1991 industrial policy highlights

1. Industrial Policy1991 Highlights
1.Distinctive Objectivesof NewIndustrial Policy(NIP),1991: NIPhad two distinctiveobjectives
comparedto the earlierindustrialpolicies:
i)Redefinitionof Conceptof Self Reliance:
NIPredefinedthe conceptof economicself-reliance.Since 1956 till 1991, Indiahad always
emphasizedonImportSubstitutionIndustrialization(ISI)strategytoachieve economic-self reliance.
Economicself-reliance meantindigenousdevelopmentof productioncapabilitiesandproducing
indigenouslyall industrial goods,whichthe countrywoulddemandratherthanimportingfrom
outside.The goal of economicself reliance necessitatedthe promotionof ISIstrategy. Ithelpedto
builtupthe vast base of capital goods,intermediategoodsandbasicgoodsindustriesoveraperiod
of time.NIPredefinedeconomicself-reliance tomeanthe abilitytopayforimportsthroughforeign
exchange earningsthroughexportsandnot necessarilydependinguponthe domesticindustries.
ii)International Competitiveness:
NIPemphasizedthe needtodevelopindigenouscapabilitiesintechnology
and manufacturingtoworldstandards.None of the earlierindustrial policies,eitherexplicitlyor
implicitly,hadmade reference tointernational technologyandmanufacturingcapabilitiesinthe
contextof domesticindustrialdevelopment(Ministryof Commerce andIndustry,2001).For the first
time,NIPexplicitlyunderlinedthe needfordomestic industrytoachieve international
competitiveness.
To achieve these objectives,amongothers,NIPinitiatedchangesinIndia'sindustrial policy
environment,whichgainedmomentumgraduallyoverthe decade.The importantelementsof NIP
can be classifiedasfollows:
1. PublicSectorDe-Reservationand
PrivatizationthroughDis-Investment
Till 1991, Public Sector was assigned a pre eminent positioninIndianIndustryto enable it to achieve "commanding heights
of the economy" under the Industrial Policy Resolution(IPR), 1956. Accordingly, areas ofstrategic importance andcore
sectors were exclusivelyreservedfor public sector enterprises. Public enterprises were accordedpreference even inareas
where private investments were possible.
Since 1991, the public sector policyconsists of:
i)Reductionin the number of industries reservedfor public sector
Now onlytwo industries (atomic energyand railwaytransport) are reservedfor the Public Sector. Theyare knownas
"Annexure I" industries(Ministryof Commerce and Industry, 2001). The essence ofgovernment's Public Sector
Undertakings (PSUs)policysince 1991 has beenthat government should not operate anycommercialenterprises. The
policyemphasized to bring down government equityin all non-strategic PSUS to 26 percent or lower, restructure or revive

2. potentiallyviable PSUs, close down PSUs, whichcannot be revived and fullyprotect the inferests of workers Government's
withdrawal fromnoncore sectors is indicatedon considerations of long-term efficient use of capital, growingfinancial un-
viabilityandthe compulsions for these PSUs to operate inanincreasinglycompetitive and market orientedenvironment
(Disinvestment Commission, 1997).
ii) Implementation ofMemorandum ofUnderstanding(MOU):
As a part of the measures to improve the performance of public enterprises, more and more ofpublic sector units have
been brought under the purviewof Memorandumof Understanding(MoU)system. A memorandum of understandingis a
performance contract, a freelynegotiated document betweenthe Government and a specific public enterprise.
iii)Referral to BIFR:
Manysickpublic sector units have beenreferredto the Boardfor Industrial and FinancialReconstruction(BIFR) for
rehabilitationor, where necessary, for winding up.
iv) Manpower Rationalization:
In order to make manpower rationalizationVoluntaryRetirement Scheme (VRS) has been
introduced ina number of PSUs to shedthe surplus manpower
v)Private EquityParticipation:
PSUs have been allowed to raise equityfinance fromthe capital market. This has providedmarket pressure onPSUs to
improve their performance.
vi) Disinvestment and Privatization :
Disinvestment and privatizationof existing PSUs hasbeen adoptedto improve corporate efficiency, financial performance
and competition amongst PSUs. It involves transfer of Government holdinginPSUs to the private shareholders.
2.Industrial Delicensing:
The removal of licensing requirements for industries, domestic as well as foreign, commonlyknownas "de-licensing of
industries" is another important feature of NIPTillthe 1990s, licensing was compulsoryfor almost everyindustry, which
was not reservedfor the public sector. Thislicensingsystemwas applicable to all industrial enterprises having investment
in fixed assets (which include land, buildings, plant & machinery) above a certainlimit. With progressive liberalizationand
deregulationof the economy, industriallicense is requiredinveryfew cases. Industrial licenses are regulatedunder the
Industries(Development and Regulation)Act 1951. At present, industrial license is requiredonlyfor the following:
i)Industries retained under compulsorylicensing(five industries are reservedunder thiscategory).
ii)Manufacture ofitems reserved for small scale sector bylarger units:
An industrial undertaking is defined as small scale unit ifthe capitalinvestment doesnot exceedRs. 10 million
(approximately$ 222, 222). The Government has reserved certainitems. for exclusive manufacture inthe small-scale
sector. Nonsmall-scale units canmanufacture items reservedfor the smallscale sector iftheyundertake an obligationto
export 50 percent of the productionafter obtaining anindustriallicense.
ii) Whenthe proposedlocation. attracts locational restriction:
Industrial undertakings to be located within25 kms of the standardurban area limit of23 citieshaving a populationof 1
millionas per 1991 census require an industrial license.Thus, excluding these, investors are free to set upa newindustrial
enterprise, expandan Industrial enterprise substantially, change the location ofanexistingindustrial enterprise and

