Economic Planning In India – Five Year Plans

The term economic planning is used to describe the long term plans of the government of India
to develop and coordinate the economy with efficient utilization of resources. Economic planning
in India started after independence in the year 1950 when it was deemed necessary for
economic growth and development of the nation.
History of five yr plans
 Borrowed the concept of five yr plan from the former soviet union
 Jawaharlal Nehru was impressed with the remarkable successes in industrialization
achieved by the USSR in their initial five yr plans
 India has an extensive network setup to formulated 5 yr plans under the supervision of
the planning commission

Functions of the Indian Planning Commission

1. To make an evaluation of the material, capital and human

resources of the country, including technical employees,
and investigate the possibilities of augmenting those are
related resources which are found to be deficient in
relation to the nation’s requirement.
2. To devise a plan for the most effective and balanced
utilisation of country’s resources.
3. To define the stages, on the basis of priority, in which the
plan should be implemented and propose the allocation of
resources for the due completion of each stage.
4. To specify the factors that tends to retard economic
development.
5. To determine the conditions which need to be established
for the triumphant execution of the plan within the
incumbent socio-political situation of the country.
6. To determine the nature of the mechanism required for
securing the successful implementation of each stage of
the plan in all its aspects.
7. To evaluate from time to time the improvement achieved
in the implementation of each stage of the plan and also
recommend the adjustments of policy and measures
which are deemed important for successful
implementation of the plan.
 8. To make required recommendations from time to time
regarding those things which are deemed necessary for
facilitating the execution of these functions. Such
recommendations can be related to the current economic
conditions, current policies, measures or development
programmes.

In 2014, Prime Minister Narendra Modi announced his objective

to dissolve the Planning Commission. It has since
been replaced by a new institution named NITI
Aayog. (National institution for transforming india).NITI Aayog
is a Government of India policy think-tank.Established in 2015.

The assured aim for NITI Aayog’s formation is to promote

involvement and participation in the economic policy-
making process by the State Governments of India.

It has adopted a bottom-up approach in planning which is a

noteworthy contrast to the Planning Commission’s
tradition of top-down decision-making. One of the important
directives of NITI Aayog is to bring cooperative competitive
federalism and to improve Centre-State relation.

Its initiatives include;

a)Action plan 3yrs

b)strategic plan 7yrs

c)vision plan 15yrs

List of Five Year Plans in India-

Long term objectives of Five Year Plans in India are:

 High Growth rate to improve the living standard of the residents of India.
 Economic stability for prosperity.
 Self-reliant economy.
  Social justice and reducing the inequalities.
 Modernization of the economy.
The idea of economic planning for five years was taken from the Soviet Union under the socialist
influence of first Prime Minister Pt. Jawahar Lal Nehru.
The first eight five year plans in India emphasised on growing the public sector with huge
investments in heavy and basic industries, but since the launch of Ninth five year plan in 1997,
attention has shifted towards making government a growth facilitator.
An overview of all Five Year Plans implemented in India is highlighted below:

List of Five Year Plans in India [1951-2017]

Five Year Years Assessment Objective

Plans

First Five 1951- Targets and objectives more or less Rehabilitation of refugees, rapid agricultural
year Plan 1956 achieved. With an active role of the development to achieve food self-sufficiency
state in all economic sectors. Five in the shortest possible time and control of
Indian Institutes of Technology (IITs) inflation.
were started as major technical
institutions.

Second 1956- It could not be implemented fully due The Nehru-Mahalanobis model was
Five year 1961 to the shortage of foreign exchange. adopted.‘Rapid industrialisation with
Plan Targets had to be pruned. Yet, particular emphasis on the development of
Hydroelectric power projects and five basic and heavy industries Industrial Policy
Target
steel mills at Bhilai, Durgapur, and of 1956 accepted the establishment of a
4.5pc
Rourkela were established. socialistic pattern of society as the goal of
Actual economic policy.
4.27pc

Third Five 1961- Failure. Wars and droughts. Yet, ‘establishment of a self-reliant and self-
year Plan 1966 Panchayat elections were started.• generating economy’
State electricity boards and state
Target PL480 (wheat variety)loan from USA
secondary education boards were
5.6pc
formed.China war 1962,Pakistan
Actual 1965-66
2.84pc

Plan 1966- A new agricultural strategy was crisis in agriculture and serious food
Holidays – 1969 implemented. It involved the shortage required attention
Annual distribution of high-yielding varieties
Plans of seeds, extensive use of fertilizers,
exploitation of irrigation potential
 and soil conservation measures.

