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Industrial Policy

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 Governments 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 (contd)


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


Entry and Growth Restrictions: 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 countrys 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.
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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 Governments 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 (contd)


Industrial Licensing:

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 (FIIs) 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 Nehrus 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--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 Indias 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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