Thursday, November 5, 2009

Economically died but politically alive-II

On this Monday Ila wrote another article which is very opt to the titled of this post.

Some excerpts:

“..Many sectors of industry were not allowed to grow large by deliberately keeping them small. Bank nationalisation was followed by small-scale industry reservation. The policy of explicitly reserving certain items for production by small companies was created. Indian industry has lost out for years because of being unable to harness economies of scale. While the list of reserved items has become shorter, it has not been before China has thundered ahead building large scale industry, while Indian industry has helplessly stood by and watched.

Until then factories with over 1,000 workers used to require government permission for lay-offs. The size threshold was amended in 1976 to 300. In 1982, when Indira Gandhi was back in power, this was further reduced to 100. Even today many industrial establishments require prior permission of the appropriate government before lay-offs, retrenchment and closure. Most problems connected with the IDA arise from this since the government becomes a third party to the dispute even if the employee is satisfied with the severance package. These sections of the Act need to be considered along with other elements of the act which makes any dispute between an employer and an individual workman an industrial dispute.

The central planning logic went into other areas was well. For example, on February 17, 1976, the Urban Land Ceiling Act was passed. It covered 73 towns and cities and imposed a ceiling of 500 to 2,000 square metres on urban land holdings. It constitutes a major distortion of the urban land market. While this was a state subject, the Constitution allows Parliament to pass a bill if more than two states agree, and this path was chosen during the emergency. Another law giving disproportionate powers to the state was the Monopolies and Restrictive Trade Practices (MRTP) Bill proposed in 1967. It became an act and came into force from June 1, 1970. The MRTP Act, which gave huge powers to the government, sought to check the expansion of large industrial houses with assets over Rs 1 crore or where their share in the market exceeded 33 %.

….Until governor Subbarao changed the rules recently, they even needed licences to open ATMs. Only 18 foreign bank branches are given the licence to open every year. If banks open branches abroad, they need permission. Every product that is launched needs permission from RBI. The authorities decide what the savings bank interest rate is. The authorities decide what the interest rate on lending to certain sectors is. The authorities define who to lend, how much to lend and at what rate to lend. They decide how much a bank has to lend to the government, to the central bank, to agriculture, to small-scale industry, to exporters, to students, to rural businesses and so on. Every element of the life of a banker is dictated by the authorities.

………..everything that can kill the growth of a healthy and competitive banking system plagues Indian banking. Undoing all this is going to be a formidable task.”

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