Fourth 1969- Was ambitious. Failure. Achieved ‘growth with stability’ and progressive
Five year 1974 growth of 3.5 percent but was achievement of self-reliance Garibi
Plan marred by Inflation. The Indira HataoTarget: 5.5 pc
Gandhi government nationalized 14
Target
major Indian banks and the Green
5.7pc
Revolution in India advanced
Actual agriculture. MS SWAMINATHAN
3.30pc

Fifth Five 1974- High inflation.govt collapse.25 June ‘removal of poverty and attainment of self-
year Plan 1979 1975 declared emergency. Was reliance’
terminated(1978) by the Janta govt.
Target
Yet, the Indian national highway
4.4pc
system was introduced for the first
Actual time.Only plan which stopped in
4.8pc between.By Morar ji Desai.1978-79
Rolling plan

Sixth Five 1980- Most targets achieved. Growth: 5.5 ‘direct attack on the problem of poverty by
year Plan 1985 pc.Family planning was also expanded creating conditions of an expanding
in order to prevent overpopulation. economy’
Target
5.2pc

Actual
5.4pc

Seventh 1985- With a growth rate of 6 pc, this plan Emphasis on policies and programs that
Five year 1990 was proved successful in spite of would accelerate the growth in foodgrains
Plan severe drought conditions for the first production, increase employment
three years consecutively. This plan opportunities and raise productivity. First
Target 5pc
introduced programs like Jawahar time pvt sector was given priority
Actual 6pc Rozgar Yojana.Rajiv Gandhi

Annual 1989- It was the beginning of privatization No plan due to political uncertainties
Plans 1991 and liberalization in India.Exchange
rate less,

Eighth Five 1992- . An average annual growth rate of Rapid economic growth, high growth of
year Plan 1997 6.78% against the target 5.6% was agriculture and allied sector, and the
achieved. LPG was introduce. NEP manufacturing sector, growth in exports and
Target
 5.6pc imports, improvement in trade and current
account deficit. to undertake an annual
Actual
average growth of 5.6%
6.6pc

Ninth Five 1997- It achieved a GDP growth rate of Quality of life, generation of productive
year Plan 2002 5.4%, lower than the target. Yet, employment, regional balance and self-
industrial growth was 4.5% which was reliance.Growth with social justice and
T 7.1pc
higher than targeted 3%. The service equality. growth target 6.5%
A 6.8pc industry had a growth rate of 7.8%.
An average annual growth rate of
6.7% was reached.Licence raj was
abolished

Tenth Five 2002 – It was successful in reducing the To achieve 8% GDP growth rate,Reduce
year Plan 2007 poverty ratio by 5%, increasing forest poverty and increase the literacy rate in the
cover to 25%, increasing literacy rates country.Double the per capita income in
T 8.1pc
to 75 % and the economic growth of next 10 yrs.Reduce the poverty by 15pc by
A 7.7pc the country over 8%. 2012

Eleventh 2007- India has recorded an average annual Rapid and inclusive growth.Empowerment
Five year 2012 economic growth rate of 8%, farm through education and skill development.
Plan sector grew at an average rate of Reduction of gender
3.7% as against 4% targeted. The inequality.Environmental sustainability.
T 8.1pc
industry grew with an annual average
To increase the growth rate in agriculture,
A7.9pc growth of 7.2% against 10% targeted. industry, and services to 4%,10% and 9%
resp. Provide clean drinking water for all by
2009.MNREGA 100days

Twelfth 2012- Its growth rate target was 8%. “faster, sustainable and more inclusive
Five year 2017 growth”. Raising agriculture output to 4
Plan percent. Manufacturing sector growth to 10
%
The target of adding over 88,000 MW of
power generation capacity.

