Reforms for Foreign Direct Investment (FDI) in India with legacy License/Quota Raj for citizens and native industries?

Green Chillies Fruit

Chilly image credit & © Sandeep Bhalla

India has a written constitution. According to 7th Schedule of this Constitution, the power to legislate is vested in Union/Central Parliament and State legislature. List 1 specifies the matters in respect of which Union Parliament can legislate. List 2 specifies the matters in respect of which State Parliament can legislate. List 3 is a Concurrent List i.e., the Central and State  both legislatures can legislate the matters specified therein. The constitution has also created a bias in favor of Union Parliament which is reflected by Article 254 which states that if a State Legislation is in conflict with Union Legislation, the latter will prevail.

Reforms for Foreign Direct Investment (FDI) in India with legacy License/Quota Raj? What about reform for citizens and native industries?

Under Entry 52 of list 1, the Union Parliament is entitled to legislate in respect of Industries, the control of which by the Union, is declared by Parliament by law to be expedient in public interest. In exercise of this power, Union Parliament passed a legislation “Industries (Development and Regulation) Act, 1951. The title of this legislation is a misnomer. According to this legislation the industries specified in the schedule to the Act were prohibited from starting without prior approval/license of Government. The schedule to the said Act covers virtually every possible industry. It however exempted the so-called small-scale industries having an investment of (as exists today) Rs. 5 Crore. Thus by one stroke of legislation, the prerogative of State Government to control the industries were taken away. Now because of this legislation the freedom of this industry is purported to be regulatory. But such freedom is abolished because the process of obtaining a license to start an industry is dependent on a political party who are known to act on quid pro quo (on expectation of return of favor).

Yet not satisfied with above, in 2006, the Union Parliament (under aegis of this Government led by Prime Minister Man Mohan Sigh) a new legislation called THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006. Presently the provisions of this Act only creates more bureaucratic berths by creating various advisory offices and to ensure timely payments to small industries from large industries but the noose is tightening. The above 1951 Act was also enacted as benign Act to promote industrialization but eventually stifled it.

The industries are governed by State list entry no. 24 with a proviso that excludes the industries governed by Central/Union Legislation. But because of above legislation, the State Governments are left with no power to permit or deny any industry.

The hoopla over FDI, Foreign Direct Investment in retail sector and precedent cited by the Prime Minister of similar opening of manufacturing sector in 1991 is misleading. While an Indian Entrepreneur with limited resources is stifled by “The License Raj” created by the above stated legislation, Foreign Multinational Companies with deep pockets and an army of lobbyists to liaison with Government are certain gainers.

It is unfortunate that such dubious actions are perceived as REFORMS. Chillies seem to be the fruit of the season. The ostrich which had its head buried in sand for eight years, has suddenly become a performer by scratching its feathers!

© Sandeep Bhalla

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