INDIAN ECONOMICS

QI. Mention two advantages of industrial diversification.

Ans: Industrial diversification offers several advantages, including:

I. Economic Stability: Diversification reduces reliance on a single industry or sector, thereby

mitigating the impact of economic downturns or fluctuations in specific markets. A diverse
industrial base provides resilience against external shocks, helping to stabilize the economy
and maintain steady growth even when certain sectors face challenges.

2. Risk Management: By diversifying into multiple industries or sectors, companies can spread
their risk and reduce vulnerability to market-specific risks, such as changes in consumer
preferences, technological advancements, or regulatory changes. This helps businesses adapt
to changing market conditions, minimize losses, and maintain long-term profitability.

Q 2. What do you mean by foreign investment? (For definition learn only the first paragraph)

Ans: Foreign investment refers to the acquisition of assets or ownership stakes in businesses,
properties, or financial instruments located in a country by individuals, entities, or governments
from outside that country. It involves the deployment of capital from one country into another
with the aim of generating returns or gaining strategic advantages. Foreign investment can take
various forms, including:

I. Forej~n Djrect Investment <FDD: This involves the acquisition of a significant ownership
stake, typically 10% or more, in a foreign company or the establishment of a new business
operation in a foreign country. FD! often involves a long-term commitment and can take the
form of greenfield investments (building new facilities) or mergers and acquisitions (buying
existing businesses).

2. Portfolio Investment: Portfolio investment involves the purchase of financial assets such as
stocks, bonds, or other securities issued by foreign entities. Unlike FDI, portfolio investment
does not entail direct control or management of the foreign company. Instead, investors seek
to earn returns through capital appreciation, dividends, or interest payments.

Foreign investment plays a crucial role in global economic integration, facilitating the flow of
capital across borders, promoting economic growth, and fostering technological transfer,
innovation, and job creation. It provides opportunities for diversification, access to new
markets, and capital infusion for businesses, while also contributing to the development of
infrastructure and industries in recipient countries. However, foreign investment can also pose
challenges related to sovereignty, national security, regulatory oversight, and the potential for
capital flight or economic dependence. Therefore, governments often enact policies and
regulations to manage and regulate foreign investment flows in their respective countries.

Q 3. Distinguish between public sector and private sector industries.

Ans: Public sector and private sector industries differ in terms of ownership, management,
objectives, funding, and accountability:

I. Ownership: Public sector industries are owned and operated by the government or its
agencies. They are established to serve public interest and may include entities such as state-
owned enterprises, government corporations, and public utilities. on the other hand, Private
sector industries are owned and operated by individuals, corporations, or partnerships. They
are established for profit-making purposes and are typically owned by shareholders or private
entities.

2. Management: Public sector industries are managed by government-appointed officials or

boards, with decisions influenced by public policy objectives, political considerations, and
regulatory framework whereas Private sector industries are managed by private individuals or
corporate executives, with decisions driven by market forces, competition, and profit motives.

3. Objectives: Public sector industries often prioritize public welfare, social equity, and
provision of essential services, even if it means operating at a loss in some cases. on the other
hand, Private sector industries prioritize profitability, growth, and shareholder value
maximiz.ation, with a focus on efficiency, innovation, and competitive advantage.

4. Funding: Public sector industries may receive funding from government budgets, subsidies,
or loans, and may have access to public resources or tax revenues whereas Private sector
industries are funded through equity investments, bank loans, bond issuance, or retained
earnings, and operate based on market capitalization and investor confidence.
5. Accountability: Public sector industries are accountable to government authorities,
regulatory bodies, and the public, with transparency and compliance with legal and regulatory
frameworks being critical whereas Private sector industries are primarily accountable to
shareholders, customers, and market regulators, with a focus on profitability, corporate
governance, and adherence to market standards.

Examples of public sector industries include government-owned utilities, healthcare systems,

and postal services, while examples of private sector industries include manufacturing
companies, financial institutions, and technology firms. Both sectors play important roles in
the economy, with each having its own strengths, weaknesses, and contributions to overall
societal welfare and economic development.