Objectives of Economic Planning in India

The following were the original objectives of economic planning in India:

 Economic Development: This is the main objective of planning in India. Economic

Development of India is measured by the increase in Gross Domestic Product (GDP) and
Per Capita Income
 Increased Levels of Employment: An important aim of economic planning in India is to
better utilise the available human resources of the country by increasing the employment
levels.
  Self Sufficiency: India aims to be self-sufficient in major commodities and also increase
exports through economic planning. The Indian economy had reached the take-off stage
of development during the third five-year plan in 1961-66.
 Economic Stability: Economic planning in India also aims at stable market conditions in
addition to the economic growth of India. This means keeping inflation low while also
making sure that deflation in prices does not happen. If the wholesale price index rises
very high or very low, structural defects in the economy are created and economic
planning aims to avoid this.
 Social Welfare and Provision of Efficient Social Services: The objectives of all the five
year plans as well as plans suggested by the NITI Aayog aim to increase labour welfare,
social welfare for all sections of the society. Development of social services in India, such
as education, healthcare and emergency services have been part of planning in India.
 Regional Development: Economic planning in India aims to reduce regional disparities in
development. For example, some states like Punjab, Haryana, Gujarat, Maharashtra and
Tamil Nadu are relatively well developed economically while states like Uttar Pradesh,
Bihar, Orissa, Assam and Nagaland are economically backward. Others like Karnataka
and Andhra Pradesh have uneven development with world class economic centres in
cities and a relatively less developed hinterland. Planning in India aims to study these
disparities and suggest strategies to reduce them.
 Comprehensive and Sustainable Development: Development of all economic sectors
such as agriculture, industry, and services is one of the major objectives of economic
planning.
 Reduction in Economic Inequality: Measures to reduce inequality through progressive
taxation, employment generation and reservation of jobs has been a central objective of
Indian economic planning since independence.
 Social Justice: This objective of planning is related to all the other objectives and has
been a central focus of planning in India. It aims to reduce the population of people living
below the poverty line and provide them access to employment and social services.
 Increased Standard of Living: Increasing the standard of living by increasing the per
capita income and equal distribution of income is one of the main aims of India’s
economic planning.

At the time of Independence, the Indian economy was facing severe

problems of illiteracy, poverty, low per capita income, industrial
backwardness, and unemployment. After India attained its
Independence in 1947, a sincere effort was made to begin an era of
industrial development. The government adopted rules and
regulations for the various industries. This industrial policy
introduction proved to be the turning point in Indian Industrial history
Industrial Policy
Industrial policy is a document that sets the tone in implementing,
promoting the regulatory roles of the government. It was an effort to
expand the industrialization and uplift the economy to its deserved
heights. It signified the involvement of the Indian government in the
development of the industrial sector.

With the introduction of new economic policies, the main aim of

the government was to free the Indian industry from the chains of
licensing. The regulatory roles of the Indian government refer to the
policies towards industries, their establishments, their functioning,
their expansion, their growth as well as their management.

The industrial growth of a country is guided and regulated through its

industrial policies. Let’s understand the journey of various
industrial policies

Industrial Policy – 1948

After having attained independence, the Government of India declared its first
Industrial Policy on 6th April, 1948. The Industrial Policy 1948 was presented in the
parliament by then Industry Minister Dr. Shyama Prasad Mukherjee. The main
historical importance of this policy is that it ushered India in the system of Mixed
Economy.
After the independence, several industrial policies were released suiting the
contemporary requirements. The main Industrial Policy documents before
liberalization, privatization and globalization in 1991 included Industrial Policy-1948;
Industrial Policy -1956; Janata Government’s Industrial Policy -1977 and the
Industrial Policy -1980. The New Industrial Policy -1991 marked advent of a new era
in Indian Economy, which we have studied in this document in other articles.

