Phases of Industrial Development in India: A Comprehensive Overview

SEBI:

The Securities and Exchange Board of India established in 1988, became a statutory body in 1992. It has been vested with wide ranging powers. It regulates, supervises and coordinates the development of the capital market. It has the responsibility of creating a conducive environment for mobilisation of adequate resources and their efficient allocation. SEBI replaced the Controller of Capital Issues and the Capital Issues Act was repealed by the government. The purposes and aims of SEBI are as follows:

(a) Regulating the business in stock markets and other securities markets.

(b) Regulating the work of stockbrokers and other intermediaries.

(c) Preventing unfair practices in the capital market.

(d) Regulating takeover of companies and acquisitions of shares.

(e) Regulating the working of mutual funds etc.

(f) Preventing insider trading in securities.

(g) Promoting investors’ education and training of intermediaries of securities market.

(h) Regulating organisations. and promoting the self-regulatory

SEBI has been vested with substantial powers. It has the power to supervise the working of mutual funds. All stock exchanges come under the control of SEBI. It has the power to impose penalties on intermediaries for defaults. The steps taken by SEBI for capital market development are as follows.

(i) A detailed programme has been drawn by SEBI to inspect stock exchanges and mutual funds. This is done to improve the functioning of stock exchanges.

ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL GROWTH:

(1) Mobilization of savings and acceleration of capital formation: Capital formation involves three stages.(a) Act of saving.(b) Mobilization of savings.(c) Conversion of savings into investments.

The capital market provides various types of securities to people and encourages people to invest. It provides a reasonable rate of return and liquidity. This enables the industries to get adequate funds.

(2) Link between investors and the industries: The capital market directs funds to the industrial sector in the best possible manner. The presence ence of stock exchange encourages people to save in securities rather than in unproductive assets like real estate, gold etc. The availability of adequate capital helps the industries to grow at a faster rate.

(3) Raising long-term capital: Industrial firms are in need of capital for a long term. Investors on the other hand want to invest for a short period of time. These conflicting interests are sorted out by the stock exchange. While the firms can retain the capital, the investors can buy or sell securities in the stock market and realise liquidity.

(4) Ready and continuous market: It provides easy opportunities to people to invest their funds. In the stock exchange, marketability is much easier. Hence, investors find it attractive to invest here rather than in other assets.

(5) Proper regulation of funds: Capital market not only helps to mobilise funds but also helps to allocate resources in the best possible manner. The most efficient industries can easily mobilise capital through the capital market. The prevailing price of the security and the relative yield guide the investors while selecting their investment options. Thus, it benefits both the industries and the investors.

(6) Provision of a variety of services: The services provided by the capital market over a period of time, has been increasing

STRUCTURE OF CAPITAL MARKET IN INDIA 

(a) Primary Market: The primary market is the market for new issues. In this market corporates, both private and public, government and other institutions mobilise liquidity by issuing equity and preference shares, bonds, debentures, units of mutual funds, fixed deposits, etc. Shares are also issued in external markets in the form of Global Depository Receipts (GDR) and American Depository Receipts (ADR). Similarly funds are borrowed by issuing bonds in the external markets. While there is no assured return from equities, bonds give a fixed return. Thus primary market consists of both equity and debt market.

The primary market is the market for new issues. In the earlier years, the Capital Issues Act was used by the Government to control the primary market. This Act was repealed in 1992. This led to the development of the primary market in a significant manner. Substantial amount is being mobilised by the firms by issuing shares and debentures. PSUs have been raising capital by issuing bonds. Since 1987-88, public sector banks were allowed to setup subsidiaries to promote mutual funds. Mobilization of capital improved through this measure. Through IPOs, substantial liquidity is mobilised in the primary market. In April-November 2021, 75 companies mobilised Rs. 89,066 crores through IPOs. In April- November 2020, 29 companies mobilised Rs. 14,733 cores. This trend indicates the issue of IPOs is greatly used in fund mobilisation.

(b) Secondary Market: The secondary market operates through the Stock Exchanges. The first organised stock exchange was established in Bombay in 1887. In 1956, there were seven stock exchanges and by 2001-02, it has gone upto 23. The number of listed companies has increased from 1,852 in 1975-76 to 9,954 in 2000-2001. Over The Counter Exchange of India (OTCEI) was setup in 1989 and became operational in 1992. It has expanded gradually in its operations both city-wise and scrip-wise. The National Stock Exchange of India was set up in 1992 and became operational by 1994. It provides facilities for trading of equity investments, warrants, debentures, etc.

