Industrial Economics

1. D R . S U N I TA S U K H I J A
A S S I S TA N T P R O F E S S O R I N C O M M E R C E
G O V T. N AT I O N A L C O L L E G E , S I R S A ( H RY )
New Industrial Policy, 1991

2. Introduction
 The new government by Shri Narasimha Rao, which took office in
June 1991, announced a package of liberalisation measures under
its Industrial Policy on July 24, 1991. The New Industrial
Policy,1991 seeks to liberate the industry from the shackles of
licensing system Drastically reduce the role of public sector and
encourage foreign participation in India’s industrial development.
 Beginning with mid-1991, the govt. has made some radical changes
in its policies related to foreign trade, Foreign Direct Investment,
exchange rate, industry, fiscal discipline etc. The various elements,
when put together, constitute an economic policy which marks a big
departure from what has gone before.
 The thrust of the New Economic Policy has been towards
creating a more competitive environment in the economy as a
means to improving the productivity and efficiency of the
system. This was to be achieved by removing the barriers to entry
and the restrictions on the growth of firms.

3. Objectives:
 (i) Liberalising the industry from the regulatory devices
such as licenses and controls.
 (ii) Enhancing support to the small scale sector.
 (iii) Increasing competitiveness of industries for the
benefit of the common man.
 (iv) Ensuring running of public enterprises on business
lines and thus cutting their losses.
 (v) Providing more incentives for industrialisation of the
backward areas, and
 (vi) Ensuring rapid industrial development in a
competitive environment.

4. Main Features of NIP,1991
 1) Abolition of Industrial Licensing:
 The new industrial policy abolishes the system of industrial licensing for most of the industries under this policy no
licenses are required for setting up new industrial units or for substantial expansion in the capacity of the existing
units, except for a short list of industries relating to country’s security and strategic concerns, hazardous industries
and industries causing environmental degradation. To begin with, 18 industries were placed in this list of industries
that require licenses. Through later amendment to the policy, this list was reduced. .There are only 4 industries at
present related to security, strategic and environmental concerns, where an industrial license is currently required-
 Electronic aerospace and defence equipment
 Specified hazardous chemicals
 Industrial explosives
 Cigars and cigarettes of tobacco and manufactured tobacco substitutes
 (2) De-reservation of Industries for Public Sector:
 The public sector which was conceived as a vehicle for rapid industrial development, largely failed to do the job
assigned to it. Most public sector enterprises became symbols of inefficiency and imposed heavy burden on the
government through their perpetual losses. Since a large field of industry was reserved exclusively for public sector
where it remained a virtual non performer (except for a few units like the ONGC). The industrial development was
thus the biggest casualty. Later, a few more industries were de-reserved and now the exclusive area of the public
sector remains confined to only 4 industrial sectors which are: (i) defence production, (ii) atomic energy, (iii)
railways and (iv) minerals used in generation of atomic energy. Presently, only two sectors- Atomic Energy
and Railway operations- are reserved exclusively for the public sector.
 Disinvestment in selected public sector industrial units:
 As a measure to raise large resources and introduce wider private participation in public sector units, the
government would sell a part of its share holding of these industries to Mutual Funds, financial institutions,
general public and workers.

5.  (3) Liberalised Policy Towards Foreign Capital and Technology:
 The inflow of foreign capital and import of technology was tightly regulated under the
earlier Industrial policy. Each proposal of foreign investment was to be cleared by the
Government in advance. Wherever foreign investment was allowed, the share of foreign
equity was kept very low so that majority of ownership control remains with Indians.
Liberalisation of Foreign Investment: This was the first Industrial policy in which
foreign companies were allowed to have majority stake in India. In 47 high priority
industries, upto 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.
 Foreign Technology Agreement: Automatic approvals for technology related
agreements.
 (4) Changes in the MRTP Act:
 According to the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, all big
companies and large business houses (which had assets of Rs. 100 crores or more,
according to the 1985 amendment to the Act) were required to obtain clearance from the
MRTP Commission for setting up any new industrial unit, because such companies
(called MRTP companies) were allowed to invest only in some selected industries. The
Industrial Policy, 1991 has put these industries on par with others by abolishing those
provisions of the MRTP Act which mediate mandatory for the large industrial houses to
seek prior clearance from MRTP Commission for their new projects. MRTP Act was
amended to remove the threshold limits of assets in respect of MRTP companies and
dominant undertakings. MRTP Act was replaced by the Competition Act 2002.

6.  5) Greater Support to Small-Scale Industries:
 The New Industrial Policy seeks to provide greater government support to the
small-scale industries so that they may grow rapidly under environment of
economic efficiency and technological upgradation. A package of measures
announced in this context provides for setting up of an agency to ensure that credit
needs of these industries are fully met. It also allows for equity participation by the
large industries in the small scale sector not exceeding 24 per cent of their total
shareholding.
 6) Other Provisions:
 Besides above discussed measures, the Industrial Policy 1991 announced some
more steps to promote rapid industrial development. It said that the government
would set up a special board (which was established as Foreign Investments
Promotion Board—FIPB) to negotiate with a number of international companies for
direct investment in industries in India.
 It also announced the setting up of a fund (called National Renewal Fund) to
provide social security to retrenched workers and provide relief and rehabilitate
those workers who have been rendered unemployed due to technological changes.
 The New Policy also removed the mandatory convertibility clause under which the
Public Sector Financial Institution were asked to convert the loans given by them to
private industries in equity (shares) and thus become partners in their
management.


