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Industrial Policy:
Industrial Policy is the set of standards and measures set by the Government to evaluate the progress of
themanufacturing sector that ultimately enhances economic growth and development of the country.
The government takes measures to encourage and improve the competitiveness and capabilities of
variousfirms.
Objectives of Industrial Policy
The various industrial policy introduced by the Indian government are as follows:
• The Industrial Policy Statement of 1980 addressed the need for promoting competition
in the domestic market, modernization, selective Liberalization and technological
upgradation.
• Due to this policy, MRTP Act (Monopolies Restrictive Trade Practices), FERA Act
(ForeignExchange Regulation Act, 1973) were introduced.
• The objective was to liberalize the industrial sector to increase industrial productivity
andcompetitiveness of the industrial sector.
• The policy laid the foundation for an increasingly competitive export-based and for
encouragingforeign investment in high-technology areas.
The New Industrial Policy, 1991 had the main objective of providing facilities to market forces and to
increase efficiency.
Larger roles were provided by
The government allowed Domestic firms to import better technology so as to improve efficiency and to
haveaccess to better technology. Foreign Direct Investment ceiling was increased from 40% to 51% in
selected sectors.
Maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion
board was established. It is a single-window FDI clearance agency. The technology transfer agreement
wasallowed under the automatic route.
Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and
usedomestic inputs, it was abolished in 1991.
Under Mandatory convertibility clause, while giving loans to firms, part of the loan will/can be converted
toequity of the company if the banks want the loan in a specified time period. This was also abolished.
Industrial licensing was abolished except for 18 industries.
Monopolies and Restrictive Trade Practices Act – Under his MRTP commission was established. MRTP
Actwas introduced to check monopolies. The MRTP Act was relaxed in 1991.
On the recommendation of SVS Raghavan committee, Competition Act 2000 was passed. Its
objectiveswere to promote competition by creating an enabling environment.
To know more about the Competition Commission of India, check the linked
article.Review of Public sector under this New Industrial Policy, 1991 are:
• Public sector investments (Disinvestment of Public sector)
• De-reservations –Industries reserved exclusively for the public sector were reduced
• Professionalization of Management of PSUs
• Sick PSUs to be referred to the Board for Industrial and financial restructuring (BIFR).
• Scope of MoUs was strengthened (MoU is an agreement between a PSU and concerned ministry).
•
• 6.2 New Industrial Policy 1991;
The New Industrial Policy of 1991 comes at the center of economic reforms that launched during the early
1990s. All the later reform measures were derived out of the new industrial policy. The Policy has brought
comprehensive changes in economic regulation in the country. As the name suggests, these reform
measures were made in different areas related to the industrial sector.
As part of the policy, the role of public sector has been redefined. A dedicated reform policy for the public
sector including the disinvestment programme were launched under the NIP 1991. Private sector has given
welcome in major industries that were previously reserved for the public sector.
Similarly, foreign investment has given welcome under the policy. But the most important reform measure
of the new industrial policy was that it ended the practice of industrial licensing in India. Industrial licensing
represented red tapism.
Because of the large scale changes, the Industrial Policy of 1991 or the new industrial policy represents a
major change from the early policy of 1956.
The new policy contained policy directions for reforms and thus for LPG (Liberalisation, Privatisation and
Globalisation). It enlarged the scope of private sector participation to almost all industrial sectors except
three (modified). Simultaneously, the policy has given welcome to foreign investment and foreign
technology. Since 1991, the country’s policy on foreign investment is gradually evolving through the
introduction of liberalization measures in a phasewise manner.
Perhaps, the most welcome change under the new industrial policy was the abolition of the practice of
industrial licensing. The1991 policy has limited industrial licensing to less than fifteen sectors. It means that
to start an industry, one has to go for license and waiting only in the case of these few selected industries.
