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INSIGHTSSimplifyingUPSCIASExamPreparation
insightsonindia.com

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India:IndustrialPolicy,LiberalizationandImpact
ByINSIGHTS

SyllabusmentionsEffectsofliberalizationontheeconomy,changesinindustrialpolicyandtheireffectson
industrialgrowth.
TableofContent
1. Introduction
2. Whyindustrialpolicy?
3. Argumentsagainstindustrialpolicy
4. CommoninstrumentsofIndustrialPolicy
5. EvolutionandChangesinIndustrialPolicyinIndia

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Introduction
Oneofthemostimportanttasksofthegovernmentistomanageeconomyofthecountry.Ithastodecidethe
meansandmethodstobeusedtowardsthis.However,thisjobwastakenupbyalmostallcountriesonlyafter
greatdepression.Inpredepressionera,therewasfaithinlaissezFairemodelofeconomy,whichliterally
meansnointerventionandletmarketforcesofdemandandsupplyhavefreehand.Thisisalsoknownas
capitalistmodeofeconomy,wheregoodsandservicestobeproducedaredecidedbypurchasingpowerofthe
people.Inthismodelneedofpeopleisnotdeliberatelyconsidered,butitisbelievedthatfreemarketswill
automaticallytakecareofeveryonesneed.Ifthereareanymismatchesindemandandsupply,thenpriceof
theproductswillfluctuateinordertoropeinoroutsuppliersandconsumersandconsequentlytherewillbe
demandsupplyequilibrium.Thiskeptgovernmentinterventionawaytilltheendofgreatdepressionof1920s.
Greatdepressionbroughtspiralinghyperinflationwhichrenderedwiderangeofcommoditiesunaffordabletothe
masses.Withthisaccompaniedmassiveunemployment.Itbeliedexcessivefaithplacedinfreemarketsandit
demonstratedthatmarketsarenotsacrosanctastherewasabigmarketfailure.FamouseconomistJohn
Keynesmadeoutcompellingcaseforgovernmentintervention,throughincurringfiscaldeficittocreate
demand.Itwasclearthatgovernmentwillhavetomanageproductionpatternsofeconomyandpromote
productionofspecificgoodsininterestofconsumersandemployment.RooseveltsNewDealinUSmadeit
quiteclearthatnowUSgovernmentwillinterveneforpromotingkeyindustries.
AnothermajorfactorwasofRussianRevolution.WithestablishmentofsocialistgovernmentinRussia,there
wasasentimentalwaveagainstconceptoffreemarkets.Governmentsalloverworldextendedfranchise
(votingrights)toworkingclassinthisperiodandlimitedtheinfluenceofcapitalists.Henceforthitbecameeasy
andmustforsuchgovernmentstointerveneininterestofall.Thisstartederaofplanningtodifferentdegreein
differentcountries.Socialistgovernmentswentforimperativeplanningunderwhichproductionwastakenup
bystateandwasdistributedaccordingtoneedsonproportionalbasis.Forasocialistcountrythiswasquite
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natural,butsurprisinglymanyerstwhileproponentsoffreemarketlikeFrance,USAalsotookupplanningin
milderform,whichiscalledindicativeplanning.Underthis,asalreadyexplained,governmentattemptsto
promoteparticularindustriesininterestofconsumersandemployment.
AfterDecolonizationmanycountriesalongwithIndia,haduphilltaskofsocioeconomicdevelopment.Their
economieswereinpastdeliberatelymadeheavilydependentonrespectivecolonialrulingpowers.Industries
andmarketswereininfancy.Newgovernmentshadtomarkpreferencesforchannelizingtheirscarce
resourcestoachievelongtermholisticdevelopment.
Duetoallthesefactors,IndustrialPolicywasadoptedbyvariouscountriesandIndiawasfirstnoncommunist
democraticcountrytohaveanofficialindustrialpolicy.
