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Industrial Policy

Trimester I
2010
Introduction
 The Industrial Policy indicates the respective roles of the public,
private, joint and co-operative sectors; small, medium and large
scale industries.
 It underlines the national priorities and the economic development
strategy.
 It also spells the Government’s policy towards industries- their
establishment, functioning, growth and management; foreign capital
and technology, labor policy, tariff policy etc. in respect of the
industrial sector.

 The Industrial Policy of India has determined the pattern


of economic and industrial development of the economy.
The Industrial Policy reflected the socio-economic and
political ideology of development.
Industrial Policy upto 1991
The objective of the policy were to :
 Reduce disparities in income and wealth

 Prevent monopolies and concentration of economic power

 Build a large and heavy public sector and manage the same
effectively
 Develop heavy and machine making industries

 Accelerate the rate of industrialization and economic growth

 Higher employment generation

 Focus on development of small scale sector

 Optimum utilization of installed capacity

 Rural Industrialization

 Promotion of export oriented units (Industrial Policy 1980)

 Industrial Dispersal and decentralization (Industrial Policy 1990)


Industrial Policy upto 1991
The industrial policy of India prior to liberalization in 1991 was characterized by the
(contd…)

following features:
Dominance of Public Sector
 Entry and Growth Restrictions
 Restrictions on Foreign Capital and Technology

Dominance of Public Sector:


 The policy of the Government was to ensure that the public sector gained
control over the economy. The Industrial Policy Resolution of 1956 brought the
socialist pattern of society as the national goal and the Second Five Year Plan
which gave emphasis to the basic and heavy industries, further expanded the
role of the public sector.
 Future development of 17 important industries such as arms and
ammunition, atomic energy, coal, iron and steel, air transport, railway
transport etc. was exclusively reserved for the public sector.
 Under the Schedule B; 12 industries such as machine tools, fertilizers,
synthetic rubber, road, transport etc; industries were progressively state
owned and the State would take the initiative to establish new
undertakings. However, existing private undertakings in these industries were
allowed to continue. Also by way of giving licenses for several other important
industries only to the public sector, the monopoly or dominance of the public
sector was established.
 The third category include all the remaining industries which were left to the
initiative and enterprise of the private sector. However, privately owned units
were also permitted to produce an item falling in Schedule A for meeting their
own requirements or as by-products.
Industrial Policy upto 1991
Entry and Growth Restrictions:
(contd…)
 There were a number of entry and growth restrictions on the private
sector (especially on large firms and foreign establishments) even in
those industries that the private sector was allowed. License was
mandatory for establishing new units with investments above a
specified limit, for manufacturing of new products and for
undertaking substantial expansion.
 Large firms of Rs. 100 crore or above and dominant undertakings
(those with a market share of 25% or more) had to obtain clearance
under the Monopolies and Restrictive Trade Practices Act in
addition to the industrial license. There were also restrictions on
capital goods etc.

Restrictions on Foreign Capital and Technology:


 In industries where foreign capital was allowed, it was subjected to a
ceiling of 40% of the total equity although there were certain
exception. Operations of foreign companies in India and issue of
securities abroad by Indian Companies was regulated by the
Foreign Exchange Regulation Act, FERA 1973.
The New Industrial Policy
1991
The Industrial Policy announced on July 24, 1991 heralded the economic reforms in
India and sought to drastically alter the industrial scenario in our country. The most
visible sign of the country’s economic crisis in early 1991 was:
 Extremely low foreign exchange reserves of Rs. 2400 crore (just enough to buy from
abroad only three weeks requirements.)
 Inflation was as high as 13.5%

This policy expanded the scope of the private sector by opening up most of
the industries for the private sector and did away with the entry and growth
restrictions. The most important initiatives are with respect to the virtual
scrapping of industrial licensing and registration policies, an end to the
monopoly law and a welcoming approach to foreign investments, apart from
redefining the role of the public sector. Words like “dramatic”, revolutionary”
and “drastic have been used to describe this policy.
.
The New Industrial Policy 1991
(contd…)
Main features :Objectives of the Industrial Policy of the Government are –
 to maintain a sustained growth in productivity;
 to enhance employment;
 to achieve optimal utilization of human resources;
 to attain international competitiveness
 Development of indigenous technology through greater investment in R&D
and bring in new technology to help Indian manufacturing units Incentive for
industrialization of backward areas
 Ensure running of PSUs on business lines and cut their losses
 Protect the interests of workers
 Abolish the monopoly of any sector in any field of manufacture except on
strategic or security grounds.
 to transform India into a major partner and player in the global arena.

