Import Substitution in India: Issues, Challenges and Promotion

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INTERNATIONAL TRADE AND FINANCE
INTERNAL ASSESSMENT SEM - IV
Import Substitution in India: Issues, Challenges
and Promotion.
Aakriti Agarwal (13004)
Aarushi Verma (13006)
Achaman Agrawal (13017)
Aditya Tanwar (13020)
BMS 2A
Shaheed Sukhdev College of Business Studies

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ACKNOWLEDGEMENT
We would like to express the deepest gratitude to our International Trade and Finance professor ,
Dr. Kumar Bijoy, who has the attitude and substance of a genius. He continually and
convincingly conveyed a spirit of adventure in regard to research and scholarship, and an
excitement in regard to teaching. Without his guidance, valuable advices and persistent help, this
research paper on ‘Import Substitution in India:Issues, Challenges and Promotion’ would not
have been possible.
Mere acknowledgement may not redeem the debt we owe to our teacher for his support during
the course of our research paper.

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TABLE OF CONTENTS
1. OBJECTIVES Pg 4
2. ABSTRACT Pg 4
3. RESEARCH METHODOLOGY Pg 5
4. INTRODUCTION Pg 6- 13
4.1. Pre Liberalization Era
4.2. Post Liberalization Era
4.3. Import Substitution
4.4. The Current Scenario
4.5. International Cases of Import Substitution
5. OIL Pg 14-21
5.1. Introduction
5.2. Current Market Situation
5.3. SWOT Analysis
5.4. Porter’s Five Force Model
5.5. PESTEL Analysis
5.6. Government Initiatives
5.7. Road Ahead
6. GOLD Pg 22-28
6.1. PEST Analysis
6.2. Suggestions for Import Substitution of Gold
6.3. Road Ahead
7. ELECTRONICS Pg 29-32
7.1. Historical Developments
7.2. Government Policies
7.3. Opportunities Ahead
8. MACHINERY Pg 33-37
8.1. Current Scenario
8.2. Challenges
8.3. Opportunities
9. CONCLUSION Pg 38
10. REFERENCES Pg 39-40

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OBJECTIVES
● To study the issues and challenges facing import substitution in India
● To analyze the main commodities that India imports and explore viable options
concerning their substitution.
● To look at the long term benefits of Make in India programme
● To understand the issues faced in the Oil, Gold, Electronics and Machinery
sectors regarding import substitution
● To analyse international cases of import substitution and evaluate whether similar
policies could work in India's favour.
ABSTRACT
Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing
foreign imports with domestic production. ISI works by having the state lead economic
development through nationalization, subsidization of vital industries (including agriculture,
power generation, etc.), increased taxation, and highly protectionist trade policies. The Indian
government is keen on Import Substitution and has extensively launched its flagship Make in
India programme.
For this purpose we have also gone in depth into the pre and post liberalisation era to better
understand the nuances affecting our foreign trade. This study also covers various international
cases to be able to better suggest methods of import substitution by learning from their
experiences. This study is vital as no other study has covered the top four commodities that India
imports, specially in the light of the BJP government’s enthusiasm towards Make in India.
Under this paper we have identified the top four imports of the Indian Economy, namely Oil,
Gold, Electronics and Machinery in that order and looked at possible issues and challenges faced
under these sectors individually and on the basis of qualitative modelling, suggested ways to
apply the principles of import substitution of them.Of these, Electronics and Machinery are
capable of true substitution in the true sense, however the other two Oil and Gold, cannot be
domestically substituted per se, however there are various other methods covered in this study
which can be used to reduce our import bill and thus achieve the purpose of narrowing our
Current Account Deficit as well as giving a strong boost to Rupee and the Indian Economy.

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RESEARCH METHODOLOGY
In this study we used RBI’s official website Database on Indian Economy for all the statistics. The
Annual Imports of Principal Commodities USD table for past 15 years was used to find out the top
imports which were taken up individually and analysed.
We also studied the economic environment before and after the liberalization, the causes and its effects on
the Balance of Payment. We’ve tried to analyze the 1991 policy changes and its implication on the
business environment.
International cases of Import substitution were taken up to better understand the process of Import
Substitution and draw from other economies success at Import Substitution policies.
Oil which forms the major part of total imports as analysed according to the data accessed for the past 10-
12 years, makes India the 3rd largest energy consumer in the world. Also, taking into account the the
Porter’s Five Forces’ Model, the SWOT and the PESTEL analysis done for the Oil and Gas Sector of
India, we analysed what can be done to reduce the increasing rate at which India is importing oil. We
used the data available at the RBI statistics to calculate the yearly imports and production of Oil as
compared to the consumption in India. To represent the same econometrics like CAGR, tables, Bar
Graphs and Line Graphs, correlation analysis were used.
Gold which ranks second in the import bill was analysed through a PEST analysis. Since we cannot in
practise substitute gold, so we have to look at ways to curb import and reduce demand. A case of
successful implementation of gold monetisation was taken up for comparison and suggestions were made
on the basis of the qualitative PEST model, however due to lack of recent research on gold mobilisation
in Indian context, largely newspaper articles and editorials were used. Simple econometrics like CAGR,
trend chart, percentage change etc were used.
Indian Cabinet introduced changes and provided incentives in the Budget of 2014 to boost the electronic
manufacturing sector as a part of the Make in India Campaign.
Machinery used in economy is said to be the direct function of the industry’s production. To analyze the
imports and exports of Machinery, we’ve tried to divide the manufacturing industry on basis of ‘small-
scale’ and‘large scale’. Also, we have considered several factors like the labour force involved, the
contribution of the industry towards the Indian economy to narrow down to the possible challenges and
their respective resolutions.

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INTRODUCTION
To be able to study India’s Balance of Payment Position and therefore Import Susbtitution
possibilities, it is inevitable to study the consequences that led to the liberalization. The
following Indian BOP scenario is meant to give an overview. Policies depend upon the historical
events. To study India’s economic position, we have divided India’s past into two major periods
namely :
1) Pre Liberlization and
2) Post Liberlization
Pre Liberalization Era
After World War 1:
Right After World War 1, the world experienced a World Trade shrinkage due to transport
difficulties and risk in movement of goods. But India experienced a boom in export. This was
due to the sharp export increase in world demand for raw materials.
Also, Imports increased due to the pent-up demand.
The return of European economic and political normalcy triggered stability of Indian Rupee
which was the cause of stabilization of International currencies. Albeit, shortly after that, imports
decreased due to the Swadeshi movement. The idea of ‘self-reliance’ gradually caught on
Effect of Great Depression:
Export:
A Steep fall in prices of Agricultural products was experience due to the decease in demand.-
steep fall in prices of Agricultural products. Therfore, Great Depression heavily impacted India’s
Agricultural Products Export
Imports:
Purchase power dropped down. India was experiencing a tense Political situation.
This drop in import was bolstered by the expansion of domestic sugar and cotton textiles
industries under policy of discrimination protection (tariffs imposed to protect 13 industries)
World War 2:
-May 1940, import restrictions on consumer goods which later expanded to almost all
commodities. Objective was to regulate available foreign exchange and limited shipping space
available for war effort. Therefore, triggering export Surplus
-Before war, India was net debtor (sterling debts) which was the key to commericial policies. In
wider pattern of International balance of payments, India was among group of net dollar earners
and made over those earnings to Europe in payment for deficits.
-India was member of Sterling Areas, main objective of which was to expand trade within the
area while preserving stability of sterling as an international Currency
-By the end of the war, entire external debt was repaid and balances of order 1,600 Cr had been
built up in Sterling. India became ‘Creditor Country’ in stability of Sterling

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- Post-war difficulties of the United Kingdom placed a limit on the rate at which the sterling
balances could be drawn upon.
-But sterling balances were largely the result of restricted consumption and investment and not a
reflection of any permanent improvement in productivity in the economy the problem of
balancing trade at the end of the war was in a sense more difficult than before it. The financing
of the war had increased money incomes but consumption had been kept down by scarcities and
price rises.
-Trade with Germany (Axis) disappeared
-increase in share of dollar area to about a quarter (trade with U.S increased and decline of trade
in Sterling area)
Post World War 2:
-Import of raw materials, food and capital goods required by industries were freed
-Partition resulted in food, cotton and jute growing areas going to Pak whereas manufacturing
Industries were located in India resulting in heavy import bill.
Effect of Colonial Rule on India’s Balance of Payment :
India did enjoy trade surplus and the positive balance of trade was used to pay invisible imports
(remittance of profits of Foreign Investment in India and banking, insurance and shipping
charges) and debt servicing obligations and unilateral transfer of fund to Britain as political
Charges. This payment of political tribute was the genesis of ‘DRAIN OF WEALTH’ from India
Balance of Payment before 1991
-Sterling balances which reached peak figure of Rs. 1733 Crore at the end of 1946 declined by
121 crore due to large imports of food and pent-up demand
-Payment of 556 crore due to payment to U.K + 284 crore for purchase of Annuities for
financing payment of Sterling pensions and acquisition’s of Defense Installation and stores left
behind in India.
-Further cut due to payment to State Bank of Pakistan’s share of these balances.