IndustrialPolicyisatypicalcharacterofamixedeconomy.Itispolicyofgovernmentinterventionwhichis
sectorspecificandisaimedatgivingpreferentialtreatmenttoaparticularsectoroverothers.Sectorare
recognizedbypolicymakers,whichareworthyofgovernmentsupportandtargetsareset.Wehavealready
seengovernmentsupporttowardrenewableenergysector,organicfarming,foodprocessingandexport
promotionofvariousproducts.AllthesearepartofIndustrialpolicy.
WhyIndustrialPolicyisDesirable?
1. KnowledgeSpilloverIndustrieshaveacertaindegreeofknowledgespillovereffectontheeconomy.
Degreeofthiseffectvariesfromsectortosector.Anewindustrywillattractrequisiteskill/talent/expertise
whichwillmultiplyovertime.Further,therewillbesomeancillaryindustrieswhichmaycomeupto
supportsuchindustries.Inshort,focusingonacertainindustrycanovertimeresultintoawhole
industrialcomplexwhichderivessynergiesandeconomiesfromeachother.Fore.g.DefenseIndustry
couldbebenefitedimmenselyifaviationindustry,Software,Highereducational,Spaceexploration
capacitiesarefullydeveloped.SoIndiasspaceprogramprovidessynergytodefensecapacity.
2. InfantIndustryAttimeofIndependence,Indiasindustrywasnonexistentinmostofthesectorsand
thoseexistingwereinfant.Theyhadlowcapacitytoadaptnewtechnologiesortoexploiteconomiesof
scale.Inthiscasegovernmentprotectionisdesirableininitialstages,sothatacompetitiveindustry
developsatlatterstages.Withoutgovernmentsupportorprotectionmanyofthepresentcompetitive
Industries,wouldneverhavecomeup.Inshort,theseindustriesneedprotectionfromforeign
competition.
3. CoordinationFailureAnindustrydoesntexistorsurviveinisolation.Itneedsotherindustrieswhich
feedtoitrawmaterialsatreasonablecostsandquality.Further,manyotherindustriesthatwillactas
customerareneededforsurvivalofthisindustry.Fore.g.Iron&SteelIndustryismostimportantsector
ofeconomy.Itismustforacompetitiveautomobilesector,constructionsector,Infrastructure,Capital
goodsmachinerysector,Defensesector.Ontheotherhand,Ironandsteelsectorcanperformonlyif
thereisavailabilityofcoalandpower.Agoodtransportsectorfacilitatesinteractionandmovementof
goodsinentireeconomy.Ininitialstagesofaneconomytheresoftenacoordinationfailure,which
governmenttriestoaddressbyindustrialpolicy.InIndiathisledtorecognitionofcoreindustrieswhich
havemultipliereffectontheeconomy,theseareIron&steel,Cement,CrudeOil,Gas,PetroRefining,
Mining,Power,Fertilizers.
4. InformationalExternalitiesSettingupanIndustryrequirescertaindegreeofconfidenceinfutureof
thewholeeconomyandthatindustryinparticular.Thereisreasonableriskwhichresultsinreluctanceon
partofinvestors.Thisriskanduncertaintyishighincaseoffirstmoverinanewlyopenedsector.Thisis
becausemarketsfornewproductareuncharteredanduntested,sotheresnoreliabledataor
informationonbasisofwhichriskreturncalculuscanbedrawn.Consequently,governmentsholdhand
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ofafewnewunitsinthatindustrythroughindustrialpolicyandthengraduallyleavethemoftheirown.As
wehaveseeninrenewableenergysector.
Argumentsagainstindustrialpolicy
1. InfluencedbySpecialInterestsTherearealwayspressuregroupsinaneconomythatcompetefor
resourcesofthegovernment.Theytrytoinfluencedecisionsofpolicymakerstocorneralargerthan
deservedshareofnaturalandeconomicresources.Thisway,often,personalinterestprevailsover
nationalinterest.Thisobviouslycreatesavenuesforcorruption,rentseeking,patronage,quidproque
asseeninelections.