Policy focus is on –
 Deregulating Indian industry;
 Allowing the industry freedom and flexibility in responding to market forces
and
 Providing a policy regime that facilitates and fosters growth of Indian
industry.
The New Policy has four features:
Liberalisation; privatisation, globalisation and stabilisation
The New Industrial Policy 1991
(contd…)
Redefinition of the role of the Public Sector:
The number of industries reserved for the public sector was reduced to eight
and it was later pruned to two ie atomic energy and railway transport.

The priority areas for growth of public enterprises will be the essential infrastructure
goods and services industry; exploration of oil and mineral resources;
technology development and building of manufacturing capabilities in areas
which are crucial in the long term development of the economy and where
private sector investment is inadequate. The policy also seeks selective
privatization and withdrawal of the public sector from industries.

Also, in respect of public sector enterprises, the following measures were adopted:
 Portfolio of public sector investments to be reviewed periodically with a view to
focus the public sector on strategic, high tech and essential infrastructure.
 Public enterprises which are chronically sick and unlikely to be turned around to
be referred to the Board for Industrial and Financial Reconstruction (BIFR) for
formulation of revival / rehabilitation schemes.
 In order to encourage wider public participation, a part of the Government’s
shareholding in the public sector would be offered to mutual funds, financial
institutions and the general public.
 Board of PSU to be more professional and have greater powers.
 Thrust to be on performance improvement and management would be granted
more autonomy in operation.
The New Industrial Policy 1991
Industrial Licensing:
(contd…)
 Industrial Licensing was governed by the Industries Development &
Regulation Act, 1951.

 Industrial Licensing policy and procedures have been liberalized and


continuously changed. Industrial licensing has been abolished for all
projects except for a short list of industries All excepting 18
industries were freed from licensing. The number was later
reduced to five. Distillation and brewing of alcoholic drinks;
cigars and cigerattes; electronic aerospace; hazardous
chemicals and industrial explosives

 The industries subject to compulsory industrial licensing account for


a very small share of the value added in the manufacturing sector.

 Industries are free to select the location of the industry. However, in


cities with a population of over 1 million, the industries are to be
located in the areas designated as “industrial areas” or 25 kms away
from the Standard Urban area limits of the city. However, industries
of a non polluting nature were exempt. The locational policy was
abolished in 2008.
The New Industrial Policy 1991
(contd…)
Liberalisation of Foreign Investment: Policy towards foreign capital
and technology has been modified very significantly. Foreign
investment will bring advantages of technology transfer, marketing
expertise, introduction of modern managerial techniques and new
possibilities for promotion of exports.

 FDI is allowed in all industries, except industries falling in a small


negative list.
 Approvals for FDI upto 51% in high priority industries requiring large
investments and advanced technology will be provided.
 Since 1992-93, the Indian stock market is open for investment by
Foreign Institutional Investors (FII’s) and Indian companies
satisfying certain conditions may access foreign capital market by
Euro issues.
 Some of the recent initiatives taken to further liberalise the FDI
regime, include opening up of sectors such as Insurance (upto
26%); development of integrated townships (upto 100%)
The New Industrial Policy 1991
(contd…)
Liberalisation of Foreign Investment……..
 Recent initiative under the small scale policy, equity holding by other
units including foreign equity in a small scale undertaking is
permissible up to 24 per cent. However there is no bar on higher
equity holding for foreign investment if the unit is willing to give up its
small scale status.
 Integration of the Indian Economy with the Global Economy is one
of the objectives of the EXIM Policy. The import policy has been
made liberal by reducing tariff levels.
 Another change has been the reform of the foreign exchange rate
policy. The Rupee has been made fully convertible on the current
account. The effort is to move towards capital account convertibility.
The Capital Issues Control Act and the office of the Controller of
Capital has been scrapped and free pricing of capital issues was
introduced.
The New Industrial Policy 1991
(contd…)
Foreign

