faBGULATORY POLICY AND INDUSTRIAL GROWTH 103 1. By attempting to link capacity licensed to the demand generated in the market. Based on such a criterion it is argued that only 43 per cent of the applications considered between 1981 and 1985 were approved. Since, it is known that business groups in India adopt the practice of preempting licences by applying for and obtaining them even if they do not plan to set up capacity, the restriction of licensed capacity to the level of projected demand could forestall entry by those who actually plan to establish capacity, resulting in a loss of potential output and the perpetration of monopoly. 2. By restricting licences granted to MRTP companies, which may be in a position to enter areas where smaller companies cannot, and setting up barriers to entry that ensure a dilution in the extent of competition in markets that are often characterized by high levels of concentration and excess profits. 3. By ensuring, through implementation of detailed regulatory processes, considerable delays in the fruition of an investment project that either renders the initial calculations meaningless or deters entry and growth for a considerable period of time. Between 1982 and 1985, fewer than 50 per cent of the applications for capacity licences were handled within three months of submission and only 66 per cent within six months. Despite considerable rationalization, as recently as 1985, over 22 per cent of the applications for foreign collaboration and 9 per cent of those for capital goods imports took over 120 days to be decided. 4. By reserving some 870 products for the small scale sector, defined in terms of a maximum investment in assets. This has meant that, large firms buying components and intermediates from the small sector cannot threaten competition based on backward integration, and so cannot ensure quality of supplies. Further, a firm that starts small will have no incentive to expand beyond a certain size as it can no more continue to operate in its defined area of activity reserved for the small scale sector. This has supposedly curtailed growth as well as led to high costs and poor quality, since there is no inducement to improve technology, update productive techniques, introduce modern product designs and reduce costs. This problem is aggravated by the incentive to remain small resulting from the greater flexibility with regard to labour employed and closure enjoyed by the small scale sector. 5. By imposing restrictions on the expansion of existing units, and thereby encouraging uneconomic scales of production in areas where larger scale leads to substantial savings in costs of production. In fact, the report argues that the curbs on expansion