 Salient Features of Industrial Policy, 1948

Salient Features of Industrial Policy, 1948
Four Fold Classification of Industries
Under this policy, the large industries were classified in four categories viz. Strategic
Industries, Basic / Key industries, Important Industries and other industries which
respectively referred to Public Sector; Public-cum-Private Sector; Controlled Private
Sector and Private & Cooperative sector. They have been discussed below:
Strategic Industries (Public Sector)
This category included three industries in which Central Government had monopoly.
These included Arms and ammunitions; Atomic energy and Rail transport
Basic / Key Industries (Public-cum-Private Sector)
Six industries viz. coal, Iron and Steel, Aircraft manufacturing, Ship-building,
Manufacture of telephone, telegraph and wireless apparatus, and Mineral oil were
designated as “Key Industries” or “Basic Industries”. It was decided that the new
industries in this category will henceforth only be set-up by the Central Government.
However, the existing private sector enterprises were allowed to continue.
Important Industries (Controlled Private Sector)
Eighteen industries were kept in the “Important Industries” category. Such important
industries included heavy chemicals, sugar, cotton textile and woollen industry,
cement, paper, salt, machine tools, fertiliser, rubber, air and sea transport, motor,
tractor, electricity etc. These industries will continue to remain under private sector
however, the central government, in consultation with the state government, will
have general control over them.
Other Industries (Private and Co-operative Sector)
All other industries which were not included in the above mentioned three categories
were left open for the private sector. However, government could impose controls on
these industries also if any of them was not working satisfactorily.
Other features of Industrial Policy 1948
Apart from the four fold classification of the industries; the Industrial Policy 1948
endeavoured to protect cottage & small scale industries by according them priority
status. It also emphasised on establishing harmonious industrial relations; gave high
priority to fair wage rates; social security to workers and their participation in
management. The industrial policy 1948 had acknowledged the significance of
foreign capital for industrialisation of the country, but it was decided that the control
should remain with Indian hands.
With this policy, India ushered into a mixed economy taking the society on socialistic
pattern.The core idea was to keep the strategic and basic industries under the
exclusive ownership / control of Government. The central and state governments
had a virtual monopoly in railroads and exclusive rights to develop minerals, iron ore
etc. The 18 important industries were to be developed under direct control and
regulation of the government.