This has ended the era of license raj or red tapism in the country. The 1991 industrial policy contained the
root of the liberalization, privatization and globalization drive made in the country in the later period. The
policy has brought changes in the following aspects of industrial regulation:
1. Industrial delicensing
1. Industrial delicensing policy or the end of red tapism: the most important part of the new industrial policy
of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the industrial licensing
policies, private sector firms have to secure licenses to start an industry. This has created long delays in the
start up of industries. The industrial policy of 1991 has almost abandoned the industrial licensing system. It
has reduced industrial licensing to fifteen sectors. Now only 13 sector need license for starting an industrial
operation.
2. Dereservation of the industrial sector– Previously, the public sector has given reservation especially in
the capital goods and key industries. Under industrial deregulation, most of the industrial sectors was
opened to the private sector as well. Previously, most of the industrial sectors were reserved to the public
sector. Under the new industrial policy, only three sectors- atomic energy, mining and railways will continue
as reserved for public sector. All other sectors have been opened for private sector participation.
3. Reforms related to the Public sector enterprises: reforms in the public sector were aimed at enhancing
efficiency and competitiveness of the sector. The government identified strategic and priority areas for the
public sector to concentrate. Similarly, loss making PSUs were sold to the private sector. The government
has adopted disinvestment policy for the restructuring of the public sector in the country. at the same time
autonomy has been given to PSU boards for efficient functioning.
4. Foreign investment policy: another major feature of the economic reform measure was it has given
welcome to foreign investment and foreign technology. This measure has enhanced the industrial
competition and improved business environment in the country. Foreign investment including FDI and FPI
were allowed. Similarly, loan capital has also introduced in the country to attract foreign capital.
5. Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the Monopoly and Restricted
Trade Practice Act. In 2010, the Competition Commission has emerged as the watchdog in monitoring
competitive practices in the economy.
The industrial policy of 1991 is the big reform introduced in Indian economy since independence. The policy
caused big changes including emergence of a strong and competitive private sector and a sizable number
of foreign companies in India.
Indian government has considered plans to take concrete steps to bring affect poverty alleviation through
the creation of more job opportunities in the private sector of Indian economy, increase in the number of
financial institutions in the private sector, to provide loans for purchase of houses, equipments, education,
and for infrastructural development also. The private sector of Indian economy is recently showing its
inclination to serve the society through women empowerment programs, aiding the people affected by
natural calamities, extending help to the street children and so on. The government of India is being assisted
by a number of agencies to identify the areas that are blocking the entry of the private sector of Indian
economy in the arena of infrastructural development, like regulatory policies, legal procedures etc.
The most interesting fact about the private sector of India economy is that though the overall pace of its
development is comparatively slower than the public sector, still the investment of private sector in the
recent past, i.e. in the first quarter of 1990 registered approximately 56 % which rose to nearly 71 % in the
next quarter, accounting for an increase of 15 %. Certain steps taken by the Indian government are acting
as the stepping stone of the private sector continued journey to success, include industrial delicensing,
devaluation that was implemented previously.
The private sector of Indian economy is also adversely affected by the huge number of permits and
enormous time required for the processing of documents to initiate a firm, however the central government
has decided to abolish MRTP Act and incorporate a Competition Commission of India to bring the public
sector and the private sector at the same platform.
The participation of the private sector of Indian economy is desired by the government of India for
infrastructural development including specific sectors like power, development of highways and so on. As
the contribution of public sector in these sectors have been arrested due to the shift of the attention of the
Indian government to issues like population increase, industrial growth.
The main reasons behind the low contribution of the private sector in infrastructural development activities
are that:
• The small and medium scale companies in the private sector of Indian economy suffer from lack of
finances to welcome the idea of extending their business to other states or diversify their product
range.
• The private sector of Indian economy also suffer from the absence of appropriate regulatory
structure, to guide the private sector and this speaks for its unorganized framework.
• The unorganized framework of the private sector is interrupting the proper management of this
sector resulting in the slowdown of its development.