3. manufacture a new product throughanalreadyestablishedindustrial enterprise. Theobjective of industrialdelicencing
wouldbe to enable business enterprisesto respondto the fast changing external conditions Entrepreneurs will be free to
make investment. decisions on the basisof their owncommercial judgment. This will facilitate the technological dynamism
and international. competitiveness. Further industries willhave freedomto take advantage of 'economies of scale as well
as 'economies of scope'inthe current industrialpolicyenvironment
3.Amendment of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969:
An important objective ofIndia's earlier Industrial policies was to prevent emergence of private monopolies and
concentrationof economic power ina few individuals. Accordingly, Monopolies andRestrictive) Trade Practices (MRTP)
Act, 1969 was enactedandMRTPCommission was set upas a permanent bodyto periodicallyreview industrialownership,
advice the government to prevent concentrationof economic power, investigate monopolistic trade practicesandinquire
into restrictive trade practices, whichare prejudicial to public interest. An MRTPfirm was mainlydefinedinterms of asset
size. An MRTPcompanyhadto obtain prior approval ofthe government for setting upa newenterprise as well as for
expansion. However, MRTPAct was applicable onlyto private sector companies.
Since 1991 MRTPAct has been restructured and pre-entryrestrictions have been removedwith regardto prior approvalof
the government for the establishment ofa newundertaking, expansion, amalgamation, merger, take over, and
appointment ofdirectors ofcompanies. The asset restriction and market share for defininganMRTPfirm. has beendone
awaywith. MRTPAct is nowapplicable to both private and public sector enterprises andfinancial institutions. Todayonly
restrictive trade practices ofcompanies are monitoredandcontrolled. The MRTPact hasbeen replaced bythe Competition
Act, 2002. This lawaims at upholding competition inthe Indianmarket. The competitioncommission hasbeenestablished
in 2003 which mainlycontrol the practice that have an adverse impact oncompetition.
4. LiberalizedForeignInvestment Policy:
India's earlier industrialpolicies welcomedFDI but emphasizedthat ownershipandcontrol of all enterprisesinvolving
foreignequityshould be in Indian hands. The Balance ofPayments (BoP) difficultiesinthe mid 1960s forced the countryto
adopt a more restrictive approachtowards FDI through the setting upof a Foreign Investment Board, whichclassified
industries intotwo groups:bannedandfavoredfor foreign technical collaborationandFDI. The number of industriesfor
foreigninvestment wassteadilynarroweddownandby1973 there were only19 industries where FDI was permitted
(Kucchal, 1983).
The enactment of FERA, 1973 markedthe beginning of the most restrictive phase ofIndia's foreigninvestment policy. The
NIPradicallyreformedforeigninvestment policyto attract foreigninvestment. The important foreign investment policy
measures are as follows:
i) Repealof FERA, 1973:
FERA, 1973 has been repealed and Feign Exchange Management Act (FEMA) has come intoforce with effect fromJune
2000 (RBI, 2003). Investment and returns canbe freelyrepatriated except where the approval is subject to specific
conditions suchas lock-inperiod onoriginalinvestment, dividendcap, foreignexchange neutrality, etc. as specified in the
sector specific policies. The conditionof 'dividend balancing' waswithdrawnfor dividends declared. A foreign investor can
freelyenter, invest andoperate industrial enterprises in India,
ii)Dilution ofRestrictions onForeignDirect Investment (FDI):
FDI is allowedinall sectors including the services sector except atomic energyandrailwaytransport. FDI in
small scale industriesis allowed upto 24 percent equity. Use of brandnames/trade marks is allowed.
Further, FDI upto 100 percent is allowedunder the automatic route inall activities/sectors except the
following which require prior approval of the Government:
 Sectors prohibited for FDI;
 Activities/items that require anindustrial license;

4.  Proposalsinwhich the foreigncollaborator hasanexistingfinancial/ technicalcollaboration in Indiainthe same
field;
 Proposalsfor acquisitions ofshares inanexistingIndiancompany in financial service sector andwhere
SecuritiesandExchange Boardof India (substantialacquisitionof shares andtakeovers)regulations, 1997 is
attracted;
 All proposals falling outside notifiedsectoralpolicy/CAPS under sectors in whichFDI is not permitted.
Thus most of the sectors fall under the automatic route for FDI.
5. Foreign TechnologyAgreement:
The automatic approvals for technologyagreement are allowedto industrieswithin specifiedparameters. Indian
companies are free to negotiate the terms oftechnologytransfer withtheir foreign counterparts according to their own
commercial judgment.
6.Dilution ofProtectionto Small Scale Industries(SSI)andEmphasis onCompetitiveness:
SSIs enjoyed a unique status in Indian economydue to its diversified presence acrossthe countryandtherebyutilizing
resources and skills, whichwouldhave otherwise remainedunutilized. Due to their potential to generate large-scale
employment, produce consumer goods ofmass consumption, alleviate regional disparities, etc., Industrialpolicies
protectedthe sector for its growth.
DemarcatingSSI from the rest of industrythrough a definitionunder the IDRAct, 1951,
i)The principalprotective measures for SSI comprised
ii) Concessional credit from the banking system,
iii) Fiscal concessions,
iv) Exemptionfromindustrial licensing andlabor legislations,
v) Preferential access to scarce rawmaterials, bothdomestic and imported, vi)Market support from the government
through reservationof products for government purchase andprice preferences, and
vii) Reservationof products for exclusive manufacturing inSSIsandrestrictions onthe growthof output andcapacityin the
large-scale sector for products reserved for SSI manufacturing. These policymeasuresprotectedSSIs frombothinternal
and external com