Q 4. Write two main objectives of new industrial policy, 1991

Ans: The main objectives of the New Industrial Policy of 1991 in India were:
1. Liberalization and Deregulation: The policy aimed to liberalize and deregulate the Indian
l
economy by reducing government intervention and bureaucratic controls in the industria
g
sector. This involved dismantling the complex system of industrial licensing, removin
restrictions on foreign investment, simplifying regulations, and promoting competition. The
,
objective was to create a more conducive environment for business, foster entrepreneurship
and stimulate industrial growth and innovation.
to
2. Globalization and Integration with the Global Economy: Another key objective was
up
promote globalization and integration with the global economy. The policy sought to open
the Indian economy to international trade and investment, encourage exports, and attract
foreign technology and capital. It aimed to enhance India's competitiveness in the global market
by facilitating access to advanced technology, managerial expertise, and international best
practices. Additionally, the policy aimed to leverage India's comparative advantages in sectors
such as information technology, pharmaceuticals, and services to enhance economic growth
and development.

Q S. List two rationales of SSls in India.

Ans: Two rationales for Small Scale Industries (SSls) in India are:

1. Employment Generation: SSls play a crucial role in providing employment opportunities,

particularly in rural and semi-urban areas where large-scale industries may be limited. These
s,
industries typically have lower capital requirements and labor-intensive production processe
By
making them well-suited for absorbing surplus labor and reducing unemployment.
promoting SSls, the government aims to create livelihood opportunities, enhance income
levels, and alleviate poverty among the economically disadvantaged sections of society.

2. Promotion of Balanced Regional Development: SSls contribute to the promotion of balanced

in
regional development by decentralizing industrial activity and fostering economic growth
less developed regions. Unlike large-scale industries that are often concentrated in urban
centers or industrial clusters, SSls can be established in rural, backward, or remote areas,
thereby spreading industrialization and infrastructure development across the country. This
ies,
helps reduce regional disparities, alleviate migration pressures, and stimulate local econom
ultimately contributing to inclusive and sustainable development.

Q 6. Name the three industries reserved for public sector.

Ans: The three industries reserved for the public sector in India are:
I. Atomic Energy

2. Railways

3. Arms, ammunition, and defense aircrafts and warships

Q 7. Give two examples of small scale industries

Ans: Two examples of small-scale industries include:

I. Cottage industry: Cottage industries typically involve small-scale production carried out by
individuals or families in their homes or small workshops. Examples include handloom
weaving, pottery, artisanal crafts, and food processing.

2. Small manufacturing unit: Small manufacturing units encompass a wide range of industries
producing goods on a small scale. Examples include small-scale garment manufacturing,
furniture making, food processing units, and handicraft production.

Q 8. Why is public sector important? Give two reasons

Ans: The primary objectives of the public sector are to provide basic goods and services to the
citizens, promote economic development, and protect the interests of weaker sections of
society. The public sector is important for several reasons, including:

I. Provision of Public Goods and Services: The public sector plays a critical role in providing
essential public goods and services that are necessary for societal well-being but may not be
efficiently provided by the private sector. These include infrastructure such as roads, bridges,
and utilities, as well as services like healthcare, education, public transportation, and law
enforcement. By ensuring universal access to these services, the public sector promotes social
equity, inclusivity, and economic development.

2. Regulation and Oversight: The public sector regulates and oversees various aspects of the
economy, including markets, industries, and public utilities, to ensure fairness, transparency,
and accountability. Government agencies enact and enforce regulations to protect consumers,
workers, and the environment, prevent monopolistic practices, maintain public safety, and
promote fair competition. Through regulatory interventions, the public sector aims to safeguard
public interests, promote market stability, and address market failures.

Q 9. Give two purpose of competition policy.

Ans: Competition policy provides a healthy environment to ensure that the companies serve in
the best possible way to the consumers. In this article, we will discuss the competition policy
and the competition commission of India along with its advantages. Two purposes of
competition policy are:

I. Promoting Market Competition: Competition policy aims to foster competitive market

conditions by preventing anti-competitive practices such as monopolies, cartels, and collusion
among firms.

2. Protecting Consumer Interests: Competition policy seeks to safeguard consumer interests by

promoting fair competition, preventing deceptive or unfair business practices, and ensuring
that consumers have access to a variety of goods and services at competitive prices.
 cive environment
5. Encouragement of investment and entrepreneurship by providing a condu
for businesses to thrive.
ted more efficiently in
6. Overall economic growth and development as resources are alloca
competitive markets.