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-This created Anxiety. Government realized that the balances should only be used for
development purposes (import of machinery) and not to finance deficits
-Placed import restrictions. Import of raw materials, essential consumer goods and food were
free (no exchange rates). Other consumer goods were placed under restricted category and luxury
items under prohibited
-Correction of ‘Anti-export bias’ in 1970 resulted in promotion of export.
-Balance of Payment Crisis in 1991
-Government Attempted to mobilize balance of Payment from World Bank, IMF and Asian
Development bank
-2 Schemes Introduced to encourage inflow of capital :
1) Development Bond Scheme
2) Immunity Scheme
But the two schemes were primarily used to build up reserves and not to liberalize Imports
Long Term Measures taken :
1) Reduction in Excess Domestic Demand
2) Enhanced Competitiveness (Change in exchange rate of rupee, price drop)
3) Deregulation (of exports)
Post Liberalization Era
India’s exports have decreased since 1991
Following are the major reasons that have contributed towards the decrease in Indian exports :
The policies of liberalisation and privatisation have been instrumental in attracting huge foreign
investment. At present FDI is allowed even upto 100% in certain sectors. In 1990-91, the net FDI
in India was about 0.1 US $ billion, which increased to 18.8 US $ billion in 2009-10. This has
improved the net foreign investment in India.

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Portfolio investment includes investment by FIls in the Indian stock markets. In 1990-91,
portfolio investment was nil. In 2007-08 it was 27.4 US $ billion. Again in 2008-09 portfolio
investment was negative as withdrawls were more due to collapse of stock markets World wide
in 2008-09. However, in 2009-10, the net portfolio investments again picked up at 32.4 billion.
External commercial borrowings have been an important source of funds for the government.
Over the years the net external commercial borrowings have increased. In 1990-91, they were
about 2.2 US $ billion, which increased to 7.9 US $ billion in 2008-09, but it reduced to US $ 2.8
in 2009-10.
Private transfers include inward remittances from Indian workers working abroad, personal gifts
received from abroad, donations received from abroad by religious / charitable trusts etc. Private
transfers were about 2.1 US $ billion in 1990-91. It increased to 12.8 US $ billion in 2000-01.
Which further increased to 44.6 US $ billion.
At present, India ranks 9th in the world for overall services exports and 2nd in the world for
computer and information services exports. In 2000-01 India’s services exports have increased
from 16.3 US $ billion to 96 US $ billion in 2009-10.
The invisibles (net) on BOP account have increased over the years due to increase in services
exports. In 1990-91, the net invisibles were negative to the extent of 0.3 US $ billion, which
increased to 80 US $ billion in 2009-10.
The private transfers along with services exports have increased the net invisibles on BOP
account.
The non-resident deposits add to the capital account of BOP. In 1990-91, non-resident deposits
(net) were 1.5 US $ billion, which increased to 2.9 US $ billion in 2009-10. The various schemes
of incentives announced by Indian government helped in attracting huge deposits from non-
resident Indians.
Some of the important measures for maintaining / Improving balance of payments in order are as
follows :
During the earlier period of planning India received substantial amounts of foreign assistance
from a number of countries like USA, UK, France, Germany, and also from international
institutions like IMF World Bank and IDA. Such assistance was in concessional terms. In 1991,
when we faced BOP crisis India approached IMF and received substantial amount of loan.
However, the role of foreign assistance in financing deficits in balance of payments has declined
in recent years.
India attracts substantial amount of Foreign exchange both in form of Foreign Direct Investment
(FDI) and portfolio Investment. Government has been announcing numerous concession and
incentives to attract foreign investment. However Foreign investment is not an unmixed blessing.
Huge payments in terms of royalty and dividends are required to be made every year in foreign
exchange. Therefore, it is necessary to ensure that all investments are productively employed.
Either FDI should be directed to export industries or it should be directed in building up of
infrastructure. Thus FDI can continue to serve as a reliable source of assistance in future also.
Portfolio investment is made mainly on the basis of short run returns and hence they may not be
treated as a reliable source.

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This is a high cost method of financing deficits as external commercial borrowings can generally
be obtained at high rates of interest. Care must be taken to see that such loans are raised for
projects which have direct impact on increasing our exports or reducing imports.
Non - Resident deposits are also obtained at high rates of interest. Such deposits are highly
volatile in nature as, their main objective is to maximise returns. If conditions are unfavourable,
they can withdraw their funds from the country. Thus, both foreign institutional investors and
non-residents are fair weather friends. We cannot rely upon them at times of crisis.
Earnings from invisibles have played an important role in reducing the current account deficit in
balance of payments all through 1990’s. It v covered the entire trade deficit in the year 2001-02.
The prospects of invisibles in future looks bright for India.
The lasting solution to BOP problem lies in our policy to promote exports. All possible efforts
should be taken to increase exports. Reduction in import would be very difficult in India, under
the regime of liberalised import policies. The best policy is to promote exports with the help of
well formulated strategy. Thus promotion of exports must be the most important plank of our
trade strategy
Import Substitution
Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing
foreign imports with domestic production. ISI is based on the premise that a country should
attempt to reduce its foreign dependency through the local production of industrialized products.
The term primarily refers to 20th-century development economics policies, although it has been
advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.

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ISI policies were enacted by countries in the Global South with the intention of producing
development and self-sufficiency through the creation of an internal market. ISI works by having
the state lead economic development through nationalization, subsidization of vital industries
(including agriculture, power generation, etc.), increased taxation, and highly protectionist trade
policies. Import substitution industrialization was gradually abandoned by developing countries
in the 1980s and 1990s due to structural indebtedness from ISI-related policies on the insistence
of the IMF and World Bank through their structural adjustment programs of market-driven
liberalization aimed at the Global South
The Current Scenario
The current government is keen on Import Substitution and has extensively launched its flagship
Make in India programme. Under this the Prime Minister, Narendra Modi, has asked the
commerce ministry to cut down on the imports of inessential commodities in order to reduce our
dependence of the rest of the world and reduce our deepening Current Account Deficit, as well
as to help Rupee gain value as against Dollar. The Commerce ministry has identified nine
commodities which includes edible oil, pulses, fresh fruits, cashew, sugar, alcoholic beverages,
processed and packaged items, cocoa products and sesame seeds among the inessential
commodities. Edible oil comprised of 60% of imports in this basket. CAD in India has come
down to 1.7% of GDP in the first quarter of 2014-15 as opposed to 4.8% a year ago. But if you
compare the number to the 0.2% of GDP in the fourth quarter of 2013-14, it is still quite high.
One of the major reasons for the drop in CAD that has been possible over the past one year is
because of a whopping 57.2% drop in gold imports, but non- gold imports have gone up. The
curbing of the gold imports has also been possible due to the rise in the gold import duty, and the
government has made it clear that it will be in no hurry to reduce the gold import. It is clear that
the government is now taking the non gold imports seriously as well.
Though economic theory does not directly and causally relate fiscal deficit and current account
deficit, specific research papers have shown that in the long run, the two are correlated
positively. So the effort to bring down CAD could have positive effects on the fiscal deficit
numbers as well. Among the nine products, in several cases, the government has been working to
bring down imports anyway. However, this must be easier said than done. Let us look at two
products in the list: sugar and edible oil, both of which see high imports, but for different
reasons.
Edible oil production in India has largely been stagnant for the past few years. As population,
demography and lifestyle changes occur, the demand for edible oil has been rising steadily.
Among this palm oil (used mainly to manufacture soap) and soyabean oil lead the pack. Now it
is difficult to reduce the import of palm oil and all domestic soap manufacturers use it as a
primary raw material. India meets half of its vegetable oil requirements through import. While
the oil producers are asking for raising the import duty of edible oil for the protection of
domestic producers.The government has said that it is not looking at raising import duty in oil
for the sake of protectionism. But the rising import has made brought the oil producers under
pressure due to low pricing abilities. The government here is not required to raise duties to
protect farmers. Rather they must invest heavily in agriculture to make the sector more price
competitive and increase the production capacity of the country.