Technology Agreements:
Government will provide automatic approval for technological agreements
related to high priority industries within specified parameters.
 Indian companies will be free to negotiate the terms for technology transfer
with their foreign counterparts according to their own commercial
judgement.
 No permission is necessary for hiring of foreign technicians and foreign
testing of indigenously developed technologies. Government will
encourage foreign trading companies to assist in our export activities

Removal of MRTP Restrictions:


 Most of the MRTP restrictions pertaining to concentration of economic
power (those requiring permission for establishment of new undertaking,
substantial expansion, manufacture of new items and mergers and
acquisitions) were scrapped.
 Existing units will be provided a new broad branding facility to enable them
to produce any article without additional investment.
 The thrust of the policy is on controlling and regulating monopolistic,
restrictive and unfair trade practices.
Evaluation of the New Industrial
Policy
Positives of the new policy are:
 Delicensing of most industries will help entrepreneurs to quickly seize business
opportunities.
 Removal of controls under the MRTP Act will facilitate expansion and growth.
 There will be greater inflow of foreign capital and technology due to easing of
restrictions.
 Burden on the public sector will be reduced and reforms relating to the public
sector like transferring sick units to BIFR will help improve their performance.

Watch- outs :
However, de-bureaucratization is a challenging task. The bureaucracy has a
tendency to attempt to defeat measures aimed at deregulations.
 The policy environment is much more conducive for both domestic and foreign
investment than in the past. However, a host of countries are now trying to woo
foreign investment with a much more conducive economic environment than in
India. Also, cultural factor do also tend to tilt the balance in favor of other
nations.
 Further, foreign investors still regard the policy and procedural system in India
confusing. Rather many feel that policy and development environment in China
is superior to India.
Evaluation of the New Industrial
Policy
This Policy has been criticized on the following grounds:

 The policy is a total departure from Nehru’s model of socialism.


 It will lead to domination of MNC on the Indian Economy. Threat from
foreign competition due to cheaper imports and inability to meet the
challenge from MNCs due to their weak economic strength vis-à-vis the
MNCs. CII did raise the point that we have moved away from too much
protectionism to too little protectionism.
 Trade Unions oppose the policy due to fear of unemployment which may
arise due to privatization.
 Monopolies and concentration of economic power in a few hands is likely to
increase.
 Distortion in industrial pattern would occur due to slow pace of investment in
few basic and strategic industries. Absence of a mechanism would slow
down the development of backward areas.
 Government is silent about tackling the growing industrial sickness. The
Government has not announced a clear exit policy for sick units.
Second Generation Reforms
 The 1991 reforms have considerably helped in improving the
economic growth of the country. Yet much more needs to be done
to reap the full benefits. There is a need for Second Generation
Reforms:
 A. Exploiting the Knowledge based Global Economy:
 Revolutionizing the telecom sector to help integrate India’s economy into
the world economy.
 Build institutes for higher education

 A system of intellectual property rights to reward innovations adequately.

 Venture capital funds to finance risk projects of the knowledge based

economy.
B. Growing Indian Transnational Corporations:
 Indian firms to enjoy flexibility in entry and exit. Freedom to diversify and

close down unsuccessful units.


 Liberalize and move towards capital account convertibility.
Second Generation Reforms
C. High Growth of Agriculture:
 State to ensure that adequate investments are made in irrigation,

agricultural research and infrastructure


 D. Empowering the Poor:
 Integrate and consolidate anti poverty measures.
 Set up a system for old age security.

E. Human Development
 Primary education made compulsory.

 Involve private sector to provide better primary education.

F. Clean Environment:
 Arrest damage to environment

 Promote clean and healthy environment.

H. Improvements to Governance:
 Rationalize electricity prices

 Bring in legal reforms that ensure inexpensive and speedy justice and at

the same time facilitate economic growth.

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