Industrial Policy

Poornima

Introduction 

The Industrial Policy indicates the respective roles of the public, private, joint and co-operative sectors; small, medium and large scale industries. It underlines the national priorities and the economic development strategy. It also spells the Government¶s policy towards industries- their establishment, functioning, growth and management; foreign capital and technology, labor policy, tariff policy etc. in respect of the industrial sector. The Industrial Policy of India has determined the pattern of economic and industrial development of the economy. The Industrial Policy reflected the socio-economic and political ideology of development.   

Industrial Policy up to 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 .

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. .Dominance of Public Sector:  The policy of the Government was to ensure that the public sector gained control over the economy. further expanded the role of the public sector.

atomic energy. industries were progressively state owned and the State would take the initiative to establish new undertakings. fertilizers. road. railway transport etc. air transport.  . Under the Schedule B. Future development of 17 important industries such as arms and ammunition. iron and steel. synthetic rubber. 12 industries such as machine tools. coal. was exclusively reserved for the public sector. transport etc.

privately owned units were also permitted to produce an item falling in Schedule A for meeting their own requirements or as by-products. the monopoly or dominance of the public sector was established. However.  . The third category include all the remaining industries which were left to the initiative and enterprise of the private sector. However. Also by way of giving licenses for several other important industries only to the public sector. existing private undertakings in these industries were allowed to continue.

. for manufacturing of new products and for undertaking substantial expansion.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.

Operations of foreign companies in India and issue of securities abroad by Indian Companies was regulated by the Foreign Exchange Regulation Act. it was subjected to a ceiling of 40% of the total equity although there were certain exception. 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. Restrictions on Foreign Capital and Technology:  In industries where foreign capital was allowed. . Large firms of Rs. FERA 1973. There were also restrictions on capital goods etc.

The New Industrial Policy 1991 The Industrial Policy announced on July 24.) Inflation was as high as 13. 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. 1991 heralded the economic reforms in India and sought to drastically alter the industrial scenario in our country.5% .

apart from redefining the role of the public sector. The most important initiatives are with respect to the virtual scrapping of industrial licensing and registration policies. . revolutionary´ and ³drastic have been used to describe this policy.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. an end to the monopoly law and a welcoming approach to foreign investments. Words like ³dramatic´.

To achieve optimal utilization of human resources.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 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. .

exploration of oil and mineral resources. The policy also seeks selective privatization and withdrawal of the public sector from industries. 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 priority areas for growth of public enterprises will be the essential infrastructure goods and services industry.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.

Distillation and brewing of alcoholic drinks. 1951. hazardous chemicals and industrial explosives  . Industrial Licensing policy and procedures have been liberalized and continuously changed. electronic aerospace. The number was later reduced to five. cigars and cigerattes.The New Industrial Policy 1991 (contd«) Industrial Licensing:  Industrial Licensing was governed by the Industries Development & Regulation Act. Industrial licensing has been abolished for all projects except for a short list of industries All excepting 18 industries were freed from licensing.

the industries are to be located in the areas designated as ³industrial areas´ or 25 kms away from the Standard Urban area limits of the city. However. industries of a non polluting nature were exempt. However. The industries subject to compulsory industrial licensing account for a very small share of the value added in the manufacturing sector. The locational policy was abolished in 2008. Industries are free to select the location of the industry. in cities with a population of over 1 million.  .

the following measures were adopted:  Portfolio of public sector investments to be reviewed periodically with a view to focus the public sector on strategic.  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. .Also. financial institutions and the general public. high tech and essential infrastructure. a part of the Government¶s shareholding in the public sector would be offered to mutual funds. in respect of public sector enterprises.  In order to encourage wider public participation.

introduction of modern managerial techniques and new possibilities for promotion of exports. . marketing expertise.   FDI is allowed in all industries. Approvals for FDI up to 51% in high priority industries requiring large investments and advanced technology will be provided. except industries falling in a small negative list. Foreign investment will bring advantages of technology transfer.The New Industrial Policy 1991 (contd«) Liberalization of Foreign Investment: Policy towards foreign capital and technology has been modified very significantly.

  Since 1992-93. development of integrated townships (up to 100%) . the Indian stock market is open for investment by Foreign Institutional Investors (FII¶s) and Indian companies satisfying certain conditions may access foreign capital market by Euro issues. include opening up of sectors such as Insurance (up to 26%). Some of the recent initiatives taken to further liberalize the FDI regime.

. The effort is to move towards capital account convertibility.  Another change has been the reform of the foreign exchange rate policy.  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. The import policy has been made liberal by reducing tariff levels.. The Rupee has been made fully convertible on the current account.  Integration of the Indian Economy with the Global Economy is one of the objectives of the EXIM Policy.The New Industrial Policy 1991 (contd«) Liberalization of Foreign Investment««. The Capital Issues Control Act and the office of the Controller of Capital has been scrapped and free pricing of capital issues was introduced.

 . need prior approval of Reserve Bank of India (RBI) India officially fixed the exchange rate until 1991. overseas investments or acquisition of assets. when it made the first move to allow the market to determine the rupee's value in relation to other currencies for select transactions. which are classified as capital account transactions. The rupee is convertible in current account transactions like meeting individual foreign exchange needs for overseas travel or education abroad. However.

No permission is necessary for hiring of foreign technicians and foreign testing of indigenously developed technologies. Indian companies will be free to negotiate the terms for technology transfer with their foreign counterparts according to their own commercial judgement. Government will encourage foreign trading companies to assist in our export activities .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.

substantial expansion. manufacture of new items and mergers and acquisitions) were scrapped.Removal of MRTP Restrictions:    Most of the MRTP restrictions pertaining to concentration of economic power (those requiring permission for establishment of new undertaking. restrictive and unfair trade practices. The thrust of the policy is on controlling and regulating monopolistic. Existing units will be provided a new broad branding facility to enable them to produce any article without additional investment. .

 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. .  There will be greater inflow of foreign capital and technology due to easing of restrictions.  Removal of controls under the MRTP Act will facilitate expansion and growth.Evaluation of the New Industrial Policy Positives of the new policy are:  Delicensing of most industries will help entrepreneurs to quickly seize business opportunities.

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

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. .Evaluation of the New Industrial Policy This Policy has been criticized on the following grounds:     The policy is a total departure from Nehru¶s model of socialism. It will lead to domination of MNC on the Indian Economy. 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. The Government has not announced a clear exit policy for sick units. Government is silent about tackling the growing industrial sickness. Absence of a mechanism would slow down the development of backward areas. .

There is a need for Second Generation Reforms: A. 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. Yet much more needs to be done to reap the full benefits. Exploiting the Knowledge based Global Economy: Revolutionizing the telecom sector to help integrate India¶s economy into the world economy.Second Generation Reforms   The 1991 reforms have considerably helped in improving the economic growth of the country. .

Freedom to diversify and close down unsuccessful units. . Liberalize and move towards capital account convertibility.B. Growing Indian Transnational Corporations: Indian firms to enjoy flexibility in entry and exit.

Clean Environment: Arrest damage to environment Promote clean and healthy environment. F.  . High Growth of Agriculture: State to ensure that adequate investments are made in irrigation. Involve private sector to provide better primary education. agricultural research and infrastructure D. Empowering the Poor: Integrate and consolidate anti poverty measures. Human Development Primary education made compulsory. E.Second Generation Reforms C. Set up a system for old age security.

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. .