2. KnowledgeDeficitAnyindustrialpolicyrequirespredictionoffuturetrendsinaneconomy.Our
experiencetellsusthataneconomyistoughesttopredictandeffortsofplanningandpolicymakingoften
endupbeingfutile.Therearedifferentthinktanksatnationalandinternationallevelthatcomeoutwith
differenteconomicforecasts.Hence,policymakerschoiceofforecastisasubjectiveoneandsuccessis
onlydependentuponotherdevelopmentsineconomy.
3. DistortionofmarketsandproductionpatternsGovernmentsupportdistortspricesofproducts.
Pricesaresignalswhichtellconsumersandproducerswhattoconsumeandproduce.So,dueto
governmentprotectionandsupport,producersfailtoadoptlatesttechnologies,newmarketsetc.This
makesthemuncompetitive.
InstrumentsusedbyIndustrialPolicy
IndiaafterIndependencedeliberatelyoptedtopromoteHeavyCapitalIndustrywhichwastobeunderstate
control.Thiswasimplementedthroughfiveyearplans.After2ndfiveyearplan,whatispopularlycalledNehru
Mahalanobismodelwasadopted.InvestmentsweremadethroughstateownedPSUsinvarioussectorssuch
asHydro/Thermal/Nuclearpower,IronandSteelIndustry(SAIL),Miningetc.
Thattime,therewasanotheropinionfromsomeeminenteconomistsinfavorofsupporttotraditionalhandicraft
sectorandagroeconomy(whichwasGandhianmodel)inIndiawhichwasemploymentintensiveinthiscase,
heavyindustrywillbelefttomarkets.ButCongressgovernmentoptedforMahalanobismodelanddebateover
thischoicestillcontinues.
NehruMahanabolismodelwasinsteadcapitalintensive.Therewasstrongaffinitytoheavyindustryatthattime.
Developedcountriesprogressanddecentstandardoflivingendorsedinvestmentinfavorofheavyindustry.At
sametimegovernmentofUSSRwaspursuingrapidindustrializationandourleaderwereinstronginfluenceof
socialistideasoriginatinginUSSR.
Tobalancethisloophole,Indiassmallscaleindustrywasprotectedfromexternalanddomesticcompetition.
ForprotectionfromexternalcompetitionhighTariffandnonTariffbarrierswereplacedandincaseofinternal
competition,andcertainindustrieswerereservedonlyforsmallscalesector.
Letshavealookatcommonmeans,methodsorinstrumentsofIndustrialPolicy
Useoftariffs/nontariffbarriersandSubsidiesTariffsarecustomdutybarrierswhichareusedtoprotect
domesticindustryofacountryfromexternalcompetition.Itrenderscostsofimportedproductsartificiallyhigh
andgivesadvantagetolocalmanufacturers.Similarlytherearequantitativerestriction(nontariffbarriers)under
whichquotasarefixedlimitingquantitiesofimports.Inpre1990era,thesebothrestrictionswereextremely
high.However,StructuralAdjustmentPlanbyInternationalMonetaryFundandnegotiationsatWTOforced
Indiatobringdownthesebarriers.
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ExampleofautomobilesectorIndiainpastkeptcustomdutiesonautomobilesashighas100200%.This
gavedomesticautomobileindustryanadvantageandopportunitytoexploitdomesticmarkets.Nowwehave
domesticindustrywhichisgloballycompetent.ProductsfromMarutiSuzuki,Mahindra,andTataetc.arealso
exportedtomanycountries.Incontrast,Pakistanaffordedforeignautomobilesunrestricted(orlessrestricted)
accesstoitsmarketsfromverybeginning.Consequently,itdoesnthaveanycompetitivedomesticAutomobile
manufacturingsector.
Anotherwayofsupportistoprovidesubsidy,eitheronpurchase,sale,orinvestment.Examplesforpurchases
farmersareprovidedsubsidizedfertilizers,foroutputstheygetpricesupportandanyinvestmentinfarm
mechanizationandprocessingindustryiseligibleforcapitalorinterestsubventionsubsidy.
ImportSubstitutionAforesaidpoliciesaregenerallytargetedtowardimportsubstitution.Thismeans
importsaretobeavoidedandproductsaretobemanufactureddomestically,eveniftheircostsare
substantiallyhigherorqualityislacking.Thispolicyledtodevelopmentofcapacityintechnologyandinnovation
togreatextentinIndia.
