Industrial Policies in India Part-2

By Sudheer Kumar K|Updated : November 1st, 2020

With the Industrial Policy 1991 policy, the government started the very process of economic reforms in the economy. This policy has changed the nature and scope of the Indian economy.

Industrial Policy 1991

Conditions before Economic Reforms, 1991

  • Increase in Imports: Gradual import liberalization after 1976 had manifested itself in the rapid growth of imports, especially that of intermediate and capital goods. This increased the import bill.
  • International Aid: After 1976, International aid and loans started drying up
  • Drought: The severe drought and the global oil shock of 1979 came in this backdrop of fiscal irresponsibility, rapid monetary expansion and political instability during the time.
  • Failure of PSUs: Poor performance of public sector undertakings
  • Gulf War: Higher oil prices had fastly depleted India’s foreign reserves due to the Gulf War (1990–91).
  • Drop-in Remittances: Sharp decline in the private remittances from the overseas Indian workers in the Gulf region during the Gulf war.
  • Inflation was in double-digit at 17 per cent.
  • Fiscal Deficit: The gross fiscal deficit of the Central Government had reached 8.4 per cent of the GDP.
  • BoP Crises: By June 1991, India’s foreign exchange (FOREX reserves) had declined to just two weeks of import coverage.

Tackling the economic crises of the 1990s, the Government of India sought economic assistance from the World Bank and IMF (International Monetary Fund). They lend a line of credit of around $ 7 Billion with a set of conditionalities.

These conditionalities were codified into a series of economic reforms, which came to be known as New Economic Policy (NEP). The new policy ushered in Liberalisation, Privatisation and Globalisation (LPG) replacing draconian Licence-Permit-Quota raj.


The Highlights of Industrial Policy (Economic Reforms) 1991

  • De-reservation of the Industries
    • The industries which were reserved for the Central Government by the IPR, 1956, were reduced to only eight.
    • At present, there are only two industries (atomic energy and nuclear research and other related activities; some railway operations) which are fully or partially reserved for the Central Government.
  • De-licencing of the Industries
    • The number of industries placed under the compulsory provision of licencing (belonging to Schedules B and C as per the IPR, 1956) was reduced to only 18.
    • Later further de-licenced 14 more industries by successive governments.
    • At present there are only four industries which require compulsory licencing:
      • Tobacco, cigarette and associated products
      • Gun powder, industrial explosives and detonating fuse
      • Dangerous chemicals
      • Aerospace and defence related electronics
  •  Abolition of the MRTP Limit
    • The MRTP limit was ₹100 crore so as to facilitate mergers, acquisitions and takeovers of the industries.
    • However, in 2002, the Competition Act was passed in place of the MRTP Act. In place of the MRTP Commission, the Competition Commission has been established.
  • Promotion to Foreign Investment
    • The policy encouraged foreign investment (FI) —direct (FDI) and indirect (PIS).
    • Foreign Direct Investment:
      • Through FDI, MNCs were allowed to set up their firms in India in the different sectors varying from 26 per cent to 100 per cent ownership
    • Portfolio Investment Scheme (PIS):
      • SEBI registered foreign institutional investors (FIIs) were allowed to invest in Indian stock market.
      • India has not allowed individual foreign investment in the security market till today.
    • FERA Replaced by FEMA
      • The restrictive, draconian FERA was replaced with a highly liberal Foreign Exchange Management Act (FEMA).
    • Location of Industries
      • The procedure to follow for the location of industries was cumbersome and time-consuming. This policy replaced the old regime.
    • The policy classified industries into ‘polluting’ and ‘non-polluting’:
      • Non-polluting industries might be set up anywhere.
      • Polluting industries to be set up at least 25 km away from the million cities
    • Compulsion of Phased Production Abolished
      • Restrictions over the production limits were abolished. With this private firms could go for producing as many goods and models according to their capacity.
    • Compulsion to Convert Loans into Shares Abolished: Private companies, which were not capable of paying back loans, are obliged to convert their loans into shares. That converting their private ownership into the public sector- nationalisation of private companies. This system was abolished by the 1991 economic policy.


The outcome of the 1991 Economic Reforms

  • LPG replaced License-Permit-Quota Raj. Goodbye to ‘Control Regime’.
  • Role of state minimised, and that of Private maximised in economy
  • The Indian economy was open to the world market. Foreign companies entry become much easier
  • Change in the orientation of bureaucratic system etc.
  • Tax reforms were initiated
  • Banking Reforms etc. have started.
  • Fiscal Responsibility and Budget Management Act etc.

The detailed analysis of the impact of the economic policy 1991 will be discussed later.

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