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On the other hand, India is a surplus producer of sugar and ranks just second to Brazil when it
comes to the production of sugar. According to a Reuters report India is likely to produce 25-
25.5 million tonnes in 2014-15 year compared with local demand of about 23 million tonnes,
according to a statement by the Indian Sugar Mills Association. The government in this sector
clearly follows a protectionist policy as it raised the import duty to 40% in August. It is estimated
that sugar mills owe almost Rs 5,000 crore to farmers, and with prices falling, they were not
being able to pay the farmers. India cannot export sugar much due to low global prices, while
without the duty in place, it is difficult to stop imports.
Curbing non-gold imports for all commodities is not an easy policy to adopt, and each
commodity must be taken in a case-to-case basis. The policies for all imported goods cannot be
similar, and in that aspect, the decision to frame policy papers to lay out specific roadmap is
essential.
The policy of protectionism offered to farmers and the industrialists is not new to India, as it has
been practised in varying degrees since independence. That Narendra Modi will not blatantly
follow free trade policies was clear in a bold decision to not sign the WTO deal which could
compromise with India's food procurement and distribution policy. It also falls in line with the
RSS notion of "Swadeshi" which wants to enable domestic manufacturing to strengthen itself,
something that has clearly not happened in it. However, this needs to be backed by adequate
public investment in agriculture to reduce the dependence just on rainfall. The cost of production
of goods where India is a major producer has also to be aligned with the global costs to avoid
heavy and unnecessary imports.
Without the right investments, the protectionist policies will fall flat.
International Cases of Import Substitution
China in 80s and 90s and Taiwan in 60s and 70s grew exponentially and one of the reasons
behind that is their Import Substitution policy. Zhu (Zhu T, 2006) argues that the double digit
growth figures achieved by Taiwan and China have always been a combination of ISI(Import
Substitution Industrialisation) and EOI (Export Oriented Industrialisation) strategies during their
entire miracle-creating period; far from the shift from ISI to EOI strategies, export promotion
was used in both cases to sustain ISI, which has always been the central focus of development.
Zhu’s compelling study makes one wonder if either of the two practices are best or both ought to
be used in tandenm or is a shift from ISI to EOI would be the best thing for an economy. First the
economy could use ISI to produce enough then EOI to export the excess. This would ensure self
sufficiency as well as export efficacy.
There are various differences between China and Taiwan, with the former having a large
internal market as well as regional power. However Taiwan is smaller compared to China and
doesn’t possess much political or military power
However there are various similarities between them that make give them compatible political
and economic foundation. Taiwan followed the model, of first setting up textile, food and other
labour intensive industries followed by producing labour intensive products as a result of which
its economy started taking off. After this capital intensive products, higher value added and skill-
intensive products started being produced. Capital goods too started being produced at a rapid
pace to boost secondary import substitution. However, Taiwan having the small population as it
did couldn’t absorb the entire domestic production and exports were encouraged as well. China
pretty much followed the same path as well however, it’s policies ended up in the extremes,

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much like Soviet Union which caused problems in the long run. Also, China didn’t have the kind
of technology Taiwan did, as Taiwan had tie ups with the US and China didn’t have the hard
currency required to procure producer goods. On top of this domestic consumption was
suppressed to mobilise all productive resources. This reduced people’s incentive to work as well.
However China’s extreme ISI has become a way of life for it.
While India’s ISI is well intentioned, India would do well to learn from China and Taiwan.
Though it’s a close balancing act, it must choose between extreme and rational protectionism for
a successful Make in India campaign.

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OIL
Introduction
The oil and gas sector is one of the six core industries in India. It is of strategic importance and
plays a pivotal role in influencing decisions across other important spheres of the economy.
India was 4th top crude oil importer 128 Mt in 2008. India has 5th top oil refinery capacity (4.1%
of the world) and production of 162 Mt oil products (4.2% of the world). Net import of oil was
109 Mt in 2008.
India is the fourth-largest energy consumer (2013) of oil & gas in the world, accounting for 37
per cent of total energy consumption. Oil consumption is estimated to reach four million barrels
per day (MBPD) by FY16, expanding at a compound annual growth rate (CAGR) of 3.2 per cent
during FY08-16. By 2025, India is expected to overtake Japan to become the third-largest
consumer of oil.
The country has 5.7 billion barrels of proven oil reserves. It had 47.8 trillion cubic feet (TCF) of
gas reserves and produced 33.7 billion cubic meter (BCM) of gas in 2013.
India has 19 refineries in the public sector and three in the private sector. In FY14, public sector
refineries accounted for 53.4 per cent of total refinery crude throughput.
India has 9,460 km of crude oil pipelines and 14,083 km of product pipelines.
Market Size
Backed by new oil fields, domestic oil output is anticipated to grow to 1 MBPD by FY16. With
India developing gas-fired power stations, consumption is up more than 160 per cent since 1995.
Gas consumption is likely to expand at a CAGR of 21 per cent during FY08–17.
Domestic production accounts for more than three-quarter of the country’s total gas
consumption.
India increasingly relies on imported LNG; the country was the fifth-largest LNG importer in
2013, accounting for 5.5 per cent of global imports. India’s LNG imports are forecasted to
increase at a CAGR of 33 per cent during 2012–17.
State-owned ONGC dominate the upstream segment (exploration and production), accounting
for approximately 60 per cent of the country’s total oil output (FY13).
IOCL operates 11,214 km network of crude, gas and product pipelines, with a capacity of 1.6
MBPD of oil and 10 million metric standard cubic metre per day (MMSCMD) of gas. This is
around 30 per cent of the nation’s total pipeline network. IOCL is the largest company, operating
10 out of 22 Indian refineries, with a combined capacity of 1.3 MBPD.

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Reliance launched India’s first privately owned refinery in 1999 and gained considerable market
share (30 per cent). Essar’s Vadinar refinery has a capacity of 20 MMTPA, currently accounting
for around 10 per cent of total refining capacity.
Investment
According to data released by the Department of Industrial Policy and Promotion (DIPP), the
petroleum and natural gas sector attracted foreign direct investment (FDI) worth Rs 31,620 crore
(US$ 4.97 billion) between April 2000 and September 2014.
Following are some of the major investments and developments in the oil and gas sector:
● Petronet LNG Ltd plans to expand capacity of its Dahej terminal in the western
state of Gujarat to 17.5 million tonnes per annum (MTPA), said Mr A K Balyan,
Managing Director, Petronet LNG.
● Gujarat State Petroleum Corp Ltd (GSPC) plans to pick up stakes in Vadodara
Gas Co Ltd (VGCL), which services the Vadodara municipality area and
Sabarmati Gas Ltd (SGL) that supplies gas in three northern district of Gujarat.
● Finland-based Chempolis Ltd has signed a partnership agreement with Bharat
Petroleum Corporation Ltd's Assam-based refinery, Numaligarh Refinery Ltd
(NRL), to build a world class biorefinery.
● Gulf Petrochem Group plans to invest an additional Rs 500 crore (US$ 78.59
million) in India to enter the cluttered and competitive lubricants market worth Rs
6,000 crore (US$ 943.13 million).
● ONGC Videsh Ltd (OVL) and Pemex-Exploracion Y Produccion, the National
Oil Company of Mexico, have entered into a memorandum of understanding
(MoU) to cooperate in the hydrocarbon sector in Mexico.
● Bharat Petroleum Corp Ltd (BPCL) has planned to invest Rs 13,000 crore (US$
2.04 billion) in energy exploration and production in Mozambique and Brazil over
the next four years. It will be the firm's biggest investment in the upstream sector.

