Industrial Policy of 1991

3/4/2018
N. M. Leepsa
LMT School of Management
leepsa@thapar.edu
1
3/4/2018
LEARNING OBJECTIVES
 Meaning of Industrial Policy?

 Need for Industrial Policy in 1991
 Objectives of Industrial Policy in 1991
 Salient Features of Industrial Policy in 1991
 Criticism against Industrial Policy in 1991
 Concluding remarks
UMB501 INDUSTRIAL POLICY AND PLANNING L M Thapar School of Management © N. M. Leepsa

2
UMB501 INDUSTRIAL POLICY AND PLANNING L M Thapar School of Management © N. M. Leepsa 3/4/2018
WHY POLICIES? WHY INDUSTRIAL?
 Policies are framed to  Economic environment

provide direction to of a country is
obtain an end. influenced by industrial
production and its
contribution to GDP.
WHY TO LEARN INDUSTRIAL POLICY?

3
INDUSTRIAL POLICY
 The Industrial Policy plan of a country aim to
encourage the development and growth of
the industrial sector of the economy.
 The government takes measures "aimed at
improving the competitiveness and capabilities
of domestic firms and promoting structural
transformation.
 Industrial policies are sector specific, unlike
broader macroeconomic policies.
Source: Industrial policy available at http://en.wikipedia.org/wiki/Industrial_policy
4
INDUSTRIAL POLICY
 It covers all those procedures, principles, policies,

rules, regulations which control the industrial
undertakings of the country and shape the pattern
of industrialization (Datta & Sundharam, 1997)
 It incorporates fiscal and monetary policies, tariff
policies, labour policy, government attitude, not
only towards external assistance but public and
private sectors also. (Datta & Sundharam, 1997)
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INDUSTRIAL POLICY
 Industrial policy is concerned with

 Industrialdevelopment
 Location and functioning of industrial
establishments
 Ownership pattern of industries
 Rate of growth of industries
 It indicates the respective areas of small,

medium, large scale sectors
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INDUSTRIAL POLICY
 It indicates the relationship between
government and business and thus considered
as most important document of country.
 It gives clear guidelines for promoting and
regulating industries.
 It shapes, guides, fosters, regulates , controls
the industrial development of a country.
 Industrial policy is not an Act, so violation of it
cannot be challenged in court of law.
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TIMELINE OF INDUSTRIAL POLICY REFORMS
•Red tapism in •Private sector •No radical •Closure of •Failed to

public sector pushed to changes in district industries promote small
•Progress of backdrop foreign •Rate of GDP scale industries
private sector not •Hampered collaborations went down
possible private •Failed to Limit •Denying of
•Co-ordination entrepreneurs production of availability of
problems between •Private sector articles funds
government & took benefit of •Denying of •Infrastructure
public sector loopholes availability of industries
•State was funds affected
overburdened 8
THERE IS NOTHING MORE HORRIFYING THAN STUPIDITY IN ACTION.
- Jawaharlal Nehru
9
Taking a good hard

look at what in fact
has happened in
India over the last
decade and a half, it
is evident that public
and private
enterprises have not
remained in the
categories prescribed
by the industrial
policy resolution
--GUNNAR MYRDAL, NOBEL LAUREATE ECONOMIST, IN ASIAN DRAMA 1968
10
A MAJOR SHIFT IN THE INDUSTRIAL POLICY WAS MADE BY THE CONGRESS (I)
GOVERNMENT LED BY MR. P.B. NARASIMHA RAO ON JULY 24, 1991.
11
RATIONALE FOR NIP 1991

 To unshackle the country's industrial economy
from the cobwebs of unnecessary bureaucratic
control
 To introduce liberalisation with a view to integrate
the Indian economy with the world economy
 To remove restrictions on foreign direct investment
 To free the domestic entrepreneur from the
restrictions of MRTP Act.
 To shed the load of the public enterprises which
have shown a very low rate of return or are
incurring losses over the years.
12
MAIN OBJECTIVES OF INDUSTRIAL POLICY
 To maintain a sustained growth in productivity

