Introduction:

The new policy, 1991 has been the most significant in the Indian
industries. The congress govt. led by Narsimah Rao announced the
new industrial policy on 24th July 1991.

The Congress government led by Narasimha Rao announced the

new Industrial Policy in July 1991. The main aim of the new industrial
policy was: -

1) To unshackle the Indian industrial economy from the cobwebs

of unnecessary bureaucratic control,

2) To introduce liberalization with a view to integrate the Indian

economy with the world economy,

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 3) To remove restrictions on direct foreign investment as also to
free the domestic entrepreneur from the restriction of MRTP
Act, and

4) The policy aimed to shed the load of the public enterprises,

which have shown a very low rate of return or were incurring
losses over the years.

All these reforms of industrial policy led the government to take a

series of initiatives in respect of policies in the following areas:

a. Industrial licensing;
b. Foreign investment;
c. Foreign technology policy;
d. Public sector policy;
e. MRTP Act

The policy envisaged introduced LPG model for the

Indian industry.

LPG MODEL

______________________________________________

Liberalization Privatization Globalization

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Features of the new industrial policy, 1991:

Industrial Licensing Policy:

In the sphere of industrial licensing, the role of the government was to
be changed from that of only exercising control to one of providing
help and guidance by making essential procedures fully transparent
and by eliminating delays. This calls for bold and imaginative decision
designed to remove restraints on capacity creation:

A. Industrial licensing to be abolished for all projects except for a

short list of industries related to securities and strategic concerns,
social reasons, hazardous chemicals and overriding environmental
reasons and items of elitist consumptions industries reserved for the
small scale sector will continue to be so reserved.
List of industries in respect of which industrial licensing will be
compulsory
1. Coal an lignite
2. Petroleum (other than crude) & its distillation
products
3. Distillation & brewing of alcoholic drinks
4. Sugar
5. Animal fats and oils

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6. Cigars and cigarettes of tobacco and
manufactured
7. tobacco substitutes’
8. Asbestos and asbestos based products
9. Plywood, decorative veneers, and other wood
based products such as particle board, medium density fibre board,
block board
10. Raw hides and skins, leather, chamois leather
and patent leather
11. Tanned or dressed firkins.
12. Motor cars
13. Paper and newsprint
14. Electronic aerospace and defence equipment; all
types
15. Industrial; explosives, including detonating fuse,
safety fuse gun powder, nitrocellulose and matches
16. Hazardous chemicals
17. Drugs and pharmaceuticals (according to drug
policy)
18. Entertainment electronics (VCRs, color TVs, CD
players, Tape recorders)
19. White goods (Domestic refrigerator. Domestic
dish washing machines, microwave ovens, air conditioners) The
compulsory licensing provisions would not apply in respect of the
above items reserved for exclusive manufacture in small-scale sector.

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 B. Areas where security and strategic concerns predominate will
continue to be reserved for the public sector.
List of industries to be reserved for the public sector:
1. Arms and ammunitions and allied items of defense equipments,

defense aircrafts and warships.

2. Atomic energy
3. Coal and lignite
4. Mineral oils
5. Mining of iron ore, manganese ore, chrome ore, gypsum sulphur,
gold and diamond.
6. Mining of copper, lead, zinc, tin, molybdenum and wolfram.
7. Minerals specified in the schedule to the atomic energy order, 1953
8. Railway transport

C. In projects where imported capital goods are required,

automatic clearance will be given in cases where foreign exchange
availability is ensured through foreign equity; or if the CIF value of
imported capital goods required is less than 25% of the total value
(net taxes) of plant and equipment, up to a maximum value of Rs. 2
crore.In other cases imports of capital goods will require clearance
from the secretariat of industrial approvals (SIA) in the Department of
Industrial development according to availability of foreign exchange
resources
D. In the location other than cities of more than 1 million populations,
there will be no requirement of obtaining industrial approvals from the
central Government except for industries subject to compulsory

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 licensing. In respect of the cities with population greater than 1
million, industries other than those of a non-populating nature such as
electronics, computer software and printing will be located outside 25
kms of the periphery, except in prior designated industrial
areas.Existing units would be provided a new broad banding facility to
enable them to produce any article without additional investment. The
exemption from licensing would have applied to all substantial
expansions of the existing units.
Foreign Investment:
In order to invite foreign investment in high priory industries, requiring
large investments and advanced technology, it was decided to
provide approval for direct foreign investment up to 51% foreign
equity in such industries.

For the promotion of exports of Indian products in world markets, the

government would encourage foreign trading companies to assist
Indian exporters in export activities.

i.) Approval would be given for direct foreign investment

upto 51% foreign equity in high priority industries. There shall be no
bottlenecks of any kin in this process. Such clearance will be
available if the foreign equity covers the foreign exchange
requirement for imported capital goods.
ii.) While the import of the components, raw materials and
intermediate goods, and payment of know how fees and royalties
would be governed by the general policy applicable to other domestic
units, the payment of dividends would be monitored through the
reserve bank of India so as to ensure that outflows on account of

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 dividend payments are balanced by export earnings over a period of
time.
iii.) To provide access to international markets, majority
foreign equity holding upto 51% equity would be allowed for trading
companies primarily engaged in export activities.

Foreign Technology:
With a view to injecting the desired level of technological dynamism in
Indian industry, government will provide automatic approval for
technology agreements related to high priority industries within
specified parameters. No permission will be necessary for hiring of
foreign technicians, foreign testing of indigenously developed
technologies.

Public Sector Policy:

Public enterprises have shown a very low rate of return on the capital
invested. This inhibited their ability to regenerate themselves in terms
of new investments as well as in technology development. The
results that many of the public enterprises have become a burden
rather than being an asset to the government.

The original concept of public sector has also undergone

considerable dilution. The most striking example is the take over of
sick units from the private sector. This category of public sector units
accounts for almost one-third of the central public enterprises.
Another category of public enterprises, which does not fit into the

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 original idea of public sector being at the commanding heights of the
economy, is the plethora of public enterprises, which are in the
consumer goods and services sectors.

The 1991 Industrial policy adopted a new approach to public

enterprises. The