ReservedIndustries
BythisgovernmentreservescertainkindofstrategicIndustriesforitselfandothersforSmallscalesector(more
onthislater)
ApartfromthesethereareothercontrolssuchasLicensingRequirements,underwhichoperationscanbe
commencedonlyafterlicensehasbeengrantedandtermsofoperationofbusinesswilldependuponthose
mentionedinlicense.
EvolutionofIndustrialPolicy
Indiawasneverindustriallydevelopedcountrypriortoindependence.Itwasanagrariancountrywherein
handicraftsattainedsupremacyunmatchedanywhereelseintheworld.Thereareveryfewlinesofeconomic
activitywhichbecametraditionalinnatureandcouldbeincludedundertheproductsproducedunderthefactory
systemof19thand20thcentury.Forinstancesilkmanufacturing,utensilmanufacturing,woodworks,some
productsunderpharmaceuticalsetccouldbecategorizedasindustrialactivity,butmethodswereoften
traditionalandtheyhadtocompetewithcontinuingindustrialrevolutionofwest.
IndustrialpoliciesandeconomicpolicieswereshapedbytheBritishGovernmentinfavourofBritishinterests.
ThetariffpolicypursuedbyBritishinIndiawasbasedontheprincipalofonewayfreetradewhiletheIndian
interestforindustrializationinIndiaremaineddeliberatelyneglected.WhileBritishproducershadunrestricted
accesstoIndianmarkets,IndianproductswerekeptatbaybyBritishindustrialpolicy.Onlyaccesswasallowed
torawmaterials.
ThoughtheBritishGovernmentestablishedDepartmentofCommerceandIndustryin1905buttheactivities
pursuedthroughthisdepartmentfavoredindustrialactivityinEngland.Thereafter,theprevailingGovernment
establishedboardofScientificandIndustrialResearchin1940butnotmuchcouldcomeoutofit.Bythistime
therewerenumerousplanssuchasonebycongressworkingcommittee,Bombayplan,Visvesariyaplanetc.
Almostallofthempropagatedheavyindustrieswithdominantroleofstate.
InIndependentIndiavariousresolutionswerepassedinParliamentfromtimetotime,landmarkshifthappened
in1991whenIndiawasforcedtoopenupitseconomytoglobalcompetitionandgovernmenthadtoderegulate
sectorstoleavespaceforprivateindustry.HerearementionedsomelandmarkshiftsinIndustrialpolicyof
India.
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IndustrialPolicyResolution,1948
Aftergainingindependence,itwasnecessarytohavenewpolicyforindustryofthecountry,todecidepriority
areasandcleardoubtsinthemindsofprivateentrepreneursregardingnationalizationofexistingindustries.
InIndustrialPolicyResolutionof1948,bothpublicandprivatesectorswereinvolvedtowardsindustrial
development.Accordingly,theindustriesweredividedintofourbroadcategories:
(a)Exclusivegovt.MonopolyThisincludesthemanufactureofarmsandammunition,productionandcontrol
ofatomicenergyandtheownershipandmanagementofrailwaytransport.Theseindustriesweretheexclusive
monopolyoftheCentralGovernment.
(b)GovernmentMonopolyforNewUnitsThiscategoryincludedcoal,ironandsteel,aircraftmanufacture,
shipbuilding,manufactureoftelephone,telegraphsandwirelessapparatus(excludingradioreceivingsets)and
mineraloils.NewundertakingsinthiscategorycouldhenceforthbeundertakenonlybytheState.
(c)RegulationThiscategoryincludedindustriesofsuchbasicimportancelikemachinetools,chemicals,
fertilizers,nonferrousmetals,rubbermanufactures,cement,paper,newsprint,automobiles,electric
engineeringetc.whichtheCentralGovernmentwouldfeelnecessarytoplanandregulate.
(d)Unregulatedprivateenterprisetheindustriesinthiscategorywereleftopentotheprivatesector,
individualaswellascooperative.