 To enhance gainful employment
 To achieve optimum utilization of human

resources
 To attain international competitiveness
 To transform India into a major partner and

player in global arena
13
ANCILLARY OBJECTIVES OF INDUSTRIAL POLICY

 To help in establishing the goal of social pattern of society as
accepted by the parliament in December 1954
 To prevent undue economic concentration of economic power
and avoid emerge of monopolies in private sector
 To give encouragement to small scale cottage and handicrafts
as also to cooperate industrial sector of Indian economy
 To bring about development of basic and heavy industries with
a view to reduce dependence of country on foreign countries in
case of essential and vital goods and services
 To take steps to promote export of industrial goods so that
India can have its due share in world export trade.
 To remove regional disparities by establishing public sector
industries in economically backward regions of the country or
providing subsidy to private sector for establishing units in
these areas. 14
FOCUS OF INDUSTRIAL POLICY
 Deregulating Indian industry

 Allowing the Industry freedom and flexibility in
responding to market forces
 Providing a policy regime that facilitates and
fosters the growth of Indian industry
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AREAS OF REFORMS
 Industrial Licensing
 Foreign Investment
 Foreign Technology Policy
 Public Sector Policy
 MRTP Act
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INDUSTRIAL LICENSING POLICY

 Industrial Licensing will be abolished for all
projects except for a short list of industries.
 Areas where security and strategic concerns
predominate will continue to be reserved for
the public sector
 Reservation of products in the small scale
industries sector will continue.
 In projects where imported capital goods are
required, automatic clearance will be given
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FOREIGN INVESTMENT
 Approvals will be given for direct foreign investment up
to 51 per cent foreign equity in high priority industries
 The import of components, raw materials, and payment
of know-how fees and royalties will be governed by the
general policy applicable to other domestic units
 The payment of dividends would be monitored through
the Reserve Bank of India
 Foreign equity proposals need not necessarily be
accompanied by foreign technology agreements.
 A special empowered Board would be constituted to
negotiate with a number of large international firms and
approve direct foreign investment in select areas.
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FOREIGN TECHNOLOGY AGREEMENTS
 Authentic permission will be given or foreign

technology agreements in high priority
industries
 All other proposals will need special approval
under the general procedures in force.
 No permission will be necessary for hiring of
foreign technicians and foreign testing of
indigenously developed technologies.
19
PUBLIC SECTOR
 Portfolio of public sector investments will be reviewed with a
view to focus the public sector on strategic, high-tech and
essential infrastructure.
 Public enterprises which are chronically sick, be referred to the
Board for Industrial and financial Reconstruction (BIFR) or
other similar high level institutions created for the purpose.
 Boards of public sector companies would be made more
professional and given great powers.
 Management would be granted greater autonomy and will be
held accountable.
 To facilitate a fuller discussion on performance, the MOU
signed between Government and the public enterprise would
be placed in Parliament.
20
MRTP ACT
 The MRTP Act will be amended to remove the threshold
limits of assets in respect of MRTP companies and dominant
undertakings. This eliminates the requirement of prior
approval of Central Government for establishment of new
undertakings, expansion of undertakings, merger and
takeover and appointment of Directors under certain
circumstances.
 Emphasis will be placed on controlling and regulating
monopolistic, restrictive and unfair trade practices.
 Necessary comprehensive amendments will be made in the
MRTP Act in this regard and for enabling the MRTP
Commission to exercise penalty and compensatory powers.
21
OVERALL MAIN FEATURES OF THIS POLICY

 Except some specified industries (security and strategic
concerns, social reasons, environmental issues, hazardous
projects and articles of elitist consumption) industrial licensing
would be abolished.
 Foreign investment would be encouraged in high priority areas
up to a limit of 51 per cent equity.
 Government will encourage foreign trading companies to assist
Indian exporters in export activities.
 With a view to injecting the desired level of technological
dynamism in Indian industry, the government will provide
automatic approval for technology agreements related to high
priority industries.
 Relaxation of MRTP Act (Monopolies and Restrictive Practices
Act) which has almost been rendered non-functional.
22
OVERALL MAIN FEATURES OF THIS POLICY CONTD …

 Dilution of Foreign Exchange Regulation Act (FERA) making
rupee fully convertible.
 Disinvestment of Public Sector Units' shares.
 Closing of such public sector units which are incurring heavy
losses.
 Abolition of C.C.I, and wealth tax on shares.
 General reduction in customs duties.
 Provide strength to those public sector enterprises which fall
in reserved areas of operation or in high priority areas.
 Constitution of special boards to negotiate with foreign firms
for large investments in the development of industries and
import of technology
23
CRITIQUE OF THE INDUSTRIAL POLICY 1991
 It removes the limit of assets fixed for MRTP

