Module 2

NEW INDUSTRIAL POLICY. 1991

In order to accelerate Industrial
Development in India, and in accordance
with the changing circumstances, various
industrial policies were declared in the
years 1948, 1956, 1977, 1980 and 1985,
but in spite of all efforts, the pace and as
well as the level of Industrial
Development in India, could not reached
according to its need.

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Therefore, in order to lift unnecessary
restrictions on Industries, under the
licensing policy, and to increase their
efficiency, development and technological
level, in order to make Indian goods usable
in the competitive global market, on 24th
July, 1991, in Lok-Sabha the Minister of
States for industries, Mr. P. J. Kurian
declared the Industrial Policy, 1991.

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OBJECTIVES OF NEW INDUSTRIAL POLICY, 1991

To liberalize the economy

To increase employment opportunities
To encourage foreign assistance and co-
partnership
To make the Public Sector more
competitive
To increase the production and
productivity, give encouragement to
industries
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To liberate the economy from various government
restrictions
Industrial development of backward areas
To give liberty to private sector to work
independently
To make development for modem competitive
economy
To give encouragement for expansion of production
capacity
To increase exports and liberalize (facilitate)
imports.
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SALIENT FEATURES OF NEW INDUSTRIAL POLICY,
1991

Liberalized Industrial Licensing Policy

Under this policy, with the exception of
18 industries, licensing system has been
removed for all other industries. Some of
those 18 industries,

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where the licensing system is still
mandatory are; Army and Defence, Forest
Conservation, Industries engaged in
manufacturing goods which are harmful
to the Environment and industries, which
are manufacturing luxury goods, for the
affluent (very rich) class, etc.

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Localization Policy
Those industries which are situated in cities,
where the population is less than 1 million,
industrial permission from the government,
to start any industry is not required. In cities
having population of more than 1 million,
with the exception of electronics and other
pollution free industries, all industrial units
may be 25 kilo meters away from the city’s
boundary.
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Foreign Investment
Provision has been made to invest up to
51 percent by foreign investors in the
equity shares of Indian Companies.
Earlier, this limit was limited up to 40%
only. This will increase the flow of
foreign capital into India and make
possible technical exchange from
developed countries.

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Workers’ Participation in Management
Under this industrial policy, emphasis has
been laid on safeguarding the workers’
interest. Provision has been made for
workers’ participation in management, in
order to manage sick units, provision has
been made to form co-operative societies
of workers, to run them.

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Role of Public Sector
Those public sector undertakings which are
not doing well at present, but in which there
are enough chances of improvement, shall be
re-constituted. Public sector undertakings,
which are facing constant financial crisis,
shall be kept under observation by ‘Board of
Industrial and Financial Reconstruction’ or
by any other institution, which is fixed by
the government.
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Liberalization, Privatization, Globalization (LPG Model) in
India

After Independence in 1947 Indian

government faced a significant problem to
develop the economy and to solve the
issues. Considering the difficulties
pertaining at that time government
decided to follow LPG Model. The
Growth Economic conditions of India at
that time were not very good.

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 Liberalization is defined as making economy free
to enter the market and establish their venture in
the country. 
 Privatization is defined as when the control of
economy is shifted from public to a private hand. 
 Globalization is described as the process by which
regional economies, societies, and cultures have
become integrated through a global network of
communication, transportation, and trade.

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Liberalization
Soon after independence, the period was
known as License Raj. As a result of the
restriction in the past, India’s performance
in the global market has been very dismal;
it never reached even the 1% in the
worldwide market.
India has vast natural resources with high-
efficiency labor, but after all this, it
was still contributing with 0.53% till 1992.

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IMPACT BEFORE LIBERALIZATION
The low annual growth rate of the economy
of India before 1980, which stagnated around
3.5% from the 1950s to 1980s, while per
capita income averaged 1.3%. At the same
time, Pakistan grew by 5%, Indonesia by
9%, Thailand by 9%, South Korea by 10%
and in Taiwan by 12%.
Only four or five licenses would be given for
steel, power, and communications. License
owners built up substantial powerful empires
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A substantial public sector emerged. State-
owned enterprises made significant losses.
Infrastructure investment was weak because
of the public sector monopoly.
License Raj established the “irresponsible,
self-perpetuating bureaucracy that still
exists throughout much of the country” and
corruption flourished under this system

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PRIVATIZATION
India is leading towards privatization
from government raj. As a result, it led to
the development of country 500 faster
than previous. Now India is in the
situation of world fastest developing
economy and maybe chance that India
will be at the top till 2050

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GLOBALIZATION

 The term is sometimes used to refer specifically to

economic globalization: the integration of national
economies into the international economy through
trade, foreign direct investment, capital flows,
migration, and the spread of technology.