Themainthrustofthe1948IndustrialPolicywastolaythefoundationofamixedeconomywhereboththe
privateandpublicenterprisesweretobegivenimportanceandworktogethertodevelopeconomytoaccelerate
thepaceofindustrialdevelopment.
IndustrialPolicyResolution,1956
ThiswasmeanttogiveaconcreteshapetothemixedeconomymodelandtheideologyofSocialistpatternof
society.
TheIndustrialPolicyResolutionof1956classifiedtheentireindustrialsectorinthreeSchedules:
ScheduleA:Inthefirstcategory,thoseindustrieswereincludedwhosefuturedevelopmentwastheexclusive
responsibilityoftheState.17industrieswereincludedinthiscategory.Thisincludedheavyandstrategic
industriessuchasdefenseequipmentAtomicenergyIronandSteelHeavycastingsandforgoingofironand
steelHeavyplantandmachineryrequiredforironandsteelproductionformining.
ScheduleB:InthiscategorythoseindustrieswereincludedwhichwereprogressivelyStateownedandin
whichtheprivateenterpriseswouldbeexpectedonlytosupplementtheeffortsoftheState.Inthiscategory12
industrieswereincluded.
ScheduleC:AllindustriesnotlistedinscheduleAorBwereincludedinthethirdcategory.Theseindustries
wereleftopentotheprivatesector.Hence,theresponsibilitywithregardtoestablishment,functionand
developmentwasofprivatesector,thoughevenherethestatecouldstartanyindustryinwhichitwas
interested.
SmallScaleSectorToencouragesmallsector,inthepolicyresolution,variousstepswereproposedsuch
as:(a)Directsubsidywasprovidedtosmallscalesector,(b)Suitabletaxationreliefwasgiventothissector,
and(c)ItwasmadeobjectiveoftheStatetoprotectsmallscalesectorbyadvancingtechnicalassistance.
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However,governmentfailedtointegratetheseindustriesandtheirprogramswiththeproductionprogramofthe
largescalesector.
ForeignInvestmentallowedforeigncapitalparticipationinIndianeconomicdevelopmentbutthemajorshare
shouldbelongtoIndia.Incaseofalreadyexistingforeignestablishments,thesewillbereplacedbyIndian
techniciansgradually.
Oneofthemajorobjectivesofresolutionwasreductioninregionalinequalitiesandimbalances.Butcontraryto
this,theactualoperationofthispolicyresultedinincreasedregionalinequalities.Thisbecomesevidentfrom
variousreportswhichnotedthatthefourindustriallyadvancedStatesofMaharashtra,Gujrat,WestBengaland
TamilNadubenefitedthemostfromtheoperationofthispolicy.
Mostimportantsectorswerereservedforgovernment,butgovernmentfailedtodeveloponthesereserved
sectors.Occasionally,privatesectorwasallowedtooperateintheseareas.Asalreadymentioned,thiswasdue
tosystemofrentseekingandkickbackswhichdevelopedduringthisperiod.
TheMonopolisticandRestrictiveTradePracticesAct,1969
Thisactwashallmarkofinfamouslicensequotapermitsystem.Companieshavingmorethanspecifiedvalue
ofassetsneededtotakepermission/licensebeforeanyexpansionandcommencementofoperations.
Itsobjectiveswere
1. Toprohibitmonopolisticandrestrictivetradepractices(exceptbygovernment)
2. Topreventconcentrationofeconomicpowerinfewhands
3. TocontroltheMonopolies
4. ToprotectconsumerInterest
MRTPActbecameeffectiveinJune1970.Emphasiswasplacedonincreasingproductivityofindustry.There
weremajoramendmentsin1980sandaMRTPcommissionwasalsosetup.Thisactwasincompatiblewith
neweconomicpolicyafter1991andconsequently,itwasrepealedin2009.NowCompetitionActand
CompetitionCommissionofIndiaareinplaceinstead.

IndustrialPolicyResolution1977
Thisresolutionwasresultofchangeingovernmentatcenter.Consequently,ithadmorefocusonsmallscale
industry,cottageandvillageindustry.ThiswasmoveawayfromNehruvianMahalanobisideologytogandhian
ideologyofeconomicdevelopment.