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Oil consumption in India
Oil consumption in India is estimated to expand at a CAGR of 3.3 per cent during FY2008-16 to
reach 4 millions barrel per day.
Current Market Situation - Oil
• The Indian Oil and Gas industry plays an important role in the Indian economy with major
refineries and gas companies in the country.
• Indian Oil and Gas sector is primarily controlled by state owned Oil and Natural Gas
Corporation (ONGC) which accounts for approx. 60% of India’s crude oil output.
• The Indian Oil industry consumption was around 3.57 mn barrels per day (b/d) in 2012
compared to around 3.27 mn b/d in 2011 and is expected to reach 4.20 mn b/d by 2017.
• Indian Refinery industry has approximately 21 refineries with total oil refinery capacity being
around 3.6 mn b/d which is expected to reach 4.29 mn b/d by 2016.
• India imports around 70% of total oil needs, from countries like Saudi Arabia, Iran, UAE, etc,
and has spent USD $91,490 million in 2011 on imports.

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Major Oil Refineries in India
Comparing Imports and Production with Total Consumption of Oil in India
Year Imports Rate of
change
(wrt prev
year)
Productio
n
imports+
Productio
n
consumpti
on
Rate of
Change
(wrt to
prev year)
2000 1,336.82 52.97 % 646.34 1,983.16 2,147.44 5.72%
2001 1,574.12 17.75 % 642.40 2,216.52 2,263.73 5.42%
2002 1,609.78 2.27 % 664.75 2,274.53 2,333.44 3.08%
2003 1,788.68 11.11 % 660.03 2,448.71 2,426.33 3.98%
2004 1,911.98 6.89 % 683.11 2,595.09 2,571.55 5.99%
2005 1,938.18 1.37 % 664.66 2,602.84 2,550.25 -0.83%
2006 2,156.00 11.24 % 688.61 2,844.61 2,701.63 5.94%
2007 2,412.27 11.89 % 697.53 3,109.80 2,888.06 6.9%
2008 2,556.69 5.99 % 693.71 3,250.40 2,957.30 2.4

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2009 3,185.18 24.58 % 680.43 3,865.61 3,067.78 3.74
2010 3,271.88 2.72 % 751.30 4,023.18 3,115.45 1.55
Correlation quotient of Imports+Production and Consumption is 0.971755. this implies that there
is a positive and strong correlation between Imports+Production and consumption.
Expected rate of change(increase) in imports is 13.53%.
Expected rate of change(increase)in production is 1.35%
Expected Rate of change(increase) in consumption is 3.99%
Oil Production and Consumption in India
Looking at the data above, it can be implied that imports and production together are still less
than our consumption every year. Not ignoring the fact that India exports, though a minimal, but
an amount of Petroleum and oil from what it produces. With expanding economy comes an
increasing demand for energy and, if current trends continue, India will be the world’s third
largest energy consumer by 2020.
Due to the expected strong growth in demand, India’s dependency on oil imports is likely to
increase further.
SWOT Analysis of the oil and gas sector:-
● Strengths
•India is the worlds fifth biggest energy consumer and continues to grow rapidly

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•Major natural gas discoveries by a number of domestic companies hold significant medium to
long term potential.
•Demand for petroleum products
•Increase in demand for oil and gas
•High exploration portfolio
● Weaknesses
•The oil and gas sector is dominated by state controlled enterprises, although the government has
taken steps in recent years to deregulate the industry and encourage greater foreign participation
•Increase in oil prices
•Inadequate and slowly developing infrastructure
•Lack of awareness in safety issues
•Environmental issues
● Opportunities
•Liquefied natural gas (LNG) imports are still set to grow rapidly over the longer term as
domestic consumption expands
•India has freed gasoline retail price controls
•Untapped domestic oil and gas potential
•Strong domestic energy demand growth
•High recovery rates from existing projects
● Threats
•Increased competition within government and private players
•Continuing government interference
•Changes in national energy policies

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Porter's Five Forces' Model for Competition: Oil and Gas Sector
PESTEL Analysis: Oil and Gas Sector

21
Government Initiatives
Three landmark initiatives for energy efficiency – Design Guidelines for Energy Efficient Multi-
Storey Residential Buildings and Star Ratings for Diesel Gensets and for Hospital Buildings –
were launched by Mr Dharmendra Pradhan, Minister of State with Independent Charge for
Petroleum and Natural Gas, Government of India.
Some of the major initiatives taken by the Government of India to promote oil and gas sector are:
● India and Norway have discussed bilateral relationship between the two countries
in the field of oil and natural gas and decided to extend cooperation in
hydrocarbon exploration.
● India and Vietnam have stepped up cooperation in the energy sector as ONGC
Videsh and PetroVietnam Exploration Production Corporation has signed an
agreement to explore three oil blocks.
● The Government of India has planned to set up a Petroleum, Chemicals and
Petrochemicals Investment Region (PCPIR) near Bina, Madhya Pradesh with an
investment worth around Rs 1 trillion (US$ 15.71 billion).
● The Government of India gave its approval to sign a memorandum of
understanding (MoU) between India and the US for cooperation in gas hydrates
for a period of five years.
Road Ahead
India has been among the world’s fastest growing economies. With expanding economy comes
an increasing demand for energy and, if current trends continue, India will be the world’s third
largest energy consumer by 2020.

22
increase further. Rapid economic growth is leading to greater outputs, which in turn is increasing
the demand of oil for production and transportation.
The National Gas Hydrate Programme (NGHP) Expedition-02 and 03 are under advanced stage
of planning and are due in the period 2014 - 2017. Under the programme the government plans
to core 20 sand prone sites and drill 40 wells.
Exchange Rate Used: INR 1 = US$ 0.0157 as on December 26, 2014

23
GOLD
Gold, the metal that Indians hold a special love for, is sadly currently a villain for our economy
because of its monumental role in bloating up our Current Account Deficit. India is the largest
importer of gold with $53819.4 mn worth of gold imported in financial year 2012-13 which
accounts for nearly 11% of our total imports. Although gold imports dropped by a whopping
46.31% from FY-2013(revised) to FY-2014 (provisional) (Source:RBI) due to many stringent
protectionist policies, there’s still a lot that can be done in this sector before we can pat our backs
for having reduced our dependence on it and converted it from a sentiment-backed idle asset to
an economy booster by monetising it.
In this study we aim to do an in-depth PEST analysis of the Gold Sector from the point of import
substitution in order to present viable suggestions for the same. The suggestions shall cater to the
people of three broad categories, those possessing gold, those interested in gold and those
indifferent towards gold. We shall also look at a successful case of mobilising gold resources as
implemented by Turkey and then draw suggestions from the same. While we acknowledge that
we cannot implement import substitution for gold in the true sense of the world, ie. replacement
of foreign imports with domestic production; we can however substantially cut our imports, and
as a result our CAD.
PEST Analysis
Political
The burgeoning gold demand and therefore, gold imports, put the UPA government in alert
mode. As a result of this various protectionist measures were implemented in 2013 aimed at
curbing gold imports. By mid of 2014 the Narendra Modi wave hit India with a pro-business
image and positive investor sentiment was generated. The Modi government was also perceived
to be pro-gold and there were talks that import duty would be cut and the sentiment alone drove
gold demand quite high.
The current Prime Minister Narendra Modi joined the Reserve Bank of India Governor
Raghuram Rajan in calling upon banks to convince people to channel their savings away from
gold into financial instruments as this would not only lead to economic betterment, but also
social transformation. However, ever since BJP came into power, gold import norms have been
eased. Along with that, the Budget 2015 is expected to cut gold import duty by 2-4 per cent.
Economic
In 2013 the protectionist policies aimed at curbing gold imports included included hiking of
import duty to a record high of 10% and the 80:20 rule, under which 20% of all imported gold
must be exported. This in effect also gave preference to exporters over retail jewellers. Banks too
were discouraged from selling gold coins.
Gold Deposit Schemes (GDS) were popularised to help monetise gold, however they failed to
really take off. They were launched to mobilize the idle gold in the country so that the same can
be put into productive use and to provide an opportunity to the gold holders, to earn interest
income on their idle asset (gold) with safety, liquidity and tax benefits, and while being able to