Industrial Policy Resolution – 1956

Before we delve into the details of Industrial Policy Resolution of 1956, let’s go back
to the business environment of the day. It was a time when India’s first five year plan
(1951-56) was about to finish. The first plan mainly focussed on agriculture and
improving food grain production. Before that, the Industrial (Department and
Regulation) Act of IDR Act of 1951 had been enacted. This act empowered the
Government of India to regulate the pattern of Industrial
development through licensing. This was advent of License Raj in India.
In 1955, the Imperial Bank of India was nationalized and renamed as State Bank of
India. In 1956, some 200 insurance companies and provident societies were merged
to give birth to LIC of India. A State Trading Corporation (STC) was established to
export and import in select commodities. It was also established to trade with the
communist countries (these countries preferred to deal with state party). The STC
was also given monopoly in the trade of Cement, which was import material at that
time.
Mahalanobis Model : Basis of Industrial Policy Resolution 1956
The Industrial Policy Resolution of 1956 was based upon the Mahalanobis Model of
growth. This Model suggested that there should be an emphasis on the heavy
industries, which can lead the Indian Economy to a long term higher growth path.
Mahalanobis Model
In 1950s, an Old Russian Model was indianized by PC Mahalanobis, the founder of
Indian Statistical Institute and a close aide of Pandit Nehru. This model is known to
have set the statistical foundations for state-directed investments and created the
intellectual underpinnings of the license-raj through an elaborate input-output model.
This Model suggested that there should be an emphasis on the heavy industries,
which can lead the Indian Economy to a long term higher growth path. India’s
second five year plan and Industrial policy Resolution 1956, which paved the way for
development of Public Sector and license raj; were based upon this model.
The four fold classification of the 1948 Industrial Policy was changed now to a
threefold classification in Schedule A, B and C industries.
Three Fold Classification of the Industries
Schedule A Industries
This comprised 17 industrial areas which were strictly under the Central
Government. The companies of this area were known as CPSE (central Public
Sector Undertakings). These included key industries such as Defence Equipment;
Atomic Energy; Iron & Steel and heavy plants / machineries required for iron & steel
production; Heavy power plants; Coal & Lignite; Mining & processing of key
minerals; Railways and Air Transport; Aircraft & ship building; Telephones,
Telegraphs and wireless except radio sets; Electricity generation and distribution.
Schedule B Industries
This category comprised 12 industries that were put to the State Governments to
take measures and was left to the state government to follow up with the private
sector with provisions of compulsory licensing. However, states were not given
monopoly over these industries. They had to be state owned but private sector was
expected to supplement the efforts of the State. States were expected to facilitate
and encourage development of these industries in the private sector, in accordance
with the programmes formulated under the Five Year Plans.
The schedule B industries included other minerals than central monopoly; machine
tools; ferro alloys, steel tools; raw material needed for manufacturing of drugs, dyes
and plastics; essential drugs and antibiotics; fertilizers; synthetic rubber; chemical
pulp, road and sea transport.
Schedule C Industries
The Industrial areas which were left out of the Schedule A & B were left with the
private sectors subject to licensing and regulation under the IDR Act.
Other Focus Aras of Industrial Policy 1956
The other key focus areas were as follows:
 This policy integrated the need for infrastructure development as prelude to private
investment. Thus, it gave priority to power, transport and financial institutions.
 It recognized the role of cottage and small scale sector in context of employment
generation and balanced regional growth and provided it tax concessions and
subsidies.
 It gave priority to industrial development in the backward regions of the country to
spur balanced growth.
 It welcomed FDI as complimentary to domestic saving if major share in control and
management was in Indian hands.
 It gave importance to “Industrial Peace” by offering share to workers in the profit and
management; better work environment and participation in the management.
 It stressed the need to promote technical and managerial skill for industrial growth,
thereby proposing establishment of ITIs and introducing business management
courses in universities.