FUNCTION OF COMMERCIAL BANKS

(A) PRIMARY FUNCTIONS:

(1) Accepting Deposits: One of the main functions of a bank is to accept deposits from the public. The savings of the public are mobilised by banks by accepting deposits. The deposits accepted by them are of various types. They are

(a) Saving Account Deposits: These deposits are held by the households. Substantial savings are mobilised by banks through savings bank deposits. The deposits can be withdrawn by means of cheques. Certain rules and regulations have to be followed while operating these accounts. A nominal rate of interest is provided for such deposits.

(b) Current Account Deposits: These deposits are maintained by businessmen. There are no restrictions on the amount of deposits or withdrawals. No interest is provided for such deposits. In fact banks charge certain commission for providing the facility. Banks always keep sufficient reserve to meet the demand of the current account holders. The amount is withdrawable by means of cheques.

(c) Fixed Deposits: When the deposits are made for a fixed period of time, they are termed as fixed deposits. The amount can be withdrawn only after the maturity period. The rate of interest offered for such deposits depends upon the time period. Longer the time period, higher would be the rate of interest and vice versa. Though the fixed deposits cannot be withdrawn before the maturity period, many banks sanction loans against the security of fixed deposits for which they charge a higher rate of interest.

(d) Recurring Deposits: Under this type, customers deposit a specified amount at regular intervals. It is designed by banks to help those who want to deposit smaller

2..FUNCTION OF COMMERCIAL BANKS

(B) SECONDARY FUNCTIONS:

The secondary functions are also known as non-banking functions. They are divided into two categories namely:(1) Agency Services, and (2) General Utility Services.

(1) Agency Services: Commercial banks act as an agent for their customers for a variety of purposes. They are: 

(a) They collect receipts like cheque, draft, etc. on behalf of the customer. They collect service charges for providing this service.

(b) They make payment on behalf of the customers. The customers have to give a standing instruction to the bank to make payments like rent, telephone bills, insurance premium etc. Banks make these payments on a regular basis by charging certain amount.

(c) By charging a nominal amount they buy and sell securities like shares, debentures etc. for customers.

(d) Commercial banks act as the custodian and executor of the will of the customers.

(e) They also provide advice to the customers in their portfolio management and manage their funds and act as the custodian of funds.

(2) General Utility Services: A variety of general services are provided by commercial banks. Some of them are:

(a) They provide safety lockers to the customers to keep their valuables like jewellery, documents, etc.

(b) They issue travellers’ cheques, foreign exchange and letter of credit.

(c) They serve as a guarantor to creditworthy customers.

(d) Underwriting service provided by banks is of great help to business houses.

(e) They help the customers in transferring funds from one place to another by issuing drafts.

PHASE I:

This phase was marked by rapid industrial development. The foundation for rapid industrial development was laid down during this period. During the second five-year plan, huge investments were made in basic and heavy industries. The same trend continued in the 3rd plan as well. The growth rate of industrial production increased from 5.7% in the 1st plan to 9% in the 3rd plan. Capital goods industries registered an impressive growth rate of 19.6% p.a. in the 3rd plan. The basic industries’ growth rate was around 10.4% p.a. in the 3rd plan. The public sector played a leading role in developing the basic and heavy industries. The credit for creating a strong industrial base in the initial years goes to the public sector.

PHASE II:

This phase was marked by industrial deceleration and structural retrogression. The growth rate, which was 9% earlier declined to 4.1% p.a. during the period 1965-1976. Apart from this, the industrial sector also witnessed structural retrogression i.e., the capital goods sector could grow only at an annual rate of 2.6%. Earlier the growth rate was 19.6% p.a. The same trend was witnessed in the case of basic industries.

(1) The Government cited a number of exogenous factors responsible for this situation. The wars of 1965 and 1971, oil crisis in 1973, drought conditions and infrastructural problems were the main reasons given by the Government.

(2) According to K. N. Raj, the slowdown in industry was mainly due to the agricultural slowdown.

(3) Other economists argued that decline in real investment in the PSUs as the main reason for the slow growth.

(4) Some economists like Isher Judge Ahluwalia, Jagdish Bhagwati and others argued that the industrial deceleration was due to defective licensing system, excessive bureaucracy, unnecessary controls etc.