As of the figures of the last decade, India has had a remarkable growth in private sector
investment. The liberal trade and investment policies and the country's infrastructure have
provided the environment for higher investment and growth in private sector.
As of the figures of 2001-06, there has been an incredible increase in the investment in the
telecommunication sector in India and as a result there has been immense growth in the telecom
industry. 64% of the investment in this sector in South Asia has been in this sector. Various private
telecom companies as Airtel, Reliance Communications, Tata Indicom etc have been the major
investors in this field. The subscriber base has increased as a result which is reflected in their
figures:
• Bharti Airtel -3,280,658
• Reliance Communications 1,232,060
• Tata Teleservices 1, 289, 17
This sector also has attracted a large investment from the private industries. Figures as of 2001-06
registered 17% investment in the sector. However in the water sector there has not been any
major investment due to political issues, weak authority etc. In India, the power distribution has
been privatized in several cities as Delhi and states like Orissa. The western state of Maharashtra
is also keen on having larger investment from the private sector in the power division.
This increase in the private sector's share is largely due to the higher foreign direct inAs of the
figures of the last decade, India has had a remarkable growth in private sector investment. The
liberal trade and investment policies and the country's infrastructure have provided the
environment for higher investment and growth in private sector.
As of the figures of 2001-06, there has been an incredible increase in the investment in the
telecommunication sector in India and as a result there has been immense growth in the telecom
industry. 64% of the investment in this sector in South Asia has been in this sector. Various private
telecom companies as Airtel, Reliance Communications, Tata Indicom etc have been the major
investors in this field. The subscriber base has increased as a result which is reflected in their
figures:
Bharti Airtel -3,280,658
Reliance Communications 1,232,060
Tata Teleservices 1, 289, 17
This sector also has attracted a large investment from the private industries. Figures as of 2001-06
registered 17% investment in the sector. However in the water sector there has not been any
major investment due to political issues, weak authority etc. In India, the power distribution has
been privatized in several cities as Delhi and states like Orissa. The western state of Maharashtra
is also keen on having larger investment from the private sector in the power division.
This increase in the private sector's share is largely due to the higher foreign direct investment over
the last decade. Over the last decade or so, with the liberalisation of the economic policies, India
has been able to achieve higher investment from the private sector. For instance due to
modifications and changes in the economic policies the transport and telecommunication industry
witnesses a higher percentage of growth and investment in the private sectorvestment over the
last decade. Over the last decade or so, with the liberalization of the economic policies, India has
been able to achieve higher investment from the private sector. For instance due to modifications
and changes in the economic policies the transport and telecommunication industry witnesses a
higher percentage of growth and investment in the private sector
When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two
primary courses of action: monetary policy or fiscal policy.
Monetary policy involves the management of the money supply and interest rates by central banks. To
stimulate a faltering economy, the central bank will cut interest rates, making it less expensive to borrow
while increasing the money supply. If the economy is growing too rapidly, the central bank can implement
a tight monetary policy by raising interest rates and removing money from circulation.
Fiscal policy, on the other hand, determines the way in which the central government earns money
through taxation and how it spends money. To stimulate the economy, a government will cut tax
rates while increasing its own spending; while to cool down an overheating economy, it will raise taxes
and cut back on spending.
There is much debate as to whether monetary policy or fiscal policy is the better economic tool, and each
policy has pros and cons to consider.
KEY TAKEAWAYS
• Central banks use monetary policy tools to keep economic growth in check and stimulate
economies out of periods of recession.
• While central banks can be effective, there could be negative long-term consequences that stem
from short-term fixes enacted in the present.
• Fiscal policy refers to the tools used by governments to change levels of taxation and spending to
influence the economy.
• Fiscal policy can be swayed by politics and placating voters, which can lead to poor decisions that
are not informed by data or economic theory.
• If monetary policy is not coordinated with a fiscal policy enacted by governments, it can undermine
efforts as well.