 It also laid emphasis on decentralization of the management of PSUs.
However, the major thrust area of the 1956 policy was to enhance the role of public
sector in the process of growth and development on socialistic pattern of society. It
did not undermine the private investment but expected that private investment would
kick-start if public sector achieves a breakthrough in the development of
infrastructure.
Outcomes

The outcome of this policy must be seen in conjunction with the Industries
(Development & Regulation) Act of 1951. The first major outcome was that the public
sector in the country expanded and it became the main vehicle for Industrial Growth.
The government gave priority to backward regions to establish the Industrial units to
spur balanced growth.
However, since all the Schedule B and many of the Schedule C industries came
under provisions of compulsory licensing of Industries (Development & Regulation)
Act of 1951; Industries in India were under License raj.
Annexure
Schedule A Industries in the Industrial Policy Resolution 1956
1. Arms and ammunition and allied items of defense equipment.
2. Atomic energy.
3. Iron and Steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining, for
machine tool manufacture and for such other basic industries as may be specified by
the Central Government.
 6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Mineral oils.
9. Mining of iron ore, manganese ore, chrome-ore, gypsum, sulphur, gold and diamond.
10. Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram.
11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and
Use) Order, 1953.
12. Air transport.
13. Railway Transport.
14. Ship Building.
15. Telephones and telephone cables telegraph and wireless apparatus (excluding radio
receiving sets).
16. Generation and distribution of electricity.
Schedule B Industries as per Industrial Policy Resolution 1956
1. All other minerals except ‘minor minerals’ as defined in Section 3 of the Minerals
Concession Rules 1949
2. Aluminum and other non-ferrous metals not included in Schedule A
3. Machine tools
4. Ferro-alloys and tool steels
5. Basic and intermediate products required by chemical industries such as the
manufacture of drugs, dye-stuffs and plastics
6. Antibiotics and other essential drugs
7. Fertilizers
8. Synthetic rubber
9. Carbonization of coal
10. Chemical pulp
11. Road transport
12. Sea transport
Analysis of Industrial Policy 1956
The Industrial Policy, 1956 was an elaborate document and was hailed as
“Economic Constitution of India” It touched virtually all aspects of Industrial
development. It established the public sector as epicentre of industrialization.
Further, this policy must be analyzed in conjunction with IDA Act and License Raj
and in light of the below statements.
 One of the pillars of this policy was to check concentration of economic power in few
individuals, groups or business houses. To what extent this policy was able to
achieve this?
 To what extent this policy was able to spur Industrial growth, check unemployment
and bridge the rural urban divide?
One of the pillars of this policy was to check concentration of economic power in few
individuals, groups or business houses. To what extent this policy was able to
achieve this?
The 1956 policy in injunction with the IDA act did just reverse of what it was
supposed to do. The licensing policy of the government favoured big business
houses who were in better position to raise huge amount of capital and had the
better management skills to run the industry. They were also able to secure financial
assistance from development and finance institutions. Further, since there was no
proper system of allocation of licenses in place; pre-empting of licensing by
authorities to select people or groups happened due to an array of reasons. Overall,
the freedom of entry into industry was restricted due to licensing and this resulted in
the concentration of economic power in few individuals.
To what extent this policy was able to spur Industrial growth, check unemployment
and bridge the rural urban divide?
The pace of annual industrial growth could never go above 3 or 4%. The
performance of the PSUs was also initially dismal and even today we see a lots of
sick PSUs around.
Further, India could not combat unemployment, rural-urban divide, imbalance growth
and other problems. The reasons were many fold. Firstly, the expansion of industry
in backward regions was dismal. Secondly, the heavy industries were capital
intensive rather than labour intensive. They lacked employment potential. The
potential of employment generation was in small and cottage industries but they
were sidelined practically either in want of institutional finance or due to competition.
Most of the institutional finance was grabbed by large scale industries leaving little
for them.

