for export promotion, blanket permits fcir export pro-
Export.s and Government Policy, Pronrotion and Perfonnance 375
motion tours abroad, and priority treatment in the allotment of scarcity raw
materials used in export production at concessional prices. But the system
of incentives and subsidies apart from being very costly tended to be admin-
istration-ridden and introduced much distortions and for exemption.
Export Credit
In the field of export ltnauce on l'hich cxport promotion dcpends con'
siderabll'. the Reserv'e Bank of India plal'ed a cmcial role. It controlled and
co-ordinated the banking facilities to make export fittauce at,ailable at the
riglrt time and in right quantum. It maintained concessional interest rate that
varied from time to time. For several y'ears the RBI's funcdons were mostly
taken over by'I.D.B.I. rvhich established its o$n export credit division. This
continued till 1982 u'hen the nell'I1' 5s1 up Export Import Bank took over
from the LD.B.I. the export hnancing and reltnancing schemes rvhich the
latter uas discharging till then.
The Central Government has also set up the Export Credit and Guaran-
tee Corporation for providing investment risk insurance to exporters. The
risk value representing to total value of the export cot'ered by the ECGC's
insurance policies reached Rs 2,121 crores in 1975. It has extended its
operation to cover joint ventures and turnkev projects in third countries and
to blanket credit coverage to banks in respect of all pre-shipment advances.
Export Houscs
Among the promotional measures rve should also note the Expo( House
Scheme undcr u'hich an organisation on obtaining a Recognition Certihcate
as Export House from the Ministrl' of Commerce (Chief Controller of Im-
ports and Exports) could get a number of incentives and facilities which
van'from time to time.
In the past the impact of these incentives rvas affected by their uncer-
tainty and by the delays in payment of monel' and granting of licences.
Since these incentives are r.ital for long-term planning of profitability of
export, it is necessary that the conception of the time horizon should be
implemented. From the analt'sis of all the major export incentives made
above it is quite clear that the entire s)'stem rvas very complex and admini-
stration-ridden. Also, the effectiveness of these incentives was very often
reduced by the physical distance betrveen the centre of decision-making and
the manufacture-exporters at the grass-root levels, specially the smaller
ones, the absence of delegation to the field offrces, and the immense discre-
tionary authority vested in the agencies rvhich is capable of being used
arbitrarily. Not only is the range of commodities large and the policies
overlapping, but they tend to be very detailed and spec'fic, involvirig alarge
,.376 ---
Government and Business
EXPORT OBLIGATIONS
Exporls and Governrtent Policy, Promotion and Performance 377
EXPORT SERVICING
CONSULTANCY SERVICES
During the 70s Indian consultancy organizations, both in the public and
private sectors, have established themselves in the developing countries
because of the conrparative attractiveness for them of the intermediate tech-
nologies developed in India and also because of their lower costs compared
to the cost of Western consultants.
There rvere a numbcr of lndian consultancl'organizations rvhiclr have
been able to give efficient technical sen,ices to developing countries. These
sen,ices have resulted not onl1, in direct earnings offoreign exchange- but in
a number ofcases in increased exports oflndian manufacturers.
Some of the consultancy organizalions established in the public sectors,
u'hich have contributed in exports of Indian technological skills. Indian
knor,v-horv and the technical services in developing countries are mentioned
below:
1. National Industrial Development Corporation.
It has handled 30 projects in African and Asian countries mainlS' in the
line of Chemicals, Mining. Metallurgy, Blectronics, Civil Engineering, Con-
structions and Techno-Economic Sen'ices for setting up of projects on turn-
key basis.
2. National Research Development Corporation.
It has sold Suri Transmissions to West Germanl', a high draught Kiln to
Nepal and technologies for manufacture of Hectivated Carbon to Philip-
pines. This firm has also sold technologies to LIK for the manufacture of
Dry Ready-to-rvet Sausage Castings and also to USA, a technology for Wet-
Heat-Resistant Leather.
3. Hindustan Machine Tools Ltd.
This firm has signed a technical collaboration agreement with Messers
Wickman lt{achine Tool Sales Ltd., UK for manufacture of Short piece
Turning Machines (mini-chucker) which have been entirely developed and
designed by HMT, and also agreements to provide knorv-horv to Ceylon
Steel Corporation, Sri Lanka and machine tool manufacturing company of
Philippines for manufacture of simple tlpe of machines tools.
4. Engineering Projects (India) Ltd.
This is a consortium of 7 leading public sector enterprises who are
manufacturing various plants and machinery in India. This firm has pro-
vided consultancy services to Yugoslavia, Kurvait, Iran and other countries.
Recently EPI have silned an agreement for conducting a feasibility study
for setting up a steel plant in Ghana.
5. Engineers India Limited.
- This firm is setting up trvo refineries in Iran and fertiliser and refinory
project in Iraq.
380 Government and Business
Joint ventures abroad bi' tndian firms have become significant in recent
years. Sometimes they take the form of joint entelprises uith firms from the
major trading partners of India in third countries. The changing pattern of
India's trade has also brought out the need for inr,'estment abroad by Indian
exporters of capital goods and turnkey projects. Recent trade agreements
be(ween India and several countries have dmphasized such joint projects.
The Ministry of Commerce is the focal agenry which approves joint ven-
tures abroad, on the basis of scrutiny by an inter-Ministerial Committee.
Initially, the contribution by the Indian party could only be in the form of
capital goods exports. Under the policy announced in 1976 the Government
also decided to permit cash participation in equilv in special cases. From
around 1980 for about tlvo ),ears a scheme for permitting 100 per cent
overseas subsidiaries by Indian companies on a very selective ventures. The
Indian joint ventures numbering around 300 by 1985 have become signifi-
cant in a number of countries. There are some leading success stories.
Unfortunatell' the mortality rate of these joint ventures has been very
high and about 50 per cent ofthem till now seem to have fallen by the way
side. Then again. their impaa by way of net inflorv of resources has been
Exports and Government Policy, Prornotion and Performance 381
sizes that India's failure on the export front, "... remains very much a
problem of production and in a macro-econontic sense, it is unrealistic to
expect that exports rvould grow significantly faster than real national in-
come." This diagnosis of the conrtnittee that out problem of exports has
been a problem of production, althouglt debatable is largely true.
While there is no objection to the Committee's fundamental assumption
of the close correlation betu,een domestic production and expotls and bc-
twecn grouth irr GNP and groulh in exports. the Contnrittec secnrs lo ltavc
failcd to appreciate that slol' grorth of erports nta\ r'lol necessarih' bc llrc
effect oflorv production level, but can also be the causc, and lhat ellcourag-
ing specialisation in export sector can some timcs yield good results, We
should therefore identi$ and specialise in secLors t't'ltere u'e ltave contpara-
tive advantage not only' in the short-run but also in the long-ntu. and should
not vierv exports only as a problem ofproduction.
In revieu'ing the schcmes for incentilcs and concessions frlr exports. tlte
Committee strongly pleads that the export promotion policics tnusl graduate
from an emphasis on compensation to an enrphasis on incentive and relvard.
Horv this should be attained is not clearly spel( out although some of its
recommendations, especialll' those relating to inconrc tax cottcessions are in
the nature of express incentirres rather than simple compensation.
The improvements in the policl'and procedure goverrting the dun drau-
back scheme suggested b1'the committee merit immediate consideration.
On the general issue of export promotion vs. impon substitution the
committee enphasises:
"... export promotion and import substitution are neither mutualll exclu-
sive nor alternatirre strategies of development. They reprcscnt tu,o sides of
the same coin ... In principle. therefore, export pronrotion and intporl
substitution should receive equal attention. At the margin, horvever. thcre is
a case for preference in favour ofthe export sector." It should be recognised
holel'er, that expo( promotion and import substitution are not totallf inde-
pendent of each other. In our trade policy, there has been a tradition of
penalising exports for the sake of prontoting import substitutiott Not on[1'
rvas the degree of protection for exports verv often negative but evcn thc
effective e.rchange rate for e.\ports rvas significantly lotter than thal for
producing imporlables. Analrtical studics shorv that even the 1966 devalu-
ation. instead of being neutral in its effcct on exports vis-a-r'is import sub-
stitution, carried a bias in favour ofthe latter
In recent years there havc been some significant shifts in enrphasis in the
export promotion poliry of the Government in tune with the nerv trends
Exports and Government Policy, Promotion and Performance 385
towards pragmatism seen in the overall industrial licensing poliry and pro-
cedure. These are important not only because they are likely to have a
favourable impact on the export performance. In 1989, profits earned on
exports were made exempt from Corporation Income-Tax (Section 80 HI{C
of the Income-tax Act). In a way, this is a much more valuable incentive
than providing artificial crutches like cash compensatory support or duty
draw back. The downward adjustment of the Rupee in terms of the US
dollar by 18 per cent in July, 1991 was also intended among other tbings to
make exports more aftractive. This comprehensive package of stabilisation
measures were followed by the new 5-year Exim Policy announced on 31st
March, 1992 which has brought about massive deregulation of govern-
ment's functions and has made trade free subject to a small negative list. A
summary of this short document, is given in the Annexure to this chapter.
The renaming of the offrce of Chief Controller of Imports and Exports as
Development Commission of Exports symbolises the change.
PROSPECTS
For long-term export growth the removal of tlte known constraints on effr-
cient production must form an important part of the export strategJi. Some
of the basic points that need emphasis in the overall poliry system are: (l)
Incentives are required over a longer time-horizon given the general penali-
sation of exports implicit in the trade policy system. (2) The incentive
system should be simple and easily understood. (3) The cash incentive
system being prone to abuses, incentives through tax reliefs and concessions
as an alternative system should be considered. The pgssibility and compara-
tive merits of differenlial rates of taxation on prohts earned on exports
should be seriously examined. (4) Exporters must have easy access to what-
ever imported inputs are required. (5) The creation of exportable surpluses
in an environment of rising demands will have to be given some attention.
Some of the recent improvements have been pady due to conscious depri-
vation of the, home market. A balance has to be struck between home
consumption and exports. It is necessary to emphasize the need to link
exports rvith specially sponsored export-oriented projects designed to pro-
duce exportable surplus. (6) Emphasis should be on the most effrcient use of
India's own resources on the basis of better utilization of the unit value
rather than the export of any and all goods manufactured in India. To take
one example, the present system offers parallel incentive to all export com-
modilies irrespective of their relative competitive ability and economic
strength. But we should also consider having a more discriminatory ap-
propch where some commodities may need greatil incentive than others.
Similarly, since export prices differ according to destination the destina-
tional aspects of exports must also receive special consideration. (7) Be-
386 Government and Businiss
a misfortune, but as a
source of supplies for
light machinery and a
need considerable vol-
References
GTaPTERt)
IMPORTS
tr'ree
Importability
Import of
second hand
capital gorrds
without licence
26 Deleted.
27. Deleted.
Exports and Govefrunent Policy, Prornotion and Performance 393
28. Deleted.
Other 29 All second hand goods, other than capital goods, may be import-
second hand ed in accordance with a Public Notice or a licence issued in this
goods behalf.
Inport of 33. After completion of the projects abroad, project contractors may
used machinery import, u"ithout a licence, used construction equipment, machin-
and equipment ery, related spares upto 15% ofthe CIF value of such machinery,
tools and accessories on the basis ofproduc{ion ofevidence of
394 Government and Business
purchase for and use in the overseas project. Used office equip-
ment and vehicles may also be imported after completion of the
projects abroad, without a licence, but subject to the condition
that they have been used for at least one year.
Trade rvith In the case of trade with neighbouring countries, the Director
neighbouring General of Foreign Trade may issue from time to time such
countries instructions as may be required.
CHAPTER 1.7
Scheme 37 Capital goods may be imported with a licence rmder the Export
Promotion Capital Goods (EPCG) Scheme.
Import on Capital goods (including spares upto 10% ofthe CIF value ofthe
conccssional capital goods) may be imported at a concessional rate of customs
dutv duty of I 5% subject to an erport obligation offour times the CIF
value of the imports. The export obligation shall be fulhlled
within a period of five years from the date of issue of the import
licence.
Export 41. The follorrving conditions shall apply to the fulhlment of the
obligation export obligation under the scheme:
42. Deleted.
396 Government an d B us i n e ss
43A The licence issued under this scheme shall be deemed to be valid
for the goods already shipped./arrived provided customs duty has
not been paid and the goods have not been cleared.
Import of 44 lmport of cornputer systems for the erport of sottuare shall also
Computer be govenred by paragraphs 37 to 43 above.
Systems
LUT and/or 45 The importer shall be required to execute with the licensing
Bank Guar- authority a Legal Undertaking supported by a bank guarantee
antee u'herever necessary for the fullilment of the export obligation.
The details in this regard are specified in the Handbook of
Procedures.
Import of 46. A person may apply for a licence under the EPCG scheme to
Components import the capital goods in SKD/CKD condition or components
and goods in of such capital goods and may assemble or manufacture, as the
SKD/CKD case may be, the capital goods. This facility shall not be available
condition for replacement ofparts. The export obligation under paragraph
38 shall be lixed with reference to the CIF value of such imports
and all other provisions of this Chapter shall applv to such
imports.
(i) Architects;
(ii) Artists:
(iii) Chartered Accountants;
(iv) Consultdnts:
(v) Diagnostic Centres,
(vi) Doctors,
(vii) Economists:
(viii) Engineers:
(ix) Hotels and Restaurants;
(x) Journalists:
(xi) Larwers;
(xii) Scientists:
(xiii) Travel Agents and Tour Operators:
(xiv) An1, other service as may be specihed b1, the EpCG
Committee headed bv the Commerce Secrctan..
Minimum 46D. An application for grant ofa licence under the scheme shall be
value of for a minimum CIF value of imports of US $ 10,000.
imports
Export 46E. The export obligation to be fulfilled under the scheme shall be
obligation the pavments received in a freelv convertible currencv for the
services renderecl by the licence holder, regardless ol"*trether
the sen-ices are rendered in lndia or abroad. The export obliga_
tion shall be over and above the average level of hard ..o."n"y
398 Government and Business
Duty 47. llnder the Duty Exemption Scheme, import of rarv tnaterials,
Exemp tion intermediates, components, consumables, parts, accessories,
Schemc packirig materials and computer softv-rare (hereinafter referred to
as "inputs'') required for direct use in the product to be exported
may be permitted duty free lbr processing and esport by the
competent authority,' under the categories of licences mentioned
in this chapter.
Advance 48 An Advance Licence is granted lbr the dulv tree iinport ofinputs.
Licence Such licence shall be issued in accordance u'ith the policl, 2n6
procedure in force on the date ofissue ofthe licence and shall be
subiect to the fulhlment of a time-bound export obligation and
value addition as mav be specified. Advance Licences may be
either value based or quantity based
Value based 49 Under a value based Advance Licence. any ofthe inputs speci-
Advance fied in the licence mav be imported w'ithin the total CIF value
Licence indicated lbr those inputs, except inputs specified as sensitive
itelns. The sensitive items may be imported only to the extent of
the quantitl, or value specified in the licence. However, flexiblity
shall be available tbr the import of a sensitive item in excess to
the extent of 20o/o of its quantity indicated in the licence, within
the overall CIF value ofa value based licence. This flexiblity
shall also be admissible where the import restriction for a
sensitive item is only in terms of value.
Exports and Government Policy, Promotion and performance 399
Input-Output 5l
and Value addi-
tion norms
Spccial 56 A Special ln'rprest Licence is granted tbr the duty free import of
lmprcst irrputs to main/sub contractors for the manufactwe and supplv of
Licence produr:ts in the following cases:
Third 59A. Duty free licences shall also be granted to a manufacturer for
Party Exports making exports on behalfofother export order holders. In such
402 Government an d Busine ss
Exports 6l Exports for which pa),rnents are not received in fieely convert-
not covered by ible currenc-v shall be subject to value addition as specified in
free convertible Appendix XIII of Handbook of Procedures (Vol. I).
CUfrenc]-
Licences 62 Exporters may apply for duty tiee licences against specitic
under Export export orders. Exporters mav also applv for duty tree licences,
Production exeept Special Lnprest Licences, u'ithout an export order. TheV
Programme may be granted the licence subject to the lbllorving conditions:-
(a) For exporters having regular export performance, the
value oflicence shall not exceed25o/o ofthe average FOB
value of their exports in the preceding tluee licensing
years;
(b) For exporters who are not covered by sub-paragraph (a)
above, the value oflicence shall not exceed 10% oftheir
average turn-over in the preceding three licensing years,
provided their average turn-over is not less than Rs. 5
crores;
(c) Such licences shall be quantity based only; and
628. The Licensing authority may also grant further licence under
production Programme to the extent the exports have been
completed on a written request from the exporter.
Export 63. The period for fulfilment ofthe export obligation under a duty
Obligation tiee licence shall commence from the date ofissue ofthe licence.
The export obligation imposed shall be fultilled r:r,ithin a period
ol' I 2 months except in the case of supplies made under special
Imprest Licence for projects rvhere the export obligation must be
fitltilled during the contracted duration of the execution of a
project.
Adyance 64. A holder of a duty free licence (including a transferee) has the
Release option either to import items allowed under the licence directly
Orders or to obtain them from indigenous sourceVcanalising agencieV
EOU/EPZJEHTP units against Advance Release Orders denom-
inated in foreign exchnnge/Indian nrpees. An Advance Release
Order may be granted, on application, by the licensing authority
u'hich issued the duty liee licence.
Exports 66. Exports/supplies made from the date ofreceipt ofan application
in anticipation under this scheme by the licensing authority mav be accepted
of Iicence towards discharge of expod obligation. If the application is
approved, the licence shall be issued based on the input output
and value addition norms in force on the date of receipt of
application by licensing authority in proportion to the provision-
al exports already made till any amendment in the norm is
notihed. For rest ofthe exports the Policy/Procedures in force on
the date ofissue ofthe licence shall be applicable. The conver-
sion of duty free shipping bills to drawback shipping billd may
also be permitted by the Customs authorities in case the applica-
tion is rejected or modified by the licensing authority. The
exports/supplies made in anticipation ofthe grant ofa duty free
404 Government and Business
68. Deleted.
Prohibited 69. Prohibited items in the Negative List of imports shall not be
Items imported under the scheme.
Scheme for 72 A quantitv based Advance Licence for Gold and Silver
Advancc jeu,ellery and articles is granted lbr the duW free import of
Licence for
Gold and
(i) Gold, mountings, sockets, fiames and findings of lg
carats and below; and
Silver
Jewellery (ii) Silver, mountings, sockets, frames and findings.
and Articles 73 The scheme shall, however, be limited to exports which are
supported. by an irrevocable letter of credit, documents
against acceptance, and/or payment of cash-on-delivery basis.
Imports may be made only through specified ports as notified
by the Customs authorities.
74 only against prior imports. The export
from the date of import of the first
be required to be fulhlled within 120
days from the said date.
75 The value ad
at urrich the 9tt"
e<1. rhe cIF ffi:"f;
taken into account and their imporVexport shall be on net_to_
net basis. The minimum value addition for plain and studded
gold jewellery shall be l0% and 15% respectivell, and fbr
silver jeuellery articles shall be 25%.
76
Value 77 The value addition for the purposes ofthis Chapter, other than
Addition the Scheme referred to in Para 72, shall be:
VA A-B
x 100. rvhere
B
VA is Value addition
A is the FOB value realised by the export ofthe product
covered by the licence; and
B is the CIF value of the imported inputs covered by the
licence plus any other imported materials used.
.406 -____
Got,ernment and Business
Replenishment 79. The exporters of Gems and Jewellery products listed in Appen_
Licences dix shall be eligible for grant of Replenishment Licences at
thc rate and for the items mentioned in sai<I Appendix to
import and replenish their inputs. Such licences will be trans_
ferable. The exports made in fulhlment of export obhgation
against Diamon<VDTC Imprest Licences shall not qualifv for
this benefit.
preceding
o one and
t";":iT;;
sponding increase in the export obligation. Th"
holders may also apply for licences on monthly basis on all-ot_
ment of sight from DTC, London. These licences will be valid
for import from DTC, L
shall be completed within
the lirst consignrnent and
lbr each sight made on the licence.
Bulk 84. Bulk licences fbr rough diamonds may be issued to lWs.
Licenccs
for Rough
Diamonds
Re-Export
(i) the items *'hich are not sold abroad shall be imported
rvithin 45 davs ofthe close ofthe exhibition: and
(ii) lbr items sold abroad, the gold and silver content shall
be imported as replenishment not later than 60 days ol
the close of the exhibition. The nominated agencv
shall execute a bond to this etlect rvith the Customs
before export is alloued In respect of exhibitions
organised bl'others. bonds or banlt guarantees shall be
executed bv thc organisers as required under the rules
of the RBI or the Customs authorities. Alter the close
of the exhibition, for the purpose of replenishment,
booking shall be made bv the exporter with the assis-
tance of the State Banlt of India (SBI) or their agents
at the place rvhere the exhibition is held betbre the
close of the exhibition or with the authorised SBI
branches iu lndia within 50 davs of the close of the
exhibition.
(a) diamonds,
(b) precious stones,
(c) semi-precious and synthetic stones and cubic zirconia,
and
(d) pearls.
Invoice 92. Under all the schemes, imports and exports shall be invoiced
in US dollars.
Importability 94. AnEOU/EPZ unit may import fee of duty all types of goods,
of goods including capital goods, required by it for manufacture, pro-
duction or processing provided they are not prohibited items
in the Negative List of Imports. However import of Basmati
paddy/brou'n rice shall be prohibited.
Value Addition 97. The unit shall achieve a minimum Value Addition (VA) of
and Export ZlYo bul units engaged in the manufacture or production of
Obligation items specified in Appendix II shall achieve the Value Addi-
tion (VA) norms indicated therein Items of manufacture lbr
erport specified in the letter of permission/letter of ilttent
alone shall be taken into account for salculation of value
addition and discharge ol' export obligation. Not*'ithstanding
0re above, projects shall be allou.ed to be set up s'ithout
minimum value addition stipulation in sectors such as elec-
tronic hardn'are.
Legal 98 The unit shall execute a bond./legal undertaking u'ith the De-
Undertaking velopment Commissioner concerncd and in the event of tail-
ure to fultjl the obligations stipulated in the lettei ofapproval/
intent, it would be liable to penalty in terms of the boncVlegal
undertaliing or under any other law lbr the time being in
tbrce.
Minimum 99. Ifthe export of any good from the Domestic Tariff Area
Export Price (DTA) is subject to Minimunr Export Price (MEP) under the
(MEP) Policv, the export of that good by a EOU/EPZ unit also will
be subject to the same MEP.
Bcnelits for 106. (i) Supplies from the DTA to EOU/T*'Z trnits will be re-
supplies garded as "deemed exports" and,'besides being eligi-
firm the ble for the relevant benefits under paragraph 122 of
DTA this Policy, will be eligible for the following benehts:
(a) Refund ofCentral Sales Tax;
(b) Exemption from payment of Cenrii Excise Duty
on capital goods, comportents and raw materials;
and
Exports and Government Policy, Promotion and Performance 4r9
Conditions to7 The benehts stated under paragraph 106 shall be available
provided the goods supplied are manulhctured in the country.
Benefits 108 Concessional Rent: The units set up in the EPZs will be eligi-
forEPA ble for concessional rent for lease ofindustrial plots and stan-
EOU Units dard design tactory (SDF) buildings/sheds allotted lbr the lirst
three years at the fbllowing rates:
For Plots: The concession w-ill be 75Vo for the tirst year' 50o/t
for the second vear and 25Vo fot the third vear if production
had commenced in the ltrst year or the second year. The
concession will not be available for the third year if produc-
tion had not commenced bv the end ofthe second year;
For SDF buildingVsheds: The concession will be 50% for the
Irrst year and 40Vo for the second year if production had
commencecl in the hrst year. The concession will be 25Vo for
the third year if production had commenced in the tirst year.
The concession lr"ill not be available if production had not
commenced by the end of the first year;
The EOU/EPZ units will also be entitled for the same bene-
frts, including grant of special import licence, as are available
to the manufacturers who have acquired ISO 9000 (series) or
BIA 14000 (series) or any other equivalent internationally
recognised certihcate of quality.
420 Government and Business
De-Bonding
Conversion I18. Existing DTA units may also apply for conversion into
an
EOU but no concession in duties and taxes would be available
undel the scheme for plant, machinery and equipment already
installed.
Value addition I l9 Valu this chapter shall be ex_
Pres calculated for a periocl of
of Commercial production
lt:
VA= 4--B x 100, where
A
VA is Value additio4
A is the FOB value of exports realised by the EOU/EpZ
unit; and
B
DEEMED EXPORTS
Definition 120. "Deerned Erports" tneans those transactions in whicil the goods
suppliecl do not leave the country and the payment lbr the
goods is received by the supplier in hdia'
(b) Deleted
(d) Deleted.
(g) Deleted
Benefits 122. Deemed exports shall be eligible for tlie following benefits in
for deemed respect of hanufactrue and supply of goods qualifoing as
E)(PORTS
Free Exports 123. All goods may be exported rvithout anv restriction except to
the extent such exports are regu-lated by the Negative List of
Exports or any other provision ofthis Policv or any other law
for the time being in force.
The Director General of Foreign Trade may, however, speci!'
through a Public Notice the terms and conditions according to
which any goods not included in the Negative List of exports
may be exported \r,ithout a licence. Such terms and cbnditions
may include Minimum Export price (lvIE'P), regishrition with
specified authorities, quantitative ceilings and compliancb
with other [au's, rules, regulations.
Registration 124. Any person applying for (i) a licence to export or (ii) any
Cum Member- othpr benefit or (iii) concession under this Policy shall be
Certificate
ship reqrtired to furnish his Registration cum Membership Certifi-
(RCMC) cate (RCMC) number granted to him by authorities issuing
RCMC as indicated in Chapter KII para 219 of the Handbook
of Procedures Volume l.
125. Deleted.
Denomination 126. All export contracts and invoices shall be denominated in
of Contracts freely convertible currency. Contracts for which payments are
received through the Asian Clearing Union (ACU) may be
denominated in the currency of the country of the exporter or
the importer or in any freely convertible crurency. The Cen-
tral Government may relax the provisions of this paragraph in
appropriate cases.
127. Deleted.
Re-exports 128 Goods imported in accordance with this Policy may be re-
exported in the same or substantially the same form, without a.
licence provided that the item to be exported is not in the
Negative List of Imports and Exports.
Export of t29 Bonafide personal baggage may be exported either alongwith
Personal the passenger or, if unaccompanied, within one year before or
Baggage after the passenger's aeearture from India. Iterns included ia
424 Government and Busin ess
130. Deleted.
Erport l3l. Goods including edible items of value not exceeding Rs.
of Gifts 15,000/- in a licensing year may be exported as a gift. Items
in the Negative List ofExports shall not be exported as a gilt,
without a licence, except in the case of edible items.
Erport of l32A Goods or parts thereofon being exported and tbund defectivei
Replacement damaged or othervvise unht for use may be replaced free of
Goods charge by the exporter and such goods shall be allowed clear-
ance by the Customs Authorities provided that
134 Deleted.
Criterion 136. However, when an Export House, Trading House, Star Trading
rcnewal
for Ifouse or Super Star Trading House applies afresh at the erpi-
ry of the atirresaid period for recognition as Erport House.
Trading House, Star Trading House or Super Star Trading
House, as the case may be, it shall satisfy the criterion laid
doun hereinafter for grant ofsuch recognition.
Criterion 137. The criterion for recognition as Export House, Trading House,
for recognition Star Trading House or Super Star Trading House shall be
either on the basis ofthe FOB value or Net Foreign Exchange
earned on physical exports and export of services as indicated
in Paragraph 1374, during the last three licensing years or
preceding licensing year. whichever is opted by the exporter,
is given below. However, for the purpose of grant of Super
Star Trading House status, exports at least in minimum three
product groups shall be essential.
Supr Sttr 750 crores 1000 crores 400 qores 600 aores
Trading
Houses
Extra l3 9.
n'eightagc
on FOB
criterion
140. FOB value of erports made by a subsidiarv company of the
exporter, w'hether in Domestic Tariff Area or situatecl in Ex_
port ProcessingZone or as an Export Oriented UniU Electron_
ic Harduare Tachnology park (EHTp), shall be counted to_
wards export performance of the parent company for the pur_
pose ofeligibility.
Extra 140 A. Double weightage shall be given to the NFE earned by the
rveightage export of products manufactured by Small Scale Industries
on NFE (SSI) and triple weightage shall be given to the NFE earned
criterion by the export ofproducts, including hand-knotted carpets and
silli products, manufactured by the handlooms and hamclicrafts
sectors.
1408. The holder of the Super Star Trading House status shall be
entitled to membership of Apex Consultative bodies con_
cerned with trade policy and promotion, shall be considered
for preferential treatment for representation .on important
business delegations and shall get the permission for overseas
Export.s and Government Policy, prornotion and perfonnance 421
Autonomy 149. The EPCs would be autonomous and shall regulate their own
all'airs They would not be required to obtain the approval of
the Central Government for sencling sales teams oi a"tega_
tions abroad for participation in fairs/exhibitions etc. The
Central Government would only approve the annual plans and
budget of the EPCs and monitor and evaluate their perfor_
mance. The Ministry of Commerce/Ministry of Textiles
would interact with the Managing Committee of the Council
430
Goy e rnment a nd Busi n e s.r
Qualitl'
awareDcss
campaign
Statc-lq'el
programmes
Indian Joint l54E Policy in regard to Indian Joint Ventures abroad is meant to
Ventures enable lndiarr business to gain easy access to global netrvorks
Abroad while at the same time avoiding large capital outflows. Joint
Ventures and Wholly Owned Subsidiaries will be permitted
Ibr trading and services also Fiexibilitt,would be providecl to
the Indian investor in choosing a combination of equity and
loans There rvould be a single window clearance by RBI
through an automatic route in most cases and through special
procedures in regard to others involving sizeable investmeirts.
RBI will separately notify the procedures in this regard.
Project l54F The Policy framework for pro.ject exports encompasses the
Exports twin objectives of (a) encouraging specihc project export
eflbns u,hich are internationally competitive and giving broad
seotoral and regional direction to such etlort; and (b) integrat-
ing and synthesising institutional mechanisms to enhance the
effectiveness of project exports.
Annexure 2
GOVERNMENT OFINDIA
MINISTRY OF INDUSTRY
DEPARTMENT OF INDUSTRIAL DEVELOPMENT
PRESSNOTENO. I3
(1991 Series)
Procedure
4. complete applications, in l0 copies in the prescribed form, entitled ..Ap-
PLICATION FORM FoR 100% EOUs/EPZ UNITS" are to be submitted to the
SIA for 100% EoUs, or to the DCs of the concemed EpZs. The application will
be accompanied by a crossed Demand Draft for Rs. 1,000 in favourof the pay
and Accounts ofticer, Department of Industrial Development, Ministry of Indus-
try, payable at State Banlc of lndia, Nirman Bhavan Branch, New Delhi. All
imports should be mentioned in FE and rupee terms and the list of imported
capital goods should be enclosed. Ifthe application is forurd to satisfythe condi-
tions mentioned rn para 2 above, a Letter of Approval shall be issued within two
434
--
Government and Business
BOARD OF APPROVALS
Applications
5. All cases not falling within the scope of para 3 above
shail come befbre
the. Board of Approvals, *'hich shall consider and dispose them of within
a
qeriod of 45 days of submission of the complete application. The proforma
fbr
this shall be the same as for automatio approval, i.e.,
the "A''LICATI.N
FORM FoR 100% EotJs/EpzLrNITS". and'are to be
submitted, in l0 copies. to
the SLA for 100% Eous or to the DC of the concem
edEpz.The application will
be accompanied by a crossed Demand Draft of
Rs 2500/- nfavour of the pal,&
stry of Industry.
elhi. The receipr
as the case mat,
GENERAL PROVISIONS
be required and the normal RBI procedure will prevail. In all other cases, the
provisions mentioned in Press Notes No. 10 and 12 (1991 Series) of the Depart-
ment of Industrial Development may be followed.
C.G. Imports
9. lt is also clarified that no indigenous clearance will be required for import
of capital goods Import of second-hand CG is not permitted if the facility of
sub-para (iv) ofpara 3 above is availed of, for automatic clearance. The approval
of the 'Committee of Secretaries for Second Hand CG' is. hor+,ever, re<pired for
import of CG that is more than 7 vears old.
Customs Requirements
.l0 As 100% EOUs and EPZ units operate under Customs bonding, these
units have to meet the requirements of the Customs authorities in so far as they:
Currency Balancing
11. In order to ensure l.he maximum eamings of free foreign exchange, the
Board of Approvals shall eryoin a condition on units that export to the RPAe
stipulating that the outgo of foreign exchange on account of imports is balanced
by exports to the GCA, on an annual basis.
,/-
436 Government and Business
ITC Classifrcations
12. Entreprenews may note that the description of artrcle(s) to be manufbc-
hued should be stated according to the Indian Trade Classifrcation system, Cop-
ies of the Indian Trade Classification @ased on Harmonised Commodity De-
scription and Coding System), published by the Ministry of Commerce, Direc-
torate General of Commercial Intelligence and Statistics, Calcutta, can be ob-
tained on palment from the Controller of Publications, l, Cir"rl Lines, Delhi -
110054 or trom any of the agents authorised to sell Goremment of India publi-
cations.
-sd-
@.N. MURTHY)
Joint Secretary to the Govemment of India
V. OTHERS
a) Latex gioves 40%
b) Crranite 45%
c) Fish and shrimp culture, feed production units 30%
d) Test & Measuring instruments; 20%
Industrial/control values, photocopiers and
medical and scientific instruments.
e) Clocks/Time piecesAMrist Watches 30%
f) Cigarettes 35%
g) Cigarette Lighters 40%
h) Bristles, including brushes 30%
i) Tissue culture plants 60%
j) Telecom equipment 30%
k) Smaller Vessels i.e., Trarvlers, tugs, dredgers etc. 3jYo
l) Large, ocean going vessels 40%
GOVERNMENT OF INDIA
MINISTRY OF INDUSTRY
DEPARTMENT OF INDUSTRIAL DEVELOPMENT
PRESS NOTE NO. 14
(1991 Series)
SUBJECT :Revamping of Export Promotion Zone @PZ)I 100% Expon Ori-
ented Unit @OU Schemes Delegation of some specitic powers
-
of Board of Approvals/Administratire Ministries to Development
Commissioners of CPZs for 100% EOUs and EPZ units.
As the entrepreneurs are alvare. Ministry of Commerce issued a press Re-
lease on 30th -lune, 1991 on revamping the Schemes of l00%o EOUs and Export
Processing Zone Units. This Press Note sets out the changes in the existing
system and procedures for indrutrial approvals arising out ofthe aforesaid press
release.
In supersession of the earlier powers delegated to the concemed Develop-
ment conrnissioners of the Export Processing Zones, Government have decided
to delegate the following powers, for being exercised by the Development Com-
missioners of the Export Processing Zones and 100% EoUs under their respeo-
tive charge as annexed, subject to the maintenance ofvalue addition stipulated in
the letter ofapproval and currency balancing conditions:
extent of l5%o over and above the value ofC.G. already approved.
2. Currency fluctuations
To allow, for all industries, increase in the value of C.G. imports in terms of
Rupees owing to foreign exchange rate fluctuations vis-a-vis foreign currencies.
3. Increased value of imported C.G.
To permit increase in the value of imported capital goods for an amount not
exceeding l5%o ifthere has been any increase in the invoice value.
4. Attention of C.G. import list
To permit attestation of C G. list fbr imports u'ithin the approved value
including additional value permitted in 1 and 6.
5. Capacify enhancement
To permit capacity enhancement of EOUs/EPZ Units in the case of all indus-
tries, on a regular or ad-hoc basis through additional imports of raw materials/
inputs and consumables, provided the following additional conditions are com-
plied with:
a) No additional import of oapital goods is made over and above Ihe l5%o
permitted as per delegation I and 3.
b) The unit gives an undertaking to the concerned Del'elopment Commis-
sioner that the entire additional exports u'ill be to GCA countries.
6. Broad bandings
a) Broad banding facility is available in respect ofindustries, the design and
production fbcilities ofrvhich are corunon for many aggregates, pror"ided
there is similar manufacturing process. The Development Commissioners
will har.'e the power to permit additional balancing equipment upto 15%
of the value of installed machinery for the items covered under broad
banding. This facility can be availed of by the writ provided it does not
avail ofthe benefits covered under (l) above.
b) No specific approval from the Devlopment Commissioner to avail of the
broad banding f'acility will be required if no additional investment is
envisaged. The entrepreneurs will keep the Development Commissioner
informed outlining the revised proiections and undertake to maintain
value addition and currency balancing as stipulated in his original
approval.
7. Change in name
To authorise the change in name of the company or the implementing agency
provided the change does not amount to trafficking in Industrial Licences or
Letters of Approvals and subiect to the following conditions:-
(i) For change from an individual to a company provided:-
a) the new company is promoted by the applicant;
b) he is a subscriber to the articles of memorandum of association of the
new comPany,
c) he subscribes to the tune of at least lUYo of the issued equity capital
ofthe new company, and
d) the individual is a director of the new company.
Exports and Government Policy, Promotion and Performance 439
-sd/-
(s. BI{AVAND
Dy. Secretary to the Govt. of India.
Chapter Thirteen
The tempo of industrial activity in any country owes a great deal to the
promotional activities of the Government. Indirectly some of the broad
policies of the Government, e.g., the tariff or the import substitution poli-
cies, the thrusts in the corporate taxation system, or the changes in the bank
rate, can have enormous, although somewhat indirect, effect on the pattern
of industrial development. But equally important is the direct role of the
Govelnment in promoting industrial or business activities, e.g., the direction
and character of'Government subsidies, the facilities for term loans offered
by Government-sponsored institutions, the infrastructure facilities and the
general investment opportunities afforded by Government policy. In Great
Britain from the eighteenth century onwards the power of the State came to
be systematically used to destroy mercantilism, establish the market econ-
omy, provide the necessary commercial-legal infrastructure and lay the
foundations of Britain's industrial power. Even in the USA, the bastion of
free enterprise, Governmental power, both at Federal and State lwels, has
always been used in a large measure rrot only to discourage certain types of
corporate growth, but also to create indlcements and sanctions leading to
the allocation of resources in certain directions. American economic growth
cannot be explained purely as the result of the operation of market forces,
nor simply as the result of the unaided genius of private business men,
although both these had contributed very substantially. In a great measure it
has been due to the State policies and activities, the promotional and exten-
sion support received from both Federal and State Governments. In this
respectllndia lags behind countries like Japan, Singapore, Malaysia, South
Korea, Thailand, Indonesia or BrazTl, each of which in recent years has
registered spectacular progress towards industrialization largely through a
system of incentives and prombti,onal measures. Contrary to popular impres-
sion in the Asia-Pacffic model of development although the private sector is
the engine for growth, the government also has an active and critical role in
Government's Promotional Role in Industrial Development 443
ment of India. Some of the financial incentives offered by the State Indus-
trial Development Corporations are : refund of sales tax paid for the first
tluee years, subsidy of power tariffup to 30 per cent for 5 years. The State
of Maharashtra through the State Industrial and Investment Corporation of
Maharashtra has perhaps gone frrrther than any other State in successfully
administering its schemes for financial incentives, e.g., the capital participa-
tion scheme under which if an entrepreneur has 25 per cent of the capital
cost of a project SICOM gives a loan of another 25'per cent thus doubling
the borrowing capacity, provided the rrnits are located outside Bombay
Thana-Kalyan and Poona areas.
INFRASTRUCTURE FACILITMS
EXTENSION ACTIVITMS
the State Governments as also the Indian Investment centre should extend
entrepreneurial guidance programmes. Further, the committee attached
great
some
It als
model of KITCO and NEITCO srarted by the IFC.
s
e
it
Government's Promotional Role in Industrial Development 447
References