An Overview of Monetary Policy
Monetary policy refers to the actions taken by a country's central bank to achieve
its macroeconomic policy objectives. Some central banks are tasked with targeting a particular level of
inflation. In the United States, the Federal Reserve Bank (the Fed) has been established with a mandate to
achieve maximum employment and price stability.
This is sometimes referred to as the Fed's "dual mandate." Most countries separate the monetary
authority from any outside political influence that could undermine its mandate or cloud its objectivity. As
a result, many central banks, including the Federal Reserve, are operated as independent agencies.1 2 3
When a country's economy is growing at such a fast pace that inflation increases to worrisome levels, the
central bank will enact restrictive monetary policy to tighten the money supply, effectively reducing the
amount of money in circulation and lowering the rate at which new money enters the system. Raising the
prevailing risk-free interest rate will make money more expensive and increase borrowing costs, reducing
the demand for cash and loans.
During and after the Great Recession, the Federal Reserve made use of quantitative easing as a means to
spur the economy.4
The Fed can also increase the level of reserves commercial and retail banks must keep on hand, limiting
their ability to generate new loans. Selling government bonds from its balance sheet to the public in the
open market also reduces the money in circulation. Economists of the Monetarist school adhere to the
virtues of monetary policy.
When a nation's economy slides into a recession, these same policy tools can be operated in reverse,
constituting a loose or expansionary monetary policy. In this case, interest rates are lowered, reserve limits
loosened, and bonds are purchased in exchange for newly created money. If these traditional measures
fall short, central banks can undertake unconventional monetary policies such as quantitative easing (QE).
Cons
• Effects Have a Time Lag
Even if implemented quickly, the macro effects of monetary policy generally occur after some time
has passed. The effects on an economy may take months or even years to materialize. Some
economists believe money is "merely a veil," and while serving to stimulate an economy in the
short-run, it has no long-term effects except for raising the general level of prices without boosting
real economic output.
• Technical Limitations
Interest rates can only be lowered nominally to 0%, which limits the bank's use of this policy tool
when interest rates are already low. Keeping rates very low for prolonged periods of time can lead
to a liquidity trap. This tends to make monetary policy tools more effective during economic
expansions than recessions. Some European central banks have recently experimented with
a negative interest rate policy (NIRP), but the results won't be known for some time to come.
Cons
• May Be Politically Motivated
Raising taxes can be unpopular and politically dangerous to implement.
Foreign trade is the exchange of capital, goods, and services across international borders or territories.
In most countries, it represents a significant share of gross domestic product (GDP). Industrialization,
advanced transportation, globalization, multinational corporations, and outsourcing are all having a major
impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. International trade is a major
source of economic revenue for any nation that is considered a world power.
Without international trade, nations would be limited to the goods and services produced within their
borders.
Foreign trade is, in principle, not different from domestic trade as the motivation and the behavior of parties
involved in a trade does not change fundamentally depending on whether a trade is across a border or not.
The main difference is that international trade is typically more costly than domestic trade. The reason is
that a border typically imposes additional costs such as tariffs, time costs due to border delays, and costs
associated with country differences such as language, the legal system, or a different culture.
Foreign trade is all about imports and exports. The backbone of any foreign trade between nations is those
products and services which are being traded to some other location outside a particular country’s borders.
Perhaps it is because they have the labor supply or abundant natural resources which make up the raw
materials needed. No matter what the reason, the ability of some nations to produce what other nations
want is what makes foreign trade work.
1. Import
Importing is the purchasing of goods or services made in another country. For example, importing edible
oil from Chinese producers to sell in Africa.
2.Export
Exporting is selling domestic-made goods in another country. For example, Hameem Garments exports
Readymade Garments (RMG) products to Western Countries.
3. Re-export
When goods are imported from a foreign country and are re-exported to buyers in some other foreign
countries, it is called re-export.
For example, Firm/ Readymade Garments located at EPZs imports raw materials (cotton) from Korea and
produces Readymade Garments products by Thai cotton and then those products to Canada.