y, Point out the

Q 2. Discuss in brief the role of public sector industries in Indian econom
various problems associated with the public sector industries. (5+5)
l roles:
Ans: Public sector industries in the Indian economy play several crucia
at the forefront of
I. Infrastructure Development: Public sector industries are often
ortation, energy, and
infrastructure development, particularly in sectors such as transp
like roads, railways,
telecommunications. They build and maintain critical infrastructure
essential for economic
airports, power plants, and telecommunications networks, which are
growth.
energy, and space
2. Strate~ic Importance: Certain industries, such as defense, atomic
and sovereignty. Public
exploration, are considered strategically important for national security
ng that the country's
sector enterprises typically play a significant role in these sectors, ensuri
strategic interests are safeguarded.
at promoting social
3. Social Welfare: Public sector industries often undertake initiatives aimed
affordable healthcare,
welfare and addressing societal needs. This can include providing
tions.
education, housing, and other essential services to underserved popula
yers, providing jobs to a
4. Employment Generation: Public sector industries are major emplo
ng unemployment and
significant portion of the workforce. They contribute to reduci
workers, particularly in
underemployment by creating opportunities for skilled and unskilled
rural and less developed regions.
in balancing regional
5. Balancing Regional Development: Public sector industries can help
y backward regions.
development by establishing facilities and infrastructure in economicall
g employment and
This promotes inclusive growth and reduces regional disparities by creatin
fostering economic activity in less developed areas.
in sectors where private
6. Market Regulation: In some cases, public sector enterprises operate
pating in these sectors,
competition alone may not adequately serve public interest. By partici
tition, and prevent
public sector industries can help regulate markets, ensure fair compe
monopolistic practices that could harm consumers.
y, there have been
While public sector industries play an essential role in the Indian econom
ess compared to their
ongoing debates about their efficiency, productivity, and competitiven
sector enterprises are
private sector counterparts. Efforts to reform and modernize public
the economy.
continually underway to improve their performance and contribution to
Several problems are associated with public sector industries:

I. Inefficiency and Bureaucracy: Public sector industries are often criticized for being
inefficient and bureaucratic, leading to slow decision-making processes, lack of innovation,
and poor performance compared to private sector counterparts. Bureaucratic hurdles and red
tape can hinder productivity and hinder responsiveness to market dynamics.

2. Lack of Accountability: Public sector industries may lack the same level of accountability
and transparency as private enterprises. Decision-making processes may be influenced by
political considerations rather than economic or business logic, leading to suboptimal outcomes
and misallocation ofresources.
3. Poor Financial Performance: Many public sector industries suffer from financial losses due
to factors such as overstaffing, outdated technology, inefficient operations, and political
interference. These losses can strain government finances and require taxpayer subsidies to
sustain operations, diverting resources from other priority areas.

4. Limited Autonomy and Flexibility: Public sector industries often face constraints on
autonomy and flexibility in decision-making, as they are subject to government regulations,
policies, and bureaucratic procedures. This can impede their ability to respond quickly to
market changes, adopt innovative practices, and compete effectively with private sector rivals.

5. Lack of Competition and Monopoly: In some cases, public sector industries may operate as
monopolies or oligopolies, facing little or no competition. This can lead to inefficiencies, lack
of incentives for improvement, and reduced consumer choice. Monopoly power can also result
in abuse, such as price gouging and poor service quality.

6. Political Interference: Public sector industries are susceptible to political interference,

including patronage appointments, favoritism, and corruption. Political considerations may
override economic rationale, leading to suboptimal resource allocation, mismanagement, and
erosion of public trust.

7. Technological Obsolescence: Public sector industries may lag behind in adopting modem
technologies and best practices, resulting in outdated infrastructure, equipment, and processes.
This can affect productivity, competitiveness, and the ability to meet evolving consumer
demands.

Addressing these challenges often requires comprehensive reforms aimed at improving

governance, enhancing accountability, promoting competition, fostering innovation, and
streamlining operations within public sector industries.

Q 3. What are the major problems encountered by small scale industries (SSis)? Examine the
role of the MSMED Act, 2006 in enhancing the productivity of SSis in India. (5+5)

Ans: Small scale industries (SSis) face several challenges, including:

I. Limited Access to Finance: SSis often struggle to access adequate financing from banks and
financial institutions due to factors such as lack of collateral, limited credit history, and high
interest rates. This constrains their ability to invest in technology, expand operations, and
compete effectively.
2. Lack of Infrastructure: Inadequate infrastructure, including poor transportation networks,
unreliable power supply, and limited access to water and sanitation facilities, can hinder the
productivity and growth of SSls. Infrastructure deficiencies increase operational costs and
logistics challenges for small businesses.

3. Technology Adoption and Innovation: SSis may lack the resources and expertise to adopt
modem technologies and innovate processes, products, and services. This limits their
competitiveness and ability to meet changing market demands, particularly in industries with
rapid technological advancements.