Thisclassifiedthesmallsectorintothreecategories:
a)Cottageandhouseholdindustrieswhichprovideselfemploymentonawidescale.
b)TinysectorincorporatinginvestmentinindustrialunitinmachineryandequipmentuptoRs.1lakhan
situatedintownswithapopulationoflessthan50000
c)SmallscaleindustriescomprisingindustrialunitswithaninvestmentofRs.10lakhandincaseof
ancillarieswithaninvestmentinfixedcapitaluptoRs.15lakh.
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SmallScalesectorspecificpoliciesweremade.Numberofitemsreservedforthissectorwasincreased(105to
807).DistrictIndustriesCenterswereestablishedineverydistrict,whichareinstrumentalforsupportto
smallscaleindustry.Thisagencywouldprovideunderasingleroofalltheservicesandsupportrequiredby
smallandruralentrepreneurs.KhadiandVillageIndustriesCommissionwasrevamped.
ThisresolutioncategorizedlargeindustriesonthelinesofBasic/coreindustry,CapitalGoodsindustry,High
TechnologyindustryandotherIndustries.
Itwasalsoenvisagedthatallpossibleeffortsbemadeinthedirectionofdevelopmentofindigenous
technology,whichshouldensureefficientproduction,continuedinflowoftechnologyinsophisticatedandhigh
priorityareaswhereIndianskillsandtechnologyareyetnotadequatelydeveloped.
Further,foreigninvestmentwouldbeencouragedonlyforsomeindustriesinthenationalinterestasdecided
bytheGovernment.Thisclearlymeantthatinareaswheretheforeigncollaborationwasnotrequired,such
casewouldnotbereviewed.ForthistherewasdraconianForeignExchangeRegulationActinplace.
IndustrialPolicyresolution,1980
Congressmadecomebackandsoonrestoreditsownindustrialpolicy.
MajorChangeswere
1. Someoftheitemsreservedforsmallscaleindustryweredereserved.
2. Manyunits/companieswereoperatingonexcesscapacities,thanallowedbylaw.Theseexcess
capacitieswereregularized.
3. ForeignInvestmentwasallowedwithtechnologytransfer
4. Regulations,Licensing,restrictionswereeasedabitsignalinginclinationtowardsprivatesector.

NewIndustrialPolicy,1991
Theyear1991witnessedadrasticchangeintheindustrialpolicygoverningindustrialdevelopmentinthe
countrysinceindependence.Thislandmarkchangewasentirelyanewchapterwhichwastoenforcetotally
openeconomicsystemascomparedtotheearliermixedsystem.Thecountrydecidedtofollowthelinesof
capitalism.Itisalsosaidthattherewasshiftfromimperativetoindicativeplanningundernewsystem.
FeaturesofNewIndustrialPolicy
1. IndustriallicensingpolicyNewindustrialpolicyabolishedallindustriallicensing,irrespectiveofthe
levelofinvestment,exceptforashortlistof18industriesrelatedtothesecurityandstrategicconcerns,
socialreasons,hazardouschemicalsandoverridingenvironmentalreasonsanditemsofelitist
consumption.However,ofthese18industries,13categorieshavebeenremovedfromthelistgradually
andcurrentlyonly5categoryofhealth,strategicandsecurityconsiderationsindustriesneedslicenseviz.
Alcohol,cigarettes,hazardouschemicals,electronic,aerospaceandalltypesofdefenseequipment.

2. PolicyonPublicSectorThe1956Resolutionhadreserved17industriesforthepublicsector.The
1991industrialpolicyreducedthisnumberto8.Asofnowonly3industriesarereservedforgovernment
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1)AtomicEnergy2)MiningofAtomicMinerals3)RailwayTransport.

Thepolicyalsosuggestedthatthosepublicenterpriseswhicharechronicallysickandwhichareunlikely
tobeturnedaroundwill,fortheformationofrevival/rehabilitationschemes,bereferredtotheBoardfor
IndustrialandFinancial
Reconstruction(BIFR),orothersimilarhighlevelinstitutionscreatedforthepurpose,inordertoprotect
theinterestsofworkerslikelytobeaffectedbysuchrehabilitationpackage,asocialsecuritymechanism
willbecreated.