24
continue to enjoy the appreciation in the gold prices. If nothing else, people should view it as an
interest free option of keeping their gold holdings safe, as opposed to paying hefty locker
charges. However because of meagre 0.75% interest for 3 years and 1% for 4 and 5 years, people
don’t see much profit in it specially because majority of the gold is in form of jewellery and
under GDS the gold is melted to test purity and converted into bars. This causes 20% loss in
value, not to mention people’s downright unwillingness for their meticulously selected and
prized jewellery to lose its form. Also, to reconvert the bars into jewellery will further incur
making charges and wastage. The minimum limit of 500 gms is rather unrealistic as well because
average households hardly keep so much reserve and would certainly not be willing to part with
so much of fine jewellery. Meanwhile, even SBI is struggling to deploy the entire deposits in
productive assets. Banks have to incur heavy expenditure on converting the jewellery deposited
into pure gold bars. In addition, the interest payable to the depositors starts from the day stocks
were deposited. Thus banks end up incurring losses on gathering such deposits. Moreover, there
are no proper guidelines relating to the lending of the gold stocks to traders and exporters and
how would they utilise such stocks besides the absence of specific timeframe in which it was
supposed to be returned to the banks.
Additionally, when the scheme was launched many banks failed to understand the psyche of
Indian masses who traditionally love to possess gold in the form of jewellery however low the
quantity may be. To them it is an investment which could come in handy on a rainy day. Further
the offer was not attractive enough for the masses to deposit their jewellery with the bank to earn
interest. Perhaps, if the scheme had been linked with some kind of amnesty under which
authorities were barred from questioning the depositor about the source of their wealth, the
scheme could have proven to be more attractive.Though these measures led to the desired fall in
gold import to some extent, there were some adverse impacts as well.
Since India is the largest importer of gold in the world, the huge drop in demand caused global
gold prices to fall by as much as 28%. However, on the domestic front, the demand wasn’t
shrinking much. This caused huge premiums and a wide gap between global and domestic gold
prices. In 2013, banks led by State Bank of India pitched for considering gold deposits as part of
cash reserve ratio (CRR) at a banking conference. This was suggested to help put their idle gold
reserves to use as the banks asserted greater need to make use of gold available in the country
and make it more liquid.

25
Secondly, the supply crunch and high premiums caused an exponential rise in gold smuggling.
About 200 metric tons was smuggled in 2014, after controls drove premiums paid by jewelers to
as much as $160 an ounce of gold.
However, ever since 2014 import duty norms are being relaxed. The 80:20 re-export rule was
scrapped. On 18th February, the Reserve Bank of India announced that banks would again be
allowed to import gold on a "consignment basis", under which they act as intermediaries and
don't pay for the stock until a buyer has been found, which is usually quickly.Trading houses will
be allowed to bring in gold with no conditions attached. These reforms are expected to boost
sentiment and gold imports may increase to 75-90 tonnes in coming months as against about 40
tonnes in recent months. The global gold prices may also rise on account of revived demand
from India. Just when the CAD was beginning to fall, this move may end up being a populist
policy which may please traders, but will perhaps hurt the economy in the long run. On another
hand, we could also consider that our CAD has fallen due to oil prices tanking to record lows as
well, and perhaps we can afford to cut down on the import duty in order to control the
smuggling.
Social
Demand for gold in India is interwoven with culture. It would be futile to control gold demand
knowing how much the passion for gold drives savings itself. It is virtually impossible to keep
Indians away from gold, jewellery being the preferred mode of acquisition. While the
sentimental and safety aspects of this mode of investment cannot be denied, neither can one
overlook the gains during uncertain times as in the recent past. In addition, the lack of access to
banks and high inflation led to people buying gold which created macroeconomic problems in
2013.
The growth in the gold rate as compounded annually amounts to 14.34% since 2000. It is no
wonder that Indian households do not wish to let go of the yellow metal then.
Technological
There isn't much proper linkage between gold purchases and PAN card, for the small
unorganised sector of gold jewellers. There are still many small jewellers who act as family

26
jewellers and do not abide by the mandate by RBI that all jewellery purchases over Rs. 50,000
must be accompanied with PAN card number. This is the main cause people are able to convert
their black money into gold and therefore creating significant gold demand. More so, cashless
payments should be encouraged for bank accounts are automatically linked with customer
inforrmation thanks to the stringent KYC policies being followed in banks.
Non physical forms of investing in gold are rather cumbersome and require formalities like
sepearate Commodity Demat account for eGold and broker interaction for Gold ETFs. Such
processes tend to deter investment in electronic form of gold
International Case : Turkey
Turkey is the fourth-largest consumer of gold (dwarfed only by India, China and the US). But it
is the one country most gold players have been watching for the past few years. India should be
studying it too. In many ways, Turkey is similar to India. Gold plays an integral part of the social
fabric. It is given as a gift at weddings, at the birth of a child. Like Indians, Turkish people love
gold and put some of their savings into purchasing the yellow metal.
But unlike India, Turkey has witnessed a drop in its bullion imports. But this was possible only
on account of several measures the country undertook since 2007. It permitted banks to import
gold. Gold refineries were attached to banks, so that the gold that was deposited with banks
could be assayed or refined, or both.By 2011, according to the World Gold Council (WGC) an
innovative central bank policy incentivised commercial banks to create a range of gold-backed
banking products to mobilise Turkey’s stock of “under the pillow” gold that millions of people
have collected in their homes and bank lockers over decades. Policymakers have now
successfully seen around 250 tonnes of gold (US$10.4bn) drawn into the financial system and
put to work supporting Turkey’s economy. And it allowed banks to designate 30% of their
required reserves in gold deposits.
Since Turkey practices Islamic banking, depositors of this gold do not get interest on the amount
of gold deposited. They instead become participants in the profits earned on this gold. This gold
is lent out to goldsmiths who, in turn, fabricate jewellery. They pay back for the gold at a pre-
negotiated price, or replace it with gold — volume for volume — plus a bit more as previously
negotiated. This has allowed the trade to get gold from the banks which get it through imports
but supplemented by gold coming from depositors, and through refiners. Some of the refineries
are LBMA and Comex certified, thus making the bars and coins they produce acceptable by
other countries as well. In 2012 alone, gold fabrication, consumption and recycling added at least
US$3.8bn to Turkey’s economy.
At the same time, it has encouraged people to invest in gold — not just in jewellery. People can
purchase gold from banks, through the Internet, and also through gold ATM machines. Gold is
made available in denominations ranging from just one gram (gm) to 500gm, though larger
quantities can be purchased from either the banks or from gold refineries. Gently, the trade has
taught its people to give gifts of gold, instead of gold ornaments, thus making their investments
more fungible, without sacrificing the traditional concept of owning gold ornaments as well.
In fact, some major transactions are carried out in gold. For instance, a gold retail shop in
Turkey’s Kapalicarsi or the Grand Bazaar — which has been in existence since 1461 — was sold
for 135 kg of gold. Turkey, today, allows any citizen from any country to gift gold to a resident
in Turkey through the Internet. You can purchase the gold through any Turkish bank website as
ane-commerce transaction. The person in Turkey gets a text on his/her mobile, with a code,
which when fed into a gold ATM, hands over the metal to the recipient of the gift.