 However, globalization is usually recognized as

being driven by a combination of economic,
technological, sociocultural, political, and
biological factors.
 
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Disinvestment
“Investment refers to the conversion of money
or cash into securities, debentures, bonds or any
other claims on money. As follows,
disinvestment involves the conversion of
money claims or securities into money or
cash.” 
Disinvestment can also be defined as the action
of an organization (or government) selling or
liquidating an asset or subsidiary. It is also
referred to as ‘divestment’ or ‘divestiture.’

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Disinvestment typically refers to sale
from the government, partly or fully, of a
government-owned enterprise.
A company or a government organization
will typically disinvest an asset either as a
strategic move for the company, or for
raising resources to meet general/specific
needs.

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The following main objectives of
disinvestment are: 
To reduce the financial burden on the Government

To improve public finances

To introduce, competition and market discipline

To fund growth

To encourage wider share of ownership

To depoliticize non-essential services

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The importance of disinvestment lies in
utilization of funds for:
Financing the increasing fiscal deficit

Financing large-scale infrastructure development

For investing in the economy to encourage spending

For retiring Government debt- Almost 40-45% of the

Centre’s revenue receipts go towards repaying public
debt/interest 

For social programs like health and education

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Industrial sickness
The strength of the industrial sector, by
and large, determines the soundness of the
economy.
Industrial sickness usually refers to a
situation when an industrial firm performs
poorly, incurs losses for several years and
often defaults in its debt repayment
obligations.

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The Reserve Bank of India has defined a
sick unit as one “which has incurred a
cash loss for one year and is likely to
continue incurring losses for the current
year as well as in the following year and
the unit has an imbalance in its financial
structure.

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In case of small scale industrial unit (SSI), it
is regarded as a sick unit if it has:
(i) Incurred a cash loss in the previous
accounting year and was likely to
continue with losses in the current
accounting year and further its cumulative
cash losses are equal to 50 per cent or
more of its peak net worth during the last
five years
(ii) It has defaulted in meeting four
consecutive installments of interest.

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Iii) Theunit has remained closed for a
period more than six months.

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MRTP Act
The Monopolies and Restrictive Trade
Practices Act (MRTP Act) was passed by
Parliament of India on 18 December 1969
and got president’s assent on Dec 1969

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The Monopolistic and Restrictive Trade
Practices Act, 1969, was enacted
To ensure that the operation of the
economic system does not result in the
concentration of economic power in hands
of few,
To provide for the control of monopolies,
and

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To prohibit monopolistic and restrictive
trade practices.
The MRTP Act extends to the whole
of India except Jammu and Kashmir.

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Unless the Central Government otherwise directs,
this act shall not apply to:

Any undertaking owned or controlled by the

Government Company,
Any undertaking owned or controlled by the
Government,
Any undertaking owned or controlled by a
corporation (not being a company established by
or under any Central, Provincial or State Act,
Any trade union or other association of workmen
or employees formed for their own reasonable
protection as such workmen or employees,

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Any undertaking engaged in an industry,
the management of which has been taken
over by any person or body of persons
under powers by the Central Government,
Any undertaking owned by a co-operative
society formed and registered under any
Central, Provincial or state Act,
Any financial institution.

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Competition Act 2002
The Monopoly and Restrictive Trade
Practice Act 1969 became obsolete in the
present world of throat cutting
competition. The MRTP Act prevent the
expansion of the companies whose
assets was 100 crore, because these
companies need to take government
permission to expand their business.

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So there was a desperate need to shift
focus from the monopoly to the
competition. Hence a new law has been
enacted and published in the gazette of
India on 14 January, 2003 for bringing
competition in the Indian market.

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Main motive of the act was to promote
the competition in the Indian market so
that the interests of the customers can be
protected and to ensure freedom of trade
carried on by participants in the Indian
market.