Privatization/disinvestment
Governmentannounceditsintentiontoofferapartofgovernmentshareholdinginthepublicsector
enterprisestomutualfunds,financialinstitutions,thegeneralpublicandtheworkers.Abeginninginthis
directionwasmadein199192themselvesbydivertingpartoftheequitiesofselectedpublicsector
enterprises.

3. MonopolisticandRestrictiveTradePracticelimit
UndertheMonopolisticandRestrictiveTradePracticeAct,allfirmswithassetsaboveacertainsize
(Rs.100croresince1985)wereclassifiedasMRTPfirms.Suchfirmswerepermittedtoenterselected
industriesonlyandthisalsoonacasebycaseapprovalbasis.Inadditiontocontrolthroughindustrial
licensing,separateapprovalswererequiredbysuchlargefirmsforanyinvestmentproposals.TheNew
IndustrialPolicyremovedthethresholdlimitinassetsinrespectofMRTPcompanies.

4. PolicyonForeigninvestmentandTechnologyagreements
TheNewIndustrialPolicy,preparedaspecifiedlistofhightechnologyandhighinvestmentpriority
industries,whereinautomaticpermissionwastobemadeavailablefordirectforeigninvestmentupto51
percentforeignequity.Theindustriesinwhichautomaticapprovalwasgrantedincludedawiderangeof
industrialactivitiesinthecapitalgoodsandmetallurgicalindustries,entertainmentelectronic,food
processingandtheservicessectorshavingsignificantexportpotential.Listisbeingexpandedsince
then.CurrentsituationofFDInormswillbediscussedinnextarticle.
5. AbolitionofPhasedManufacturingProgramsforNewProjectsTheseprogramswasaimedat
indigenizationoftechnology.Thesewereinforceinanumberofengineeringandelectronicindustries.
Thenewpolicyabolishedsuchprogramforfuture.

6. RemovalofMandatoryConvertibleClauseInpreliberalizationera,therewasamandatory
convertibleclauseinloanagreementwithborrower(industriesinthiscase).
Asperthisclause,bankshadrighttoconverttheirloanamountintoequitywhenevertheyfeelso.This
willmakethemownerfromlenderinthatenterprise.Thisclausewasusedbygovernmentasan
instrumenttonationalizeprivatefirms.Thiswasremovedunderneweconomicpolicy.
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Neweconomicpolicywasculminationoflongeraofinefficientdominanceofpublicsector.Nevertheless,public
sectorbythistimehadbuiltstrongindustrialbaseonwhichotherindustriescanthriveinfuture.Thiswasoneof
theobjectivesofNehruvianmodel.Unsurprisingly,Industrialandeconomicgrowthremaineddismalduringthis
period.Processofliberalizationbegunin1980swhichshowedupinbetterperformanceofeconomy.Recent
highgrowth(aspersomeeconomists)cantbeattributedtoinitiativesofNewindustrialandeconomicpolicyas
statisticalevidencesuggestbetterperformancefromearly1980s.Somuchcreditcantgotointerventionof
InternationalMonetaryFund.
Inpostliberalizationera,governmenttookuptheroleoffacilitatorandregulator.Someconclusiveindications
towardthisarereplacingForeignExchangeRegulationActwithManagementAct,latteronebeingmore
liberalandlessharsh.Similar,MRTPactwasreplacedbycompetitionAct.NowFDIisallowedinwidearrayof
sectors,inmanyofthemthroughautomaticroute.However,post1991growthisaccusedoflopsidedgrowth
withdevastatingsocialimpactasgovernmentrolledbackexpenditurefromsocialsectorstoo.
NoteEffectsofLiberalizationonvariousaspectsofIndianeconomyandSocietywillbediscussedinnext
article,alongwithpost1991andcurrentIndustrialpolicies.

INSIGHTS2015.AllRightsReserved.

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