The following points explain the need and importance of foreign trade to a nation.
Foreign trade leads to the division of labor and specialization at the world level. Some countries have
abundant natural resources.
They should export raw materials and import finished goods from countries which are advanced in skilled
manpower. This gives benefits to all the countries and thereby leading to the division of labor and
specialization.
Due to specialization, unproductive lines can be eliminated, and wastage of resources avoided. In other
words, resources are canalized for the production of only those goods, which would give the highest
returns.
Thus there is rational allocation and utilization of resources at the international level due to foreign trade.
3.Equality of Prices
Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in
turn stabilizes the prices, making allowances for transport and other marketing expenses.
Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries
have to keep up the quality of goods.
Imports can facilitate the standard of living of the people. This is because people can have a choice of new
and better varieties of goods and services.
By consuming new and better varieties of goods, people can improve their standard of living.
Foreign trade helps in generating employment opportunities by increasing the mobility of labor and
resources. It generates direct employment in the import sector and indirect employment in other sectors
of the economy.
Imports facilitate the economic development of a nation. This is because, with the import of capital goods
and technology, a country can generate growth in all sectors of the economy, agriculture, industry, and
service sector.
During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the
problem of shortage of essential goods.
Foreign trade enables a country to import food grains and medicines from other countries to help the
affected people.
For example, Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic
goods.
Foreign trade brings countries closer. It facilitates the transfer of technology and other assistance from
developed countries to developing countries. It brings different countries closer due to economic relations
arising out of trade agreements.
Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace
as such countries try to maintain friendly relations among themselves.
1. Import dependency (our country foreign trade depend on import because of high demand and low
supply),
2. Import capital goods and industrial goods,
3. Export of readymade garments (RMG), RMG and Knitwear 74% export,
4. Export of agricultural raw materials and products,
5. Unfavorable balance of payment ( More import but less export),
6. Operate most business by sea/ocean,
7. More import from Asia (China, Singapore, India ) and export in Western countries (USA, England),
8. Government initiation and control (By TCB and EPB govt control foreign trade and operate helpful
initiative),
9. Export of jute and jute goods,
10. Export of manpower,
11. Private initiative,
12. Diversity of import goods (necessary goods and unnecessary luxurious goods ).
13. Effect of free trade economy (for open market economy unnecessary luxurious goods are imported
in our country, and our country’s money went to another country)
14. Business with all countries.
• The General Agreement on Trade and Tariff (GATT) came into existence in 1947
• It sought substantial reduction in tariff and other barriers to trade and to eliminate discriminatory
treatment in international commerce.
• India became a signatory to GATT in 1947 along with twenty two other countries
GATT faced many problems, with the world trade becoming more and more complex, GATT was unable to
deal with it. Eg. In the agriculture sector, loopholes in the multilateral system were heavily exploited, and
efforts at liberalizing agricultural trade met with little success. In the textiles and clothing sector, an
exception to GATT’s normal disciplines was negotiated in the 1960s and early 1970s, leading to the
Multifibre Arrangement. Even GATT’s dispute settlement systems were causing concern. The Uruguay
round negotiations lasted for about seven and a half years, twice the time originally planned for.
But economists conclude that it was worth the trouble, basically all issues related to trade were discussed
in these negotiations, GATT’s articles were reviewed and most importantly the Final Act concluding the
Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial
meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.
WTO kept the basic objectives of GATT same, while worked on their implementation.
WTO
• WTO on paper came into existence on 1-1-1995 with the conclusion of Uruguay Round Multilateral
Trade Negotiations at Marrakesh. Finally, enforced on 1-1-2005: For Transparent, free and rule-
based trading system
• To provide common institutional framework for conduct of trade relations among members To
facilitate the implementation, administration and operation of Multilateral Trade Agreements
The Article of Association provides an enabling environment for the countries to address the concerns
relating to food security and livelihoods. Non-trade concerns were adequately reflected in the decisions,
particularly those related to market access and domestic support. The relevant decisions of the World Food
Summit on food security and livelihoods were taken as the integral part of the negotiations.