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An Act, keeping in view of the economic
development of the country, was laid
down to provide for an establishment of a
commission with the following object:

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-to prevent practices having adverse
effect on competition,
 -to promote and sustain competition in
markets, -to protect the interests of
consumers,
 -to ensure freedom of trade carried on by
other participants in markets in India and
 -for matters connected therewith or
incidental thereto.
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Objectives of the competition Act 2002
are;
1.To protect the interests of the
consumers by providing them good
products and services at reasonable prices.
2. To promote healthy competition in the
Indian market.
3.To prevent the interests of the smaller
companies or prevent the abuse of
dominant position in the market.

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4. To prevent those practices which have
adverse impact on competition in the
Indian markets.
5. To ensure freedom of trade in Indian
markets.
6. To regulate the operation and activities
of combinations (acquisitions, mergers
and amalgamation).

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The Act mainly covers these aspects
1.Prohibition of anti competitive agreements
2. Prohibition of abuse of dominance
3. Regulation of combination (acquisition,
mergers, and amalgamation of certain size)
4.Establishment of the competition
commission of India
5. Power and functions of the competition
commission of India

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Key differences of Competition Act &
MRTP
 MRTP Act is a competition law, that was created in
India, in 1970 to prevent concentration of economic
power in few hands. On the other hand, Competition Act
emerged as an improvement over MRTP act to shift the
focus from controlling monopoly to initiating
competition in the economy.
 MRTP Act is reformatory in nature, whereas
Competition Act is punitive.
 In Monopolies and Restrictive Trade Practices (MRTP)
Act, the dominance of a firm is determined by its size.
On the other hand, the dominance of a firm in the
market is determined by its structure in the case of
Competition Act.
 MRTP Act focuses on the interest of consumers.
Conversely, Competition Act focuses on the interest of
the public at large.
 MRTP Act does not specify any penalty for offenses but
Competition Act states penalty for the offence.
 The basic motto of MRTP Act is to control monopolies.
As against this, the Competition Act intends to initiate
and sustain competition.
 Monopolies and Restrictive Trade Practices (MRTP)
Act, requires that the agreement to be registered. In
contrast, the Competition Act is silent on the registration
of agreement.
 In MRTP Act, the appointment of chairperson was done
by Central Government. On the contrary, in Competition
Act the appointment of chairperson was done by
Committee that comprises of retired.
Foreign Exchange Regulation Act
Foreign Exchange Regulation Act, shortly
known as FERA, was introduced in the year
1973. The act came into force, to regulate
foreign payments, securities, currency import
and export and purchase of fixed assets by
foreigners.

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The act was promulgated in India when
the position of foreign reserves wasn’t
satisfactory.
It aimed at conserving foreign exchange
and its optimum utilization in the
development of the economy.
The act applies to the whole country.
Therefore, all the citizens of the country,
inside or outside India are covered under
this act.

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The act extends to branches and agencies
of the Indian multinationals operating
outside the country, which is owned or
controlled by the person who is the
resident of India.
FEMA
FEMA expands to Foreign Exchange
Management Act, which was promulgated
in the year 1999, to repeal and replace the
earlier act.

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The act applies to the whole country and to
all the branches and agencies of the body
corporate operating outside India, whose
owner or controller is an Indian resident and
also any violation committed by the person
covered under the Act, outside India.
The main objective of the act is to
facilitate foreign trade and to encourage
systematic development and maintenance
of forex market in the country.

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There are total seven chapters contained in
the act which are divided into 49 sections,
out of which 12 sections deal with the
operational part while the remaining 37
sections cover penalties, contravention,
appeals, adjudication and so on.
Diff. Between FERA and FEMA
FERA is an act which is enacted to regulate
payments and foreign exchange in India, is
FERA. FEMA an act initiated to facilitate
external trade and payments and to promote
orderly management of the forex market in the
country.

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FEMA came out as an extension of the
earlier foreign exchange act FERA.
FERA is lengthier than FEMA, regarding
sections.
FERA came into force when the foreign
exchange reserve position in the country wasn’t
good while at the time of introduction of FEMA,
the forex reserve position was satisfactory.

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 The approach of FERA, towards forex
transaction, is quite conservative and restrictive,
but in the case of FEMA, the approach is flexible.
 Violation of FERA is a non-compoundable
offence in the eyes of law. In contrast violation of
FEMA is a compoundable offence and the charges

can be removed.
Citizenship of a person is the basis for
determining residential status of a person
in FERA, whereas in FEMA the person’s
stay in India should not be less than six
months.

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Contravening the provision of FERA may
result in imprisonment. Conversely, the
punishment for violating the provisions of
FEMA is a monetary penalty, which may
turn into imprisonment if the fine is not
paid on time.