27
Significantly, it has also improved the fortunes of its 3.5 million gold artisan workforce, which
has begun increasing its market share in the export of gold jewellery.
Like Turkey, India too has the “under the pillow” gold, estimated to be anywhere between
22,000 tonnes to 25,000 tonnes. This gold, if brought into productive use, could actually reduce
India’s import of gold.
For instance, the government could canalise all gold import through designated Indian banks at
an import duty rate of not more than 2.5%. Banks, in turn, could offer this gold to gold refiners
and the trade at an additional 2% duty. The cumulative 4% levy on gold import would
disincentivise smugglers who find sneaking in gold very profitable, thanks to the current 10%
import duty. Smuggling not only increases the appetite for gold, it also corrodes the value of the
domestic currency. More worrisome is that once smuggling channels are set up, these channels
could also be used for smuggling in drugs and worse still, arms by terrorists. Hence it is
imperative for any government to ensure that gold import duties are never allowed to exceed 5%.
Refiners and designated banks could also invite gold deposits against participatory profit sharing,
as in Turkey, or a simple interest rate of 1%. If India could also allow banks to designate some
— say 10% — of their reserves (SLR and CRR) in gold, it would let the demand for gold
jewellery to be met through gold deposits, temple gold, and even gold from refineries. Only the
incremental amount would have to be imported.
Currently, almost 100 tonnes of gold required by the Indian gold trade come through recycling
annually (see chart). This, say gold traders, could easily swell 4-5 times. The biggest benefit
would go to India and China who control over 50% of global demand for gold. It would also
allow the 3.5 crore people engaged in the gold trade to gain easy access to gold. Coupled with
the strict implementation of hallmarking, it could help clean up the gold trade in India — just as
was done in Turkey.
Suggestions for Import Substitution of Gold
● Buying and selling of gold by banks must be freely done, thereby making it more liquid.
Since banks can sell gold coins, but they can’t buy them, this is in effect creating a
demand which cannot be met from within the country. Actual buying and selling of gold
has to occur much more freely in order to ensure that consumers don’t just buy gold and
put it aside in a safe rather than to use.
● The industry also needs to address the issue relating to consumers not getting the
same value when buying and selling gold. Usually, the jeweller would take the
full price from the consumer when selling gold, but when buying it back, would
discount the impurities and the making charge – in other words shortchange
consumers.
● Some immunity/amnesty could be provided for people bringing gold back into the
economy though the GDS schemes and the minimum limit should be brought
down from the existing 500gm. Turkey, which has achieved great success in
mobilising its gold allows citizens to depost even 1 gm in their gold account.
Perhaps there could be different interest rates for different quantities of gold, with
the rates going higher with increase in quantity. This would ensure small
households are able to participate by benefitting from not having to invest in
safekeeping, and the ones with large holdings would be incentivised to bring as

28
much as possible into the economy. With the increased amount of domestic
supply of gold, along with adequate import duty would increase banks’ bargaining
power and therefore even banks would actively try to promote the GDS schemes.
The increased supply will help stabilize the prices to a great extent and banks may
be able to buy gold at lower prices at the end of 10 years, at the end of which one
could either get return in cash or gold equivalent. Simultaneously, the lock in
period could be increased as well to provide banks more time to procure the gold.
To explain further the benefit of greater lock in period, let us divide the
population into two groups- the protectionists (above the age of 35) and the
consumerists (below the age of 35). While the protectionists have a greater craze
for gold, and strongly believe it to be a sound investment comparable only to real
estate, the consumerists on the other hand wish to spend on consumer goods,
durable and non-durable goods. They don’t view gold with enthusiasim
comparable to that of the protectionists. By the time the 10 years lock-in period
would be over, According to the census 2011, 31.41% of the Indian population is
between the ages 10-24. Within the next 10 years they shall be the driving force
of the economy.In a lot of cases they may inherit the GDS certificates from their
parents, and if presented with the option of cash vs gold, the gold-disillusioned
consumerist populace is likely to go with cash, hence the banks will not even have
to procure gold in lieu of the GDS certificates at maturity period, thereby ensuring
sufficient supply of gold in the economy without a major withdrawal demand at
the end of the lock-in period, which is likely to happen for shorter term GDS
schemes. Also the consumerist section is less likely to buy pure gold jewellery
and go with costume jewellery and spending the remaining money on consumer
goods instead.
● While the previous point dealt with people already possessing gold. There will
also be many people who do not have gold but want to invest in it. For such
people, attempts should be made at directing them towards . For such schemes
more publicity and investor education is required. While eGold and Gold ETFs
are not a bad option, they are any day better for the economy than people buying
gold jewellery just to stash it in their homes, Gold Saving Mutual Funds, which is
a new breed of mutual funds is one of the best bets. It invests not in physical gold
but in gold manufacturers, refiners and other gold industries. This enhances
production capacity and boosts economy further. Publicity is the need of the hour
for such schemes. Turkey in 2011 incentivised commercial banks to create a
range of gold-backed banking products to mobilise Turkey’s stock of gold. This
improved the health of the banking sector by reducing costs and improving
liquidity, as well as ensuring commercial banks boost their gold reserves. Kuveyt
Turk Participation Bank, said customers can get gold coins through the ATMs of
her bank. Interestingly, Kuveyt has developed such a system through which a
person in any part of the world can buy gold coins from the bank online and gift it
to a person based out of Turkey. A code will be sent to the cell phone of the
beneficiary, who has to go to the nearest ATM of the bank in Turkey to collect the
coin using the code number.

29
● Now we’ve covered investors interested in gold. For others, who are indifferent
towards gold, the government should have clear, transparent, easy to understand
savings and investment schemes that should look towards earning interest more
than rate of inflation and should be widely publicised for the general public at
large to know about it. If the government wants true financial inclusion and
monetisation they must come up with a scheme that’s as easy to understand as
India’s pet FD schemes.
Road Ahead
It is not the safety of money in banks that worries people, for bank fixed deposits (FDs) are
simply the largest form of financial savings in India. Rather, people buy gold for other reasons –
one, as a long-term hedge against inflation, and two for use as jewellery. Gold buyers do not fret
about temporary decreases in the value of gold, for they do not buy the metal only as investment.
For them gold has use value, store value and exchange value. It is currency that they can also use
for jewellery. The problem is neither the government, nor the Reserve Bank of India (RBI) has
yet offered any product that is easy to understand by the ordinary saver and also offer inflation
protection. Hence gold really has no competitor beyond real estate, but gold is more fungible that
property.
In an alternative and idealistic view, rather than attempting to prevent people from buying and
owning gold, politicians would better serve their citizens by creating a favourable climate for
start up companies and entrepreneurs which would lead to exports and employment growth
which will lead to healthier economies.Rising gold prices and people saving in gold are
symptoms of deeper financial, economic and monetary problems and not the cause.Governments,
in India and internationally, need to manage their economies better and rein in inflation and
make their currencies a store of value that people will trust. They should work towards having
more efficient capital markets and safer, more prudent banks.Finally, they should ensure that
there are positive real interest rates that protect the savings and capital of families, pensioners
and companies.This would gradually lead to Indian people reducing allocations to gold and
trusting rupee deposits and other financial assets.
So if Modi wants to lure people away from buying gold he has to address at least one side of the
demand equation – gold’s use as an inflation hedge.

30
ELECTRONICS
Historical Developments
The above chart shows the percentage imports of India taken over a 15 years average with Crude
Oil and Petroleum products constituting 31%, Gold 9% and Electronic goods 7%. Electronics
constitutes the highest amount of manufactured equipment that is imported. Hence substituting
import of electronics with domestic production will lead to a decrease in the current account
deficit by a large extent.
The Indian electronics industry had its origins to the year 1965 with an orientation towards space
& defence technologies. This was rigidly controlled and initiated by the government. This was
followed by developments in consumer electronics mainly with transistor radios, black & white
TVs, calculators, and other audio products. Colour televisions soon followed. 1982 was
asignificant year in the history of television in India when the government allowed thousands of
color TV sets to be imported into the country to coincide with the broadcast of Asian Games in
New Delhi. In the beginning, it was a temporary permit, with the Union Government allowing
the import of 50,000 colour television sets by November of that year. But by the end of it,
Government raked in earning Rs.70 crore in customs revenue from imported sets, with one lakh
sets imported into the country. 1985 saw the advent of Computers and Telephone exchanges,
which were succeeded by Digital Exchanges in 1988.
Industry Scope and Growth drivers
The electronics market in India is one of the largest in the world and is anticipated to reach US$
400 billion in 2022 from US$ 69.6 billion in 2012. The market is projected to grow at a
compounded annual growth rate (CAGR) of 24.4 per cent during 2012-2020. With imports at
$32.5 billion in 2012, it constituted roughly about 43% of the total demand in the current
scenario. But with growth rate pegged at 25%, domestic production if promoted, can far surpass
the imports. If not, then the share of electronics in imports would continue to create a huge dent
in India’s CAD.
Key Growth drivers are raising incomes, credit availability and government spending. Increase in
discretionary income and credit availability has boosted demand for consumer durables. The
government is one of the biggest consumers of the sector and leads the corporate spend on
electronics; this is not surprising given that electronics facilitates e-governance, developmental
schemes and initiatives launched by the government. Strong demand and favourable investment
climate in the sector are attracting investments in R&D as well as manufacturing.
Few intiatives of the Central Government for e-governance include:
· National e-Governance Plan (NeGP)
· National e-Governance Division (NeGD)
· e-Governance Infrastructure
· Mission Mode Projects
· Citizens Services
· Business Services