Barring the first three years after the enforcement of the agreement, (1995-1998) agriculture imports
continued to grow faster than exports. Between 1998 and 2000-01, the average annual import of farm
products rose by about 64 per cent, while exports declined by 7 per cent. Though the years 2002-03 have
seen some buoyancy in farm exports, imports have also continued to grow.
A study on this particular aspect reports that the annual import of agriculture goods rose from $1,190
million in the three years preceding the WTO to $1,996 million in the first triennium after the WTO. In the
same period, exports increased from $3,725 million to $6,530 million. But, this favourable trend in the initial
years of the WTO did not last long and the next three years witnessed a whopping rise in imports and a
slight decline in exports.
This crash was due partly to the cyclical nature of international prices partly due to increased global
competition in agro-export because of liberalising trade.
The situation was aggravated by an increase in the already high farm subsidies in the developed countries.
The Indian non-Basmati rice and wheat could not face global competition. The export of oilmeal, the second
biggest export item after marine products, also suffered a set back due to a decline in global prices.
The export earnings from traditional export commodities like tea, coffee, spice and tobacco suffered mainly
due to a sharp fall in international prices, as the quantum of exports in most cases did not drop.
Exports of marine products, livestock and horticulture items maintained the tempo of growth that was build
up in the pre-WTO period. This implies that the post-WTO situation was favourable for the export of high-
value food products.
In case of imports, liberalisation of trade in the initial years after the WTO did not result in any perceptible
spurt because global prices were high. But subsequently, when global prices began to fall, India's imports
started
rising. The level of imports nearly doubled in the three years between 1996-97 and 1999-2000. This
downturn in global prices continued even in the subsequent years.
The international prices of cereals in the years 2000 and 2001 were almost half of what they were in the
beginning of the WTO-era.
The composition of items in the import basket indicates that edible oils accounted for the bulk of the
increase in total agro-imports. The other items clocking significant increase in imports include pulses, spices,
cotton, wood and wood products.
The study has also revealed that the spurt in the imports vegetable oils, and wood and its products has
depressed their domestic prices, adversely impacting indigenous production.
The agricultural products from India can be made competitive in international market and the prices of
agricultural goods in the domestic market can be improved by taking serious steps of reform. It appears
that India does not stand to gain much by shouting for agriculture reforms in developed countries because
the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in
India to make Agriculture globally competitive. In Pharma-sector there is need for major investments in
Research ; Development and mergers and restructuring of companies to make them world class to take
advantage. India has already amended patent Act and both product and Process are now patented in India.
India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which
should be tapped and further strengthened. It should rather focus on Textile industry modernization and
developing international Marketing muscle and expertise, developing of Brand India image, use its
traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities,
and develop selective engineering sector industries like automobiles ; forgings ; castings, processed foods
industry and the high end outsourcing services. It
wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western
Europe, North Africa, Mexico and other such strategically located areas for large US and European markets.
The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and
entering into multinational contracts to source oil reserves.
Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: " We reject the use of
labor standards for protectionist purposes, and agree that the comparative advantage of countries,
particularly low-wage developing countries, must in no way be put into question. In this regard we note
that the WTO and ILO Secretariat will continue their existing collaboration". Not many people in this country
are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it
apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us
and won these cases like in pharmaceutical patents. India too has complained against the US and Europe
and it too has won its fair share of disputes in areas like textiles.
India must effectively use this mechanism to extract fair share in world markets. It would be advantageous
for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN.
CONCLUSION
“Globalize or Perish” is now the buzzword synonymous to “Do or Die” which conveys that there is no
alternative to globalization and everybody should learn to live with it. India, being a signatory to the
agreement that led to W.T.O, can no way step backwards. This is not the time to curse the darkness but to
work for making India emerge as a global market leader.