Industrial Policy Statement 1977

The Industrial Policy Statement 1977 was announced by Janata Government led by
Morarji Desai on 23 December, 1977. This policy was later replaced by incumbent
Congress Government in 1980.
This was the first time when a non-congress government was ruling dispensation at
centre. The Janata Government had a different approach and planning philosophy
from Congress, and it reflected in its Industrial policy also.
Salient Features of Industrial Policy Statement 1977
Special Focus on Small−scale Industries
So far, the Industrial polices gave maximum emphasis to the large scale industries.
The 1977 policy gave highest priority to the small scale and tiny industries.
For the first time, 1977 Industrial policy defined a “tiny unit” as a unit with investment
in machinery and equipment up to Rs. 1 Lakh and situated in towns or villages with
a population of less than 50,000 (as per 1971 census).
The policy declared to establish one District Industries Centre in each district to meet
the requirement of industries within that district. It also announced to establish a
separate cell in (now IDBI) to cater to the need of the small industries. It
emphasized on more attention to marketing, standardisation, quality control etc. in
small industries.
Focus on Labour−intensive Technology
In contrast with capital intensive industries, this policy emphasized on special efforts
to develop small and ordinary machines and their optimal use to enhance
productivity and income of the workers engaged in small and cottage industries. The
role of large scale industries was kept limited to key and strategic sectors such as
capital goods, iron and steel, petroleum, fertilizers, etc. It emphasized that the Big
units would NOT be allowed to expand their production and instead; small and
cottage industries will be encouraged to expand. Thus, role of the large industries
was redefined to compliment the role of small industries. It expanded the list of items
reserved for exclusive production in the small scale sector from 180 to more than
500.
Viability of Public Sector
The policy emphasized on the viability, efficiency and profitability of the public sector
units. It declared that government will to bear minimum possible loss; and will take
immediate measures to rehabilitate and manage the units taken over.
Focus on Indigenous Technology
The policy called for use of indigenous technology as far as possible for future
development of Industry. However, for sophisticated sectors, the government would
buy best available technology from abroad. This policy called for a restrictive use of
foreign technology.
Focus on self-sufficiency
This policy called for minimum export and maximum possible self−sufficiency. It
called for removing restrictions on those imports which are needed for development
of priority industries.
Balanced Regional Development
Via this policy, the government decided that in the interest of balanced regional
development; no more licences will be issued for the establishment of industries
within certain limits of metropolitan cities having a population exceeding 10 lakh and
in other cities having a population exceeding 5 lakh according to 1971 census.
Workers’ Participation
Policy laid emphasis on increased participation of workers in management.
Restrictions on Foreign Investments
The policy declared that the foreign investment in the “unnecessary areas” (means
those which had not role to play in development of the country), was prohibited. This
was virtually a complete NO to the foreign investment. This policy is also
remembered for a very important provision. The statement stated that foreign
companies that diluted their foreign equity up to 40 per cent under Foreign Exchange
Regulation Act (FERA) 1973 were to be treated at par with the Indian companies.
Companies like Coca Cola and IBM did not comply with the provisions and Industry
Minister George Fernandez threw the Coke and IBM out of India.