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Government Policies
India has been successfully promoting reforms in all the constituents of the Internet
Communication, and Entertainment sector. Being a signatory to the Information Technology
Agreement (ITA-I) of the World Trade Organization and with effect from March 1, 2005 the
customs duty on all the specified 217 items has been eliminated. It mostly includes electronic
components and equipments which are used in manufacturing of bigger electronic goods.
Industrial Licensing has been virtually abolished in the Electronics and Information Technology
sector except for manufacturing electronic aerospace and defence equipment.
There is no reservation for public sector enterprises in the Electronics and Information
Technology industry and private sector investment is welcome in every area. Electronics and
Information Technology industry can be set up anywhere in the country, subject to clearance
from the authorities responsible for control of environmental pollution and land use regulations.
Foreign Investment Policy
A foreign company can start operations and man in India by registration of its company under
the Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100 per
cent. At the time of registration it is necessary to have project details, local partner (if any),
structure of the company, its management structure and shareholding pattern. FDI in
manufacturing of electronic good is generally through the automatic route barring a few strategic
segments.
i) Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the
Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued
by the Government of India from time to time.
ii) Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance.
Foreign Trade Policy
In general, all Electronics and IT products are freely importable, with the exception of some
defence related items. All Electronics and IT products, in general, are freely exportable, with the
exception of a small negative list which includes items such as high power microwave tubes,
high end super computer, and data processing security equipment.
Tariffs on different electronic equipments:
· Peak rate of Basic Customs Duty (BCD) is 10%.
· Customs duty on 217 tariff lines covered under the Information Technology Agreement (ITA-
1) of WTO is 0%.
· All goods required in the manufacture of ITA-1 items exempted from BCD subject to actual
user condition.
· BCD on specified raw materials / inputs used for manufacture of electronic components and
optical fibres and cables is 0%.
· BCD on specified capital goods used for manufacture of electronic goods is 0%.

32
· Customs duty on LCD Panels (> 19”) reduced from 10% to 0% to promote indigenous
manufacture of LCD TVs.
· Customs duty on Set Top Box increased from 0% to 10% to promote indigenous
manufacturing of Set Top Boxes.
To promote indigenous manufacturing of mobile handsets: - Parts, components and accessories
for the manufacture of mobile handsets; sub-parts for the manufacture of such parts and
components are exempted from basic customs duty and excise duty.
- Differential Excise Duty dispensation available to Mobile Handsets i.e. Countervailing Duty
(CVD) @6% and Excise Duty @1% without CENVAT (a manufacturer of final product or
provider of taxable service shall be allowed to take credit of duty of excise as well as of service
tax paid on any input received in the factory or any input service received by manufacturer of
final product.) credit and 6% with CENVAT credit.
· To promote indigenous manufacturing of Blood Pressure Monitors and Glucometers, BCD on
parts reduced to 2.5% with 5% CVD(CVDs, also known as anti-subsidy duties, are trade import
duties imposed under WTO rules to neutralize the negative effects of subsidies. They are
imposed after an investigation finds that a foreign country subsidizes its exports, injuring
domestic producers in the importing country. )
· Microprocessors, Hard Disc Drives, Floppy Disc Drives, CD ROM Drives, DVD Drives/DVD
Writers, Flash Memory and Combo-Drives for manufacture of computers are chargeable to a
concessional rate of excise duty of 5%
Modified Special Incentice Package Scheme(MSIPS)
The Union Cabinet in its Budget of 2014 gave its green signal to the Modified Special Incentive
Package Scheme (MSIPS) under which the central government will be offering up to Rs 100
billion in benefits to the electronics sector in the upcoming five years. This funding will be
majorly used for the promotion of production of electronics products and components in India.
The policy is meant to create an indigenous manufacturing eco-system for electronics in the
country. It will foster the manufacturing of indigenously designed and manufactured chips
creating a more cyber secure ecosystem in the country.
1. The scheme provides subsidy for investments in capital expenditure - 20% for investments in
SEZs and 25% in non-SEZs. It also provides for reimbursement of CVD/excise for capital
equipment for the non-SEZ units. For high technology and high capital investment units, like
fabs, reimbursement of central taxes and duties is also provided.
2. The incentives are available for investments made in a project within a period of 10 years from
the date of approval.
3. The incentives are available for 29 category of ESDM(Electronic Sector Design and
Manufacturing) products including telecom, IT hardware, consumer electronics, medical
electronics, automotive electronics, solar photovoltaic, LEDs, LCDs, strategic electronics,
avionics, industrial electronics, nano-electronics, semiconductor chips and chip components,
other electronic components and EMS. Units across the value chain starting from raw materials
including assembly, testing, packaging and accessories of this category of products are included.
The scheme also provides incentives for relocation of units from abroad.

33
4. The scheme is open for three years from notification. Approvals for incentives not exceeding
Rs. 100 billion will be granted during the 12th Plan period.
Opportunities ahead
While the Electronics sector in India is currently small, there are several advantages that India
offers that can be effectively leveraged to achieve higher growth. These can be categorised under
three heads:
· Manpower
· Market Demand
· Policy and Regulatory Support
Market for electronics is expected to expand at a CAGR of 24.4 per cent during 2012–20. The
demand for electronics hardware in India is projected to increase from an estimated USD69.6
billion in 2012 to USD125 billion by 2014 and USD400 billion by 2020. Domestic electronic
production accounts for around 45.0 per cent of the total market demand. Therefore, in order to
reduce the import bill, the government plans to boost the domestic manufacturing capabilities
and is considering a proposal to give preference to Indian electronic products in its purchases.
Consumer durables market in India is characterized by low penetration in various product
segments, viz. 1.0 per cent in microwaves, 3.0 per cent in ACs, 16.0 per cent in washing
machines, 18.0 per cent in refrigerators, etc. Higher disposable incomes are leading to realization
of penetration potential in various product segments, especially in rural areas.

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MACHINERY
The process plant and machinery industry caters to a wide range of process industries such as
petroleum refining, oil and gas, fertilisers, chemicals, metal industry, petrochemicals,
pharmaceuticals. It is imperative to state that the use of machinery is a direction function of
production.
India ranks 11 when it comes to machine imports
And 16 when it comes to machine exports
Current Scenerio :
Import Substitution when it comes to machinery has increased.
The current rate of Excise Duty on machine tools is 16%. Users of machine tools in medium and
large-scale industries are in a position to claim Modvat on the Excise Duty paid on the machine
tools. However, small-scale manufacturers and job shops that account for around 50% of the
market share for machine tools do not pay Excise Duty on their end products and are therefore
not in a position to Modvat Excise Duty paid on machine tools. As a result, small scale
manufacturers and job shops are required to pay a price higher by 16% for the same machine
compared to the medium and large scale manufacturers. This discourages new entrepreneurs and
modernization of manufacturing facilities in the small-scale sector. In order to encourage
investment in the small-scale sector, it is suggested that small-scale manufacturers and job shops,
which do not pay Excise Duty on their output products, may be exempted from payment of
Excise Duty on machine tools purchased by them.
domestic manufacturers feel that they need to upgrade their technology through technology
transfer or in-house R&D and reduce costs through innovation and productivity improvement.
Companies also need to enhance their production capacities to meet the delivery requirements of
the customers and focus more on improving further quality and after-sales service. Some
companies are gearing up to face the threat of ever-increasing imports by operating in a very
narrow technology band and niche market and reducing their product reliability gap.
The country imports nearly twice what the domestic machine tools industry produces, to meet
the requirement of machine tools for industry in all segments. The share of the Indian machine
tools industry in total consumption is around 36%, pointing to an obvious need for the industry
to further develop its products and volume to meet the requirements of the Indian user sectors. A
substantial part of the imports is in specialized machines of high technology, very large machines
and machine types, which are not manufactured in India.
The problem with Indian machine tools manufacturers is that when the business is good, they are
too busy to spend time on innovation and when the business is bad, they cannot afford to do
anything. This is especially the case with the small medium sized units. This attitude needs to be
changed to be successful in the longer run and for that the industry needs to have a vision and
strategy. The industry suffers from low productivity because the manufacturing model is more
labor intensive. With companies trying to be cost competitive, they need to look into the
production methodologies, managing the supply chain, with greater outsourcing required to
reduce costs. For standard products enhancing volume is a must to raise cost competitiveness.