4. Skilled Labor Shortai:e: SSis often face difficulties in recruiting and retaining skilled labor
due to competition from larger firms, low wages, and limited training opportunities. The lack
of skilled workers can impact productivity, quality, and innovation within small businesses.

5. Market Access and Competition: SSis may encounter barriers to market access, including
restrictive regulations, trade barriers, and competition from larger enterprises. Limited market
reach and bargaining power can constrain the growth prospects of small businesses, especially
in globalized markets.

Addressing these challenges requires a combination of supportive policies and interventions

aimed at improving access to finance, enhancing infrastructure, promoting technology adoption
and innovation, facilitating market access, streamlining regulatory procedures, and providing
targeted support for skill development and capacity building within the small scale sector.

The Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, has played a
significant role in enhancing the productivity of Small Scale Industries (SSis) in India through
various provisions and initiatives:

I. Definition and Categorization: The MSMED Act provides a clear definition and
categorization of micro, small, and medium enterprises based on their investment in plant and
machinery or equipment. This classification ensures targeted support and benefits for SS!s,
allowing them to access specific schemes and incentives tailored to their needs.

2. Credit Facilities: The Act mandates that banks and financial institutions extend credit
facilities to MSMEs, including SSls, at preferential interest rates. This provision enhances
access to finance for small businesses, enabling them to invest in technology, expand
operations, and improve productivity.

3. Reservation of Products: The Act reserves certain products for exclusive manufacture by
MSMEs, providing SSis with market opportunities and protection from competition with larger
firms. This promotes the growth of small businesses, boosts local entrepreneurship, and
contributes to job creation and economic development.
 technology upgradation and
4. Facilitation of Techn olo~ Up~adation: The Act encourages
expertise, training programs,
modernization among MSMEs by facilitating access to technical
s SSis to enhance their
and incentives for adopting new technologies. This enable
mer demands.
competitiveness, improve product quality, and meet evolving consu
reneurship by simplifying
5. Promotion of Entrepreneurship: The MSMED Act promotes entrep
ing bureaucratic hurdles, and
the registration and compliance procedures for MSMEs, reduc
s a conducive environment for
providing incentives for setting up new enterprises. This foster
growth.
small businesses to thrive, innovate, and contribute to economic
nce and support for MSMEs,
6. Marketing Assistance: The Act facilitates marketing assista
, trade fairs, and buyer-seller
including SSis, through various initiatives such as exhibitions
their products, expand their
meets. These platforms enable small businesses to showcase
stically and internationally.
customer base, and explore new market opportunities, both dome
an enabling environment for
Overall, the MSMED Act, 2006, has been instrumental in creating
logy, markets, and supportive
SSis in India, empowering them with access to finance, techno
bution to the economy.
policies that enhance their productivity, competitiveness, and contri

(FOi) inflows on the Indian

Q 4. Discuss the role and impact of Foreign Direct Investment
t could pursue to boost more
economy. Suggest some of the policy options that the governmen
inflow. {6+4)
role in the Indian economy,
Ans: Foreign Direct Investment (FOi) inflows play a significant
technology transfer, and
contributing to economic growth, employment generation,
of FOi on the Indian economy
infrastructure development. Some of the key roles and impacts
include:
l investment, expertise, and
I. Stimulating Economic Growth: FOi inflows bring in capita
cing productivity, promoting
managerial skills, which stimulate economic growth by enhan
sectors.
innovation, and expanding production capacities across various
to the establishment of new
2. Creatini;: Employment Opportunities: FOi inflows often lead
t of infrastructure projects,
businesses, expansion of existing enterprises, and developmen
ing unemployment rates.
creating employment opportunities for the local workforce and reduc
s facilitate the transfer of
3. Technology Transfer and Knowledge Spillovers: FOi inflow
-how from multinational
advanced technologies, best practices, and managerial know
technology diffusion, skill
corporations (MNCs) to domestic firms. This contributes to
leading to productivity gains
development, and capacity building within the Indian economy,
and competitiveness improvements.
s often result in increased
4. Boosting Exports and Foreign Exchange Reserves: FOi inflow
abundant resources, and
exports as foreign investors leverage India's skilled workforce,
tic and international markets.
competitive advantages to produce goods and services for domes
Higher exports contribute to foreign exchange earnings, trade balance improvement, and
strengthening of foreign exchange reserves.

5. Infrastructure Development: FDI inflows play a crucial role in financing infrastructure

projects such as roads, ports, airports, telecommunications, and power generation facilities.
This enhances the country's physical infrastructure, improves connectivity, and supports
sustainable economic development.