7. 1. Liberalisation
 Removal of Industrial Licensing and Registration:
 Previously private sector had to obtain license from Govt. for starting a new venture.
In this policy private sector has been freed from licensing and other restrictions.
 Industries licensing is necessary for following industries:
 (i) Liquor
 (ii) Cigarette
 (iii) Defence equipment
 (iv) Industrial explosives
 (v) Drugs
 (vi) Hazardous chemicals
 Following steps were taken under the Liberaliation measure:
 (i) Free determination of interest rate by the commercial Banks:
 Under the policy of liberalisation interest rate of the banking system will not be
determined by RBI rather all commercial Banks are independent to determine the
rate of interest.
 (ii) Increase in the investment limit for the Small Scale Industries (SSIs):
 Investment limit of the small scale industries has been raised to Rs. 1 crore. So these
companies can upgrade their machinery and improve their efficiency.
 (iii) Freedom to import capital goods:
 Indian industries will be free to buy machines and raw materials from foreign
countries to do their holistic development.

8. 2. Privatisation:
 The main reason for privatisation was in currency of PSU’s are running in losses due
to political interference. The managers cannot work independently. Production
capacity remained under-utilized. To increase competition and efficiency privatisation
of PSUs was inevitable.
 Step taken for Privatisation:
 1. Sale of shares of PSUs:
 Indian Govt. started selling shares of PSU’s to public and financial institution e.g.
Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire ownership
of these PSU’s. The share of private sector has increased from 45% to 55%.
 2. Disinvestment in PSU’s:
 The Govt. has started the process of disinvestment in those PSU’s which had been
running into loss. It means that Govt. has been selling out these industries to private
sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector.
 3. Minimisation of Public Sector:
 Previously Public sector was given the importance with a view to help in
industralisation and removal of poverty. But these PSU’s could not able to achieve this
objective and policy of contraction of PSU’s was followed under new economic
reforms. Number of industries reserved for public sector was reduces from
17 to 2.
 (a) Railway operations
 (b) Atomic energy

9. 3. Globalization:
 Literally speaking Globalisation means to make Global or worldwide, otherwise
taking into consideration the whole world. Broadly speaking, Globalisation
means the interaction of the domestic economy with the rest of the world with
regard to foreign investment, trade, production and financial matters.
 Steps taken for Globalisation:
 (i) Reduction in tariffs:
 Custom duties and tariffs imposed on imports and exports are reduced gradually
just to make India economy attractive to the global investors.
 (ii) Long term Trade Policy:
 Forcing trade policy was enforced for longer duration.
 (a) Liberal policy
 (b) All controls on foreign trade have been removed
 (c) Open competition has been encouraged.
 (iii) Partial Convertibility of Indian currency:
 Partial convertibility can be defined as to convert Indian currency (up to specific
extent) in the currency of other countries. So that the flow of foreign investment
in terms of Foreign Institutional Investment (FII) and foreign Direct Investment
(FDI).
 iv) Increase in Equity Limit of Foreign Investment:
 Equity limit of foreign capital investment has been raised from 40% to 100%
percent. In 47 high priority industries foreign direct investment (FDI) to the
extent of 100% will be allowed without any restriction.

10. Outcomes of New Industrial Policies
 The 1991 policy made ‘Licence, Permit and Quota Raj’ a
thing of the past. It attempted to liberalise the economy
by removing bureaucratic hurdles in industrial growth.
 Limited role of Public sector reduced the burden of the
Government.
 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, Export Processing Zones,
Agri-Export Zones, Special Economic Zones and lately National
Investment and Manufacturing Zones emerged. All these have
benefitted the export sector of the country.

11. Limitations of Industrial Policies in India
 Stagnation of Manufacturing Sector: Industrial policies in India
have failed to push manufacturing sector whose contribution to GDP is
stagnated at about 16% since 1991.
 Distortions in industrial pattern owing to selective inflow of
investments: In the current phase of investment following
liberalisation, while substantial investments have been flowing into a few
industries, there is concern over the slow pace of investments in many
basic and strategic industries such as engineering, power, machine tools,
etc.
 Displacement of labour: Restructuring and modernisation of
industries as a sequel to the new industrial policy led to displacement of
labour.
 Absence of incentives for raising efficiency: Focussing attention
on internal liberalisation without adequate emphasis on trade policy
reforms resulted in ‘consumption-led growth’ rather than
‘investment’ or ‘export-led growth’.
 Vaguely defined industrial location policy: The New Industrial
Policy, while emphasised the detrimental effects of damage to the
environment, failed to define a proper industrial location policy, which
could ensure a pollution free development of industrial climate.

12. Way Forward
 Industrial policies in India have taken a shift from
predominantly Socialistic pattern in 1956 to Capitalistic
since 1991.
 India now has a much liberalised industrial policy regime focusing
on increased foreign investment and lesser regulations.
 India ranked 77th on World Bank’s Doing Business Report 2018.
Reforms related to insolvency resolution (Bankruptcy and
Insolvency Act, 2017) and the Goods and Services Taxes
(GST) are impressive and will result in long-term gains for the
industrial sector.
 Campaigns such as Make in India and Start up India have
helped to enhance the business ecosystem in the country.
 However, electricity shortages and high prices, credit constraints,
high unit labour costs due to labour regulations, political
interference and other regulatory burdens continue to remain
challenges for firm growth of the industrial sector in India.

13. Thanks