35
(Source : www.rbi.org.in)
Scope in Food Processing and Packaging Industries :
Despite a considerable increase in the supply provided by local machinery manufacturers, there
is still a high demand for foreign machinery featuring state-of-the-art technology especially by
companies producing food and beverages not only for the local market but for export purchase
imported machinery. For the manufacturers of processing and packaging machinery for the food
and beverage industry, India has become a very important market in Asia with strong growth
potential.
In 2012, the Indian imports of processing and packaging machinery for food and beverages
increased by two percent and amounted to 662 million Euros (47 billion Rs). Germany belongs
to the most important supplying countries after Italy.
(Indian imports of processing and packaging machinery for food and beverages in Euro million)

36
*In addition to the figures shown in the table, the sales of German-Indian joint venture
companies or wholly owned German subsidiaries producing processing and packaging
machinery for food and beverages in India for the Indian market have increased within the last
years.
India exports packaging machinery on a wide scale. The following table speaks for it :
A growth of 96.4% in 5 years is spectacular
On the other hand, India being an exporter of textiles, still imports machinery for the production
of the same. Infact, going by the figure, 40-45% of machine tool equipment’s that are imported
by India are second-hand shuttle less looms. And this accounts to as much as 80% of the total
equipment purchase in textile sector.
The problem in textile sector is that most of the industries are small scale industries. Import
Substitution requires high R&D and this comes at a very high cost. It becomes almost impossible
for these small scale industries to be able to afford to opt Import Substitution.
The size of India's textile machinery industry is poised to double to Rs 45,000 crore in the next 7
years from the present Rs 22,000 crore on the back of new projects and emphasis on setting up
textile parks, an industry expert has said.
The growth in the sector and upcoming new projects along with government's initiative to set up
textile parks may boost the textile machinery industry. The market size of the sector is set to
double to Rs 45,000 crore in the next 7 years from the present Rs 22,000 crore.
Textile machines are used in fabrication and processing of fabrics, textiles, and other woven and
non-woven materials. The industry witnessed a growth of 8-10 per cent to Rs 22,000 crore in
2014 from Rs 20,000 crore in 2013.
The Modi government's Make in India programme is also expected to help the textile sector by
way of increase in demand for modern machineries
Ban on Import of Second hand Machinery, A good Move?
Due to lack of development in technology and quality of machines, companies started importing
used process plants and machines from various countries. The decision to ban import of used
plants and machinery have shook the major user industries whereas the government stresses the
move aims to safeguard the productivity and competitiveness of Indian manufacturers
This ban might create a major hurdle for user industry since they are already struggling with
unfavourable power policy and high rate of interest on capital goods. Also, clinching down on
such imports would actually limit production and almost certainly squeeze demand for producer
goods as well. Secondly, the user industry will have to compromise on the quality of machines
eventually impacting the production percentage. There is huge recurring demand for second-

37
hand machinery in Indian industry, to keep up front costs low, for instance, or simply because of
local unavailability. The ban will impact approximately 5 per cent of country’s production.
Speaking on lack of development in technology, India still requires 20 to 25 years to bridge the
gap and compete with foreign manufactures. India has succeeded in various sectors and
positioning our self globally but in the process plant and machinery industry there is long battle
waiting in the future. Singh suggest that it is essential to establish cordial relations between
academic institutions and organisations to innovate technologies which will lead proficiently
globally and overcome the idea of reverse engineering concept.
Challenges :
Indian machine tools manufacturers are also facing difficulties in obtaining capital to finance
export sales. They need distributors to hold inventory of standard products abroad to make
inroads into the export market and this requires huge capital. Indian firms also lack the ability to
do high-tech R&D and translate such technological research into market advantage. Though
India has the competitive advantage of engineering skills and low man-hour cost of research
assistants, yet this advantage cannot be capitalized due to partly lack of finance and partly lack of
synergy between the user sector and the machine tools industry on one side and the academic and
research institutes on the other
At present the machine tool industry’s supply chain is composed of small firms located in
dispersed cities and locations, with the result that there is no concerted development of these
units to provide high quality products and services to definite time schedules and at
internationally competitive prices
Research & Development The Indian machine tools is a highly innovative industry. Most of the
products manufactured are through transfer of technology from a technology leader. Usually
after absorption of technology transfer, there always exists a gap where the receiver always ends
up with less technology than the supplier has. Further, the technology leader goes on upgrading
their products and hence Indian companies need to be highly innovative, firstly, to bridge the gap
during the technology transfer and then adapting it to local conditions, tackling problems thrown
up by local materials, labour, market and environment. The role of R&D in India is slightly
different from that in a technology driven country. Its role is to solve problems that arise in
manufacturing since they cannot be solved on the shop floor and that requires special skills
embodied in the R&D department. Today in India R&D work done by the industry is in
isolation. Except for the automotive component industry, R&D is not generally done in
consultation with user sector. This needs to be changed and more interaction is necessary with
the users to bring about innovative changes and add value to the products.
Opportunities
Considering the current capacity, we find that import substitution in few major industries is quite
difficult, if not impossible. But if we look at the past year’s figures and the pattern, we find that
there are several industries with huge Market Capitalization that have the potential to grow by
leaps by bounds since these industries export a lot of production to foreign countries. Textile

38
industry is an example. Also these industries involve a huge labour force which might work in
favor of bolstering these industries.
The only hindrance that might come into play is the ‘Lack of R&D’.
If a considerable amount of R&D goes in these industries, growth of these industries might
proliferate by multiple times.

39
CONCLUSION
While India’s ISI is well intentioned, India would do well to learn from China and Taiwan.
Though it’s a close balancing act, it must choose between extreme and rational protectionism for
a successful Make in India campaign. Without the right investments, the protectionist policies
will fall flat.
The Oil consumption in India is estimated to expand at a CAGR of 3.3 per cent during FY-2008-
16 to reach 4 million barrels per day. Due to the expected strong growth in demand, India’s
dependency on oil imports is likely to increase further. According to the analysis done, we can
simply conclude by saying that with expanding economy comes an increasing demand for energy
and, if current trends continue, India will be the world’s third largest energy consumer by 2020.
increase further. Rapid economic growth is leading to greater outputs, which in turn is increasing
the demand of oil for production and transportation.
As for the gold sector, liquidity of gold needs to be increased and mobilisation encouraged by
way of proper restructuring of GDS with a greater lock in period, along with increase investor
education about alternative forms of investment- both in gold, and otherwise to shift the focus
towards more productive investments. Such measures if followed would greatly help reduce
India’s gold imports and favourably impact rupee as well as our Balance of Payment
Electronics sector in India currently constitutes a small part in the core sectors of the Industrial
Sector of India. But this can be translated into a huge opportunity because of the huge manpower
that is available. Also, since the market demand has proliferated multiple times, it paves way for
this sector to make up for the negative balance of payment. According to our research, market for
electronics is expected to expand at a CAGR of 24.4 per cent during 2012–20. The demand for
electronics hardware in India is projected to increase from an estimated USD 69.6 billion in 2012
to USD125 billion by 2014 and USD400 billion by 2020. Domestic electronic production
accounts for around 45.0 per cent of the total market demand. Therefore, in order to reduce the
import bill, the government plans to boost the domestic manufacturing capabilities and is
considering a proposal to give preference to Indian electronic products in its purchases.
In respect of India’s Balance of Payment in Machinery, Export of Machinery from India has
increase by a considerable figure, but Import of the same cannot be ignored either since it
accounts to as much as 6% of total imports over last 15 years. Manufacturing sector involves 5
million labour which is a staggering figure. To be able to capitalize on this sector of the Indian
economy, it is imperative to give R&D considerable amount of weightage. The share of the
Indian machine tools industry in total consumption is around 36%, pointing to an obvious need
for the industry to further develop its products and volume to meet the requirements of the Indian
user sectors. This can only be achieved by bridging the gap during the technology transfer and
then adapting it to local conditions, tackling problems thrown up by local materials, labour,
market and environment

40
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