Industrial Policy

Presented by:- Pankaj Dogra 21-MBA-09

The New Industrial Policy 1991The 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.

The New Industrial Policy 1991 (contd…)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.

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.

Also, in respect of public sector enterprises, the following measures were adopted:

Public enterprises which are chronically sick and unlikely to be turned around to be referred to the Board for Industrial and Financial Reconstruction 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 (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 related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons and items of elitist consumption. All excepting 18 industries were freed from licensing. The number was later reduced to six.

The industries subject to compulsory industrial licensing account for a very small share of the value added in the manufacturing sector.

The New Industrial Policy 1991 (contd…)Liberalization 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.

The New Industrial Policy 1991 (contd…)Liberalization 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.

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 judgment.

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.

The thrust of the policy is on controlling and regulating monopolistic, restrictive and unfair trade practices.

Evaluation of the New Industrial PolicyPositives of the new policy are: De-licensing 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.

Watch- outs : However, de-bureaucratization is a challenging task. The

bureaucracy has a tendency to attempt to defeat measures aimed at deregulations.

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 PolicyThis Policy has been criticized on the following grounds:

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.

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.

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.

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.

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 to be made compulsory. Involve private sector to provide better primary education.

F. Clean Environment: Arrest damage to environment Promote clean and healthy environment..

Second Generation Reforms

Thank You.