V. Industrial Policy, 1980

The Congress government announced this policy on July 23rd, 1980.

The features of this policy are:

 Promotion of balanced growth.

 Extension and simplification of automatic expansion.
 Taking over industrial sick units.
 Regulation and control of unauthorized
excess production capabilities installed for industrial houses.
 Redefining the role of small-scale units.
 Improving the performance of the public sector.
Key Provisions of New Industrial Policy 1991

On July 24, 1991, Government of India announced its new industrial policy with an
aim to correct the distortion and weakness of the Industrial Structure of the country
that had developed in 4 decades; raise industrial efficiency to the international level;
and accelerate industrial growth.
Salient Features
We can study the features of the new industrial policy 1991 under different heads as
follows:
Government Monopoly
The number of industries reserved for public sector was reduced from 17 (as per
1956 policy) to only 8 industries viz. Arms and Ammunition, Atomic Energy, Coal,
Mineral Oil, Mining of Iron Ore, Manganese Ore, Gold, Silver, Mining of Copper,
Lead, Zinc, Atomic Minerals and Railways.
Current Position
Currently only two categories from the above viz. atomic energy and Railways are
reserved for public sector. Further, Atomic minerals come within the purview of
Atomic Energy Act. Government of India does not grant license to private sector for
mining of atomic minerals and mineral sand also. However, for mining of mineral
present in beach sand deposits, the state governments can grant license to private
parties subject to prior consent of the Department of Atomic Energy. There have
been proposals to open the atomic energy sector for private sector, but so far it has
not been done.
Further, the policy had implied threat of closure of sick public sector enterprises to
increase efficiency of the public sector.
Industrial Licensing Policy
This policy abolished the Industrial licensing for all industries except for a short list of
18 industries. This list of 18 industries was further pruned in 1999 whereby the
number reduced to six industries viz. drugs and pharmaceuticals, hazardous
chemicals, explosives such as gun powder and detonating fuses, tobacco products,
alcoholic drinks, and electronic, aerospace and defence equipment. The compulsion
for obtaining prior approval for setting units in metros was also removed.
However, in this policy, industries reserved for the small scale sector were continued
to be so reserved.
Foreign Investment and Capital
This was the first Industrial policy in which foreign companies were allowed to have
majority stake in India. In 47 high priority industries, up to 51% FDI was allowed. For
export trading houses, FDI up to 74% was allowed. Today, there are numerous
sectors in the economy where government allows 100% FDI.
34 Industries were placed under the automatic approval route for direct foreign
investment up to 51 percent foreign equity. It was promised that there will be no
bottlenecks of any kind in this process provided that foreign equity covers the foreign
exchange requirement for imported capital goods. A promise to carry out some
amendments in Foreign Exchange Regulation Act (1973) was also made. (The act
was later replaced by FEMA in 1999)
NRIs were allowed to 100% equity investments on non-repatriation basis in all
activities except the negative list.
A provision was made that in cases where imported capital goods are required,
automatic clearance is given, provided there is foreign exchange availability is
ensured through foreign equity.
The government also established a special empowered board called Foreign
Investment Promotion Board (FIPB) to negotiate with international firms and approve
FDI in selected areas.
Foreign Technology Agreements
Automatic permission was given for foreign technology agreements in high priority
industries up to a lump sum payment of Rs. 1 crore, 5% royalty for domestic sales
and 8% for exports, subject to total payment of 8% of sales over a 10 year period
from date of agreement or 7 years from commencement of production. Further,
government eased hiring of foreign technicians.
Review in Public Sector Investments
A promise was made to review the portfolio of public sector investments with a view
to focus the public sector on strategic, high-tech and essential infrastructure. This
indicated a disinvestment of the public sector. The PSUs which were chronically sick
and which are unlikely to be turned around were to be referred to the Board for
Industrial and Financial Reconstruction (BIFR). It was promised that Boards of public
sector companies would be made more professional and given greater powers.
Amendments to MRTP Act
The MRTP Act will be amended to remove the threshold limits of assets in respect of
MRTP companies and dominant undertakings. This eliminates the requirement of
prior approval of Central Government for establishment of new undertakings,
expansion of undertakings, merger, amalgamation and takeover and appointment of
Directors under certain circumstances. The MRTP Limit for MRTP companies was
made Rs. 100 Crore. Currently, MRTP act is replaced by Competition Act 2002.
Definition of Tiny Sector
The definition of Tiny Unit was changed as a unit having an investment limit of Less
than Rs. 5 Lakh.
National Renewal Fund to provide safety net for labourers
Via this policy, the Government announced to establish a National Renewal Fund
(NRF) to provide a social safety net to the labour. This fund was established in 1992
and two schemes were brought under this- first Voluntary Retirement Scheme (VRS)
and another re-training scheme for rationalised workers in organised sector. The
fund money would be used to make payments under these two schemes. This fund
was later abolished in 2000.
Why NRF was abolished?
The NRF was established to provide relief to the workers affected by technological
changes, privatisation of public sector units and closure of public sector units. Those
who lost their jobs would be either paid money under VRS scheme or will be
retrained / rehabilitated. The VRS scheme was under DIPP at that time. What
happened was that for around 10 years, bulk of the payments in NRF was paid for
VRS only; the fund did not adequately serve the stated objective of “re-training and
rehabilitation”. Further, initially the private sector was also listed as its beneficiary,
but later it was felt that only public sector should be exclusively benefitted from this
fund. This, this fund was no more than a “golden handshake scheme”. Due to this
NRF was abolished and the VRS was shifted to Department of Public Enterprises
(DPE).
Tangible outcomes of the Industrial Policy 1991
 This policy made Licence, Permit and Quota Raj a thing of past. The process of
liberalization is continuing. The 1991 policy attempted to liberalise the economy by
removing bureaucratic hurdles in industrial growth.
 The role of public sector was limited. Only 2 sectors were finally left reserved for
public sector. This reduced burden on the government. A process of either
transforming or selling off the sick units started. The process of disinvestment in
PSUs also started.
 The policy provided easier entry of multinational companies, privatisation, removal of
asset limit on MRTP companies, liberal licensing. All this resulted in increased
competition, that led to lower prices in many goods such as electronics prices. This
brought domestic as well as foreign investment in almost every sector opened to
private sector.
 The policy was followed by special efforts to increase exports. Concepts like Export
Oriented Units (EOU), Export Processing Zones (EPZ), Agri-Export Zones (AEZ),
Special Economic Zones (SEZ) and lately National Investment and
Manufacturing Zones(NIMZ) emerged. All these have benefitted the export sector of
the country.
 Gradually, a new act was passed for MSMEs in 2006 and a separate ministry was
established to look into the problems of MSMEs. Government tried to provide better
access to services and finance to MSMEs.
If we were to evaluate the reform process in the Indian economy over the last two
decades or so, the results have been nothing short of dramatic. Those of us who
have managed businesses in India before the 1990s realise this only too well. The
abolition of industrial licensing, dismantling of price controls, dilution of reservations
for small-scale industries and virtual abolition of the monopolies law, relaxation of
restrictions on foreign investment, lowering of corporate and personal tax rates,
removal of restrictions on managerial remuneration, etc. were very bold steps, all of
which have enabled industry to blossom. Today’s younger generation of business
managers cannot even believe that we had such an array of restrictions and
handicaps.