Companies and dominant undertakings.
 It provides 51% foreign equity in high priority
industries and may raise the limit to 100% in case
the entire output is exported.
 The self reliance aspect has been completely
ignored.
 Spatial disparity in economic development.
 Develop monopolistic outlook and may indulge in
unfair trade practices.
25
Industrial policy aim to unshackle

from administrative and legal
controls
26
MERITS
 Privatization will automatically lead to

Efficiency
 Increase in Production
 Liberalization by removing licence raj
 Proper significance to small scale sector
 Overall relief from regime of control
27
UMB501 INDUSTRIAL POLICY AND 3/4/2018
PLANNING L M Thapar School of
Management © N. M. Leepsa
SHORTCOMINGS
 Reduction in the role of public sector

 Concentration of economic power
 Increase in regional balance
 Adverse effect on economic sovereignty
 Adverse effect on small scale sector
 Ignores social objectives
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3/4/2018
REFERENCES
 Industrial policy, pp-100-
http://books.google.co.in/books?id=06X98_m6zBEC&lpg=PA103&ots=Uqb
YAZnzDU&dq=industrial%20policy%201948%20demerits&pg=PA101#v=on
epage&q=industrial%20policy%201948%20demerits&f=true
 New Industrial Policy, 1991 available from http://www.gktoday.in/new-
industrial-policy-1991/
 Short notes on Industrial Policy, 1991, available from
http://www.preservearticles.com/2012013022068/short-notes-on-
industrial-policy-1991.html
 Review of the list of items reserved for manufacture in small scale
industries available from
 http://www.dcmsme.gov.in/publications/reserveditems/itemrese.htm?GXH
C_GX_jst=5a6d707a662d6164&GXHC_gx_session_id_=c83704b870f2d4b
6&
UMB501 INDUSTRIAL POLICY AND PLANNING L M Thapar School of Management © N. M. Leepsa

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3/4/2018

 Meaning of Industrial Policy?

 Objectives of Industrial Policy in 1991

 Salient Features of Industrial Policy in 1991

 Criticism against Industrial Policy in 1991

UMB501 INDUSTRIAL POLICY AND PLANNING L M Thapar School of Management © N. M. Leepsa

WHY POLICIES? WHY INDUSTRIAL?

 Policies are framed to  Economic environment

WHY TO LEARN INDUSTRIAL POLICY?

 It covers all those procedures, principles, policies,

 Industrial policy is concerned with

 Rate of growth of industries

 It indicates the respective areas of small,

TIMELINE OF INDUSTRIAL POLICY REFORMS

•Red tapism in •Private sector •No radical •Closure of •Failed to

THERE IS NOTHING MORE HORRIFYING THAN STUPIDITY IN ACTION.

Taking a good hard

--GUNNAR MYRDAL, NOBEL LAUREATE ECONOMIST, IN ASIAN DRAMA 1968

RATIONALE FOR NIP 1991

MAIN OBJECTIVES OF INDUSTRIAL POLICY

 To maintain a sustained growth in productivity

 To achieve optimum utilization of human

 To transform India into a major partner and

ANCILLARY OBJECTIVES OF INDUSTRIAL POLICY

FOCUS OF INDUSTRIAL POLICY

 Deregulating Indian industry

 Foreign Technology Policy

 Public Sector Policy

INDUSTRIAL LICENSING POLICY

FOREIGN TECHNOLOGY AGREEMENTS

 Authentic permission will be given or foreign

OVERALL MAIN FEATURES OF THIS POLICY

OVERALL MAIN FEATURES OF THIS POLICY CONTD …

CRITIQUE OF THE INDUSTRIAL POLICY 1991

 It removes the limit of assets fixed for MRTP

Industrial policy aim to unshackle

 Privatization will automatically lead to

 Liberalization by removing licence raj

 Proper significance to small scale sector

 Overall relief from regime of control

 Reduction in the role of public sector

 Increase in regional balance

 Adverse effect on economic sovereignty

 Adverse effect on small scale sector

 Ignores social objectives

UMB501 INDUSTRIAL POLICY AND PLANNING L M Thapar School of Management © N. M. Leepsa

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