PHASE III:

This phase was marked by industrial recovery. The industrial growth rate slowly picked up and by 1990-1991 it was 8.3%. Industrial recovery was clearly witnessed in this period. The main reasons for the recovery were:

(1) The Government liberalised a number of rules and regulations. Industries were allowed to use installed capacity, expand and diversify. Competition was injected into the domestic economy. These measures induced more supply. At the same time higher budgetary deficits, massive borrowings, incentives to spend etc. were resorted to by the Government to induce more demand.

(2) More demand from the agricultural sector for industrial products also pushed up the growth rate.

(3) Investment on infrastructure showed considerable improvement during this period.

(4) There was also an improvement in productivity and efficiency in the industrial sector.

PHASE IV:

This phase is marked by a mixed trend. This period is also known as the post-reform period. The Government announced the new industrial policy in 1991. A number of liberalization measures were announced by the Government. It included scrapping of the licensing system, dilution of the role of public sector, encouraging the private sector in various fields, allowing foreign direct investment liberally in various sectors etc. Similar changes were announced in the foreign trade sector, banking sector and other fields. The impact of liberalization on the industrial sector was a mixed one. Compared to the pre-reform decade growth rate of 7.8% p.a., the growth rate in the post reform period was 6%. The new policy of liberalisation resulted in wide fluctuations in the industrial sector during the 8th and 9th plan periods.

Phase I-1991-94: In 90-91 the annual growth rate of industrial production was 8.2%. In 1991, the new industrial policy was announced. With the introduction of the new policy, the industrial sector was expected to do better. However, in the immediate post reform period, the performance of the industrial sector was disappointing. In 91-92, the growth rate was a mere 0.6% and 92- 93 it was only 2.3%. In 93-94, the growth rate rose to 6%. The main factors responsible for this recessionary phase were as follows: (1) The industrial sector was exposed to competition suddenly and hence could not face the competition effectively. (2) Decline in the investment of the public and private sectors affected industrial growth significantly.(3) Poor quality and inadequate infrastructure adversely affected the working of industries.(4) Compression of imports on the one hand and rise in the cost of raw materials and intermediate goods increased the cost of production for Indian industries.(5) Due to the rising inflation rate demand for goods and services declined.(6) There was uncertainty about the flow of foreign capital and this affected domestic investment in various sectors.

Phase II 1994-99: This phase was marked by industrial recovery. In 94-95 the growth rate of industrial production was 9.1% which further increased to 13% in 95-96. The main factors which brought about this revival were:

(a) Better performance of the agricultural sector.

(b) Increase in consumption demand due to increased government expenditure.

(c) Rationalisation of excise and customs duties.

(d) Reduction in statutory liquidity ratio enabled the banking sector to lend more to the industrial sector.

(e) Increased demand for Indian goods in the international markets.

This recovery phase however could not be sustained for a long time. In 96-97, the industrial growth rate declined to 6.1% and in 97-98 it was 6.7 and in 98-99 it fell to 4.1%. Both internal and external factors were responsible for this slow down. The major ones were:

(a) Infrastructural bottlenecks continued to be a major problem.

(b) Rural demand for industrial goods declined due to poor performance of agriculture.

(c) Credit control, depressed capital market, stagnation in investments etc. affected industrial growth adversely.

(d) Sluggishness of the export sector and the East Asian crisis contributed to the slowdown of the industrial sector. The currencies of the East Asian countries depreciated more than the Indian rupee, making the Indian goods more expensive than the goods of the East Asian economics.

(e) Many Indian industries like electronic components, chemicals, steel etc. faced tough competition from imports.

Phase III-1999 and afterwards: This phase witnessed a mixed trend. In 1999-2000 the growth rate increased from 4.1% in 98-99 to 6.4%. Increased rural demand for industrial goods, better performance of the consumer durable sector, favourable government policies for sectors like IT, housing etc. enabled the industrial sector to perform better. However, in 2000-01 and 2001-02 there was industrial deceleration. In fact in 2001-02, the growth rate was a mere 2.3%, the lowest in the last one decade. Poor infrastructure, inadequate demand, high interest rate, absence of reforms in the labour market and trade cycles were responsible for this decline. In the subsequent years however the industrial production has been registering positive trends. In 2002-03 it was 5.7% which increased to 6.9% in 2003-04.