To boost more FDI inflows, the government could pursue the following policy options:

1. Liberalization of FDI Regulations: The government can further liberalize FDI regulations
by relaxing entry barriers, easing restrictions on foreign ownership limits, and simplifying
approval processes across sectors, particularly in critical areas such as retail, aviation,
insurance, and defense.

2. Improvement of Ease of Doing Business: Enhancing the ease of doing business through
regulatory reforms, streamlining procedures, reducing bureaucratic red tape, and enhancing
transparency and predictability in policymaking can attract more foreign investors by creating
a conducive business environment.

3. Investment Promotion and Marketing: The government can actively promote India as an
attractive investment destination through targeted marketing campaigns, investment
roadshows, and participation in international forums to showcase the country's strengths,
potential, and investment opportunities.

4. Infrastructure Development: Continued investment in infrastructure development, including

transportation, logistics, energy, and digital infrastructure, is essential to support FDI inflows
by improving connectivity, reducing operational costs, and enhancing the business
environment.

By implementing these policy options, the government can attract more FDI inflows, unleash
the potential of the Indian economy, and accelerate sustainable economic growth and
development.

Q 5. Discuss in brief the characteristics of small scale industries. Write a brief note on role
played by the small scale industries in the Indian economy.
Ans: Small scale industries (SSis) typically exhibit the following characteristics:

1. Limited Scale of Qperations: SSis operate on a small scale, often with limited resources,
capital investment, and production capacities compared to large enterprises. They typically
employ fewer workers and serve local or niche markets.

2. Independent Ownership: SSis are usually independently owned and operated by

entrepreneurs, families, or partnerships. They are often characterized by a close relationship
between ownership and management, allowing for quick decision-making and flexibility in
operations.
3. Local or Regional Focus: SSis often cater to local or regional markets, supplying goods and
services to nearby communities or specific market segments. They may have a limited
geographic reach compared to larger firms with national or global operations.

4. Labor-Intensive Operations: SSis tend to rely more on labor-intensive production methods

due to limited access to capital and technology. They may employ a significant portion of the
local workforce, including skilled and unskilled labor, contributing to employment generation
and socio-economic development.

5. Simple Technology and Production Processes: SSis often use simpler technology and
production processes compared to larger firms, which may limit their capacity for innovation
and efficiency. However, they can adapt quickly to changing market conditions and customer
preferences due to their flexibility.

6. Low Economies of Scale: SSis may face challenges in achieving economies of scale due to
their small size and limited production volumes. This can lead to higher production costs per
unit compared to larger competitors, requiring them to focus on niche markets or specialized
products to remain competitive.

7. Entrepreneurial Spirit and Innovation: SSis are often characterized by entrepreneurial spirit,
innovation, and creativity. They are more agile and responsive to market opportunities,
allowing them to introduce new products, adapt to changing trends, and fill gaps in the market
efficiently.

8. Government Support and Reco&nition: SSis typically receive government support and
recognition through various incentives, subsidies, and policies aimed at promoting small
business development, entrepreneurship, and socio-economic inclusivity.
Overall, small scale industries play a vital role in economic development, job creation, and
fostering entrepreneurship, particularly in emerging economies like India.
Small scale industries (SSls) play a crucial role in the Indian economy, contributing
significantly to its growth, employment generation, and socio-economic development. Some
key roles played by SSis in the Indian economy include:

I. Employment Generation: SSis are major contributors to employment generation in India,

particularly in rural and semi-urban areas where they provide opportunities for both skilled and
unskilled workers. They absorb a significant portion of the workforce, including women and
disadvantaged groups, thereby reducing unemployment and underemployment.
2. Contribution to GDP: SSis make a substantial contribution to India's Gross Domestic
Product (GDP) by producing a diverse range of goods and services for domestic consumption
and export markets. Despite their small scale, their collective output adds up to a significant
share of the national economy.
3. Promotion of Entrepreneurship: SSis foster entrepreneurship and innovation by providing a
conducive environment for individuals to start and grow their businesses. They encourage
creativity, risk-taking, and self-reliance, nurturing a culture of entrepreneurship that is essential
for economic development.

4. Balanced Regional Development: SSis play a vital role in promoting balanced regional
development by establishing manufacturing units and service enterprises in rural and less
developed regions. They contribute to reducing regional disparities by creating economic
opportunities and infrastructure in areas with limited industrial presence.
5. Linkages with Large Industries: SSis often serve as suppliers, subcontractors, and ancillary
units to larger industries, providing them with components, parts, and services. These linkages
contribute to the growth and competitiveness of the entire industrial ecosystem by enhancing
value chains, promoting specialization, and fostering collaboration.

6. Export Promotion: SSis play a significant role in promoting exports from India by
manufacturing and exporting a wide range of products, including textiles, handicrafts, leather
goods, and engineering components. They contribute to foreign exchange earnings, trade
balance improvement, and global market penetration.

7. Inclusive Growth: SSis contribute to inclusive growth by creating opportunities for

marginalized groups, including women, rural artisans, and tribal communities. They empower
these groups by providing them with employment, income, and skills development, thereby
fostering social inclusion and poverty reduction.
Overall, small scale industries are integral to the Indian economy's resilience, diversity, and
sustainability. Their role in fostering entrepreneurship, creating employment, promoting
innovation, and supporting inclusive growth underscores their importance in driving economic
development and prosperity.

Q 6. (a) Define foreign investment with an example. (2)

Ans: Foreign investment refers to the investment of funds or capital by individuals, businesses,
or governments from one country into assets or projects located in another country. These
investments can take various forms, including equity investments, debt securities, real estate,
infrastructure projects, and foreign direct investment (FDI).
For example, if a multinational corporation based in the United States decides to establish a
manufacturing facility in India by investing in land, buildings, machinery, and technology, it
would be considered a foreign investment. The corporation's investment in India represents a
commitment of capital from a foreign source into the Indian economy, contributing to
economic growth, job creation, and technology transfer.

(b) Explain briefly the various types of foreign investment in India. Is foreign investment good
for a country like India? (5+3)

Ans: Foreign investment in India can take various forms, including:

I. Foreiim Direct Investment <FDl}: FDI involves the direct ownership or control of assets in
India by foreign investors, such as multinational corporations, individuals, or sovereign wealth
funds. These investments can take the form of equity investments, joint ventures, or wholly-
owned subsidiaries. FDI contributes to capital formation, technology transfer, and job creation
in India.

2. Portfolio Investment: Portfolio investment refers to the purchase of financial assets in India
by foreign investors, such as stocks, bonds, and other securities, without gaining significant
control or ownership in the underlying companies or projects. Portfolio investment provides
foreign investors with exposure to Indian financial markets and the opportunity to earn returns
on their investments.

3. Foreign Institutional Investment (Fil): Flis are institutional investors, such as mutual funds,
pension funds, and hedge funds, that invest in Indian financial markets, primarily through the
purchase of stocks and bonds. Flis play a significant role in providing liquidity to Indian capital
markets and can influence stock prices and market sentiments.

4. Foreign Venture Capital Investment (FVCI}: FVCI involves investments made by foreign
venture capital investors in Indian companies engaged in sectors such as technology,
innovation, and startups. FVCls provide capital to early-stage and high-growth companies,
supporting their expansion, research, and development efforts.
5. Non-Resident Indian (NRI) Investments: NRis, Persons of Indian Origin (PIOs), and
Overseas Citizens oflndia (OCls) can invest in India through various channels, including non-
resident rupee accounts, foreign currency non-resident accounts, and direct investments in
Indian companies. NRls play a significant role in contributing to India's foreign exchange
reserves and supporting economic development.

6. External Commercial Borrowings (ECBs): ECBs refer to loans or borrowings obtained by

Indian companies from foreign sources, including commercial banks, financial institutions, and
international capital markets. ECBs provide Indian companies with access to cheaper financing
options and help meet their capital requirements for expansion and investment projects.
These various types of foreign investment contribute to capital inflows, technology transfer,
job creation, and economic growth in India. They also play a crucial role in diversifying the
sources of funding for Indian businesses and supporting the country's integration into the global
economy.

Foreign investment can bring numerous benefits to a country like India. Foreign investment,
particularly Foreign Direct Investment (FDI), brings in capital from abroad, which can be used
to finance infrastructure projects, industrial expansion, and economic development initiatives.
This helps address capital shortages, promote investment-led growth, and boost overall
economic activity. Moreover, Foreign investors often bring advanced technologies, best
practices, and managerial expertise to the host country, facilitating technology transfer and
upgrading local industries. This enhances productivity, efficiency, and competitiveness,
supporting innovation and skill development within the domestic workforce. Foreign
investment leads to the establishment of new businesses, expansion of existing enterprises, and
development of infrastructure projects, creating employment opportunities for the local
workforce. This helps reduce unemployment, alleviate poverty, and improve living standards,
particularly in rural and semi-urban areas.

However, it's essential to recognize that foreign investment also poses challenges and risks,
including potential loss of domestic control, vulnerability to external shocks, and concerns
about sovereignty and national interest. Therefore, while foreign investment can bring
significant benefits, it's crucial for policymakers to carefully manage and regulate foreign
investment flows to maximize the positive impacts while mitigating potential drawbacks.
SMALL SCALE INDUSTRIES
Development in any system hinges on the growth of smalls first and bigs next. There is a
growing recognition worldwide that micro, small and medium enterprises (MSMEs) have an
important role to play in terms of resource use efficiency, capacity for generation of
employment, technological innovation, promoting inter-sectoral linkages, raising exports and
developing entrepreneurial skills. This is particularly true in the case oflndia. It accounts for
45% of total industrial production, 40% of total exports and contributes very significantly to
the GDP. Manufacturing segment within the MSMEs also contribute to 30.50% of service.
The total contribution ofMSMEs to the GDP is 37.54%.
A large number of people work in small establishments like workshops, factories producing
components like bolt and nuts, footwear, garment factories having only few sewing and
knitting machines. They form a large and growing segment oflndian industrial sector. It is
called the small-scale industries sector. It is heterogeneous sector. It has producing units
working from domestic/household premises, rented buildings, industrial estates and own
factories. Some of them use electricity/power, while some do not and their scale of
production, that is in the scale of output that they produce per day or per week, is small. They
use little capital or investment. Their ownership is generally found to be proprietary or
partnership. In many cases it would be a family business passed on from generation to
generation. Owner and the manager would be the same person. Some hire wage labour, while
many of them do not do so and use family members as workers.
There are two types small-scale industries: Traditional or Village and Modem. The traditional
type does not use power in their production process. The village industries, cover a wide
variety of industries. This includes: Khadi (Hand-woven cloth made from hand-spun yam is
called khadi); specific village industries such as processing of cereals and pulses;
manufacture hand-made paper; bee-keeping; village pottery; handicrafts; spinning and
weaving.
Modem Small-Scale industries are those that use power and machinery: Power driven loom
making cloth, garment making; rice machine-millers; automobile accessories and parts; metal
 Castings, scientific instruments, agricultural implements, etc. are products that can be
produced both in small-scale and large-scale industries.
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 provided a
comprehensive definition of'Micro', 'Small', and 'Medium' enterprises. Under the Act,
enterprises have been categorized broadly as: (i) Manufacturing Enterprises and ii) Service
Enterprises. Both categories have been further classified into three groups as micro, small and
medium enterprises based on their investment in plant or in equipment as under.

Classification of Micro, Small, and Medium Enterprise (MSME) Sector

Composite Criteria
Investment in Plant & Machinery/Equipment and Annual Turnover

Classification Micro Small Medium

Investment in Plant Investment in Plant Investment in Plant
and Machinery or and Machinery or and Machinery or
Manufacturing and Service Equipment upto Rs. 1 Equipment upto Rs. Equipment upto Rs.
Sector Enterprises crore 10 crore 50 crore
and and and
Annual Turnover Annual Turnover Annual Turnover does
does not exceed Rs. 5 does not exceed Rs. not exceed Rs. 250
crore 50 crore crore

Contribution of Small-&:ale industries in Indian Economy:

• The small-Scale sector accounts for over 80% of the manufacturing sector's employment.
• It contributed significantly towards the economic growth of the nation, with over 39% of
the industrial production.
• Small-scale accounts for over 34% of the total exports and about 45% of the
manufacturing exports. Further, over 90% of exports of the SSis consists of non-traditional
items like sports goods, readymade garments, processed foods, chemicals etc.
• SSis are conducive for the economic development of underdeveloped countries like
lndia.[,}~½;uch industries are relatively labour intensive, so they make economical use of the
scarce capital.
• Small-scale industries are instrumental in reducing the inequalities in wealth. In these
industries, capital is widely distributed in small quantities and the surplus of these industries
is distributed among large number of people.
• Small-scale industries bring about regional dispersal of industries and alleviates regional
imbalances.
• Small-scale industries, make use of local resources including the capital and
entrepreneurial skills, which would have remained unused for want of such industries.
• Small industry sector has performed exceedingly well and enabled the country to achieve
a wide measure of industrial growth and diversification.
Problems of Small-Scale Industries:
• Given in solved answers.
Government Measures to Promote Small-Scale Industries:
Government initiated several measures for the promotion of small-scale and cottage
industries immediately after independence. The importance of these industries was
recognised in the very first Industrial Policy Resolution of 1948 and reiterated in all future
industrial policy statements. Steps taken by the government for the development of these
industries can be categorized as organizational, financial, fiscal, technical etc.
Organizational Measures
• Small Industries Development Organisation (SIDO) was set up in I 954. It functions as an
apex body in the formulation of policies and co-ordination of institutional activities for
sustained and organized growth of small-scale industries. SIDO has now been renamed as the
Micro, Small and Medium Enterprises Development Organisation.
• Regional Small Industries Service Institutes (4) with a number of branches (30),
extension centres (38), field testing centres (18) were set up to provide technical assistance to
the small scale industries.
• National Small Industries Corporation Ltd. (NSIC) was set up in 1955 to provide
machinery to small-scale units on hire purchase basis and to assist these units in procuring
orders from government departments and offices.
• Small Industries Development Bank oflndia (SIDBI): It is an apex all India financial
institution set up in 1989. SIDBI is to function as the principal financial institution for the
promotion, financing and development of industry in the small-scale sector. At the same time,
it has to co-ordinate the functions of institutions engaged in promoting the small-scale units.
• National Institute of Entrepreneurship and Small Business Development (NIESBUD): It
was established in 1983 to assist the small-scale industries. It co-ordinates Entrepreneurship
Development Programme (EDP) organized by various EDP institutions in the country.

Financial Measures
• Small Industries Development Fund (SIDE): It was set-up in 1986, to provide refinance
(i.e. finance to the financial institutions in lieu of their-lending to SSis) assistance for
development, expansion, modernisation, rehabilitation of SSis.
• National Equity Fund (NEF): It was set-up in 1987, to provide initial capital for setting-
up of new projects in small-scale sector in the form of equity (i.e. shares).
• Single Window Scheme (SWS): It was introduced in 1988, to provide short-term as well
as long-term financial assistance to SSls.
• Small Industries Development Bank oflndia (SIDBI): It was established in October 1989,
by amalgamation of Small Industries Development Fund (SIDF) and Natural Equity Fund
(NEF). SIDBI is the apex financial institution for small enterprises sector. It provides finance
to SSI, refinance assistance and coordinates the activities of other financial institutions for the
provision of credit to SSis.

Technical Measures
• Small-Scale Industries Development Organisation (SIOO): It was established in 1954.
SIDO provides technical, managerial, economic and marketing assistance to SSis through its
network of extension centres and service institutes.
• Council for Advancement of Rural Technology (CART): It was established in 1982, to
provide technical assistance to rural industries.
• Technology Development and Modernisation Fund (TDMF): It was set-up for the
technological upgradation and modernisation of the export oriented units.

PUBLIC SECTOR
At the time of independence, the country was predominantly agrarian and lacked basic
industries and infrastructure facilities. The economy needed a big push. The push could not
come from the Indian private sector, which was starved of funds and lacked technical and
managerial abilities. Further, it was incapable of taking risk involved in long gestation
investments. So, the development in the public sector became imperative. The expansion of
public sector in the field of industries took place in a big way with the launching of the
Second Plan ( 1956-61 ), which gave top priority to the industrial growth of the country. In
1951, there were just 5 enterprises in the public sector in India, but in March 2019 this had
increased to 348. CPSEs (Central Public Sector Enterprises) have earned revenue of about
225.43 lakh crore during the financial year 2018-19. They are administered by the Ministry of
Heavy Industries and Public Enterprises.
Objectives of the Public Sector:
• To capture commanding heights of the economy i.e. to take up strategic role in the
industrialisation of the country.
• To accelerate the rate of economic growth through creation of basic infrastructure.
• To generate employment.
• To promote balanced regional development.
• To generate surplus resources for development.
• To promote exports and to develop import substitution industries.
• To check concentration of economic power.
Contribution of Public Sector
• The public sector was instrumental in the creation of infrastructure and the development
of basic industrial structure of the country.
• PSUs did a commendable job in the promotion of strategic and key industries like atomic
energy, armaments and ammunition, aircrafts, heavy machinery, iron and steel, coal, drugs,
fertilizers etc.
• The public sector provided employment to about 70% of the workers employed in the
organized sector. Presently, public sector contributes about 24% to the GDP and accounts for
over 20% of the Gross Domestic Capital Formation (investment).
Problems of the Public Sector
• The return on capital invested in PSUs has been deplorably low due to low profitability
and losses of some PSUs.
• Problems related with the Price Policy i.e., Administered Prices of the products of PS Us
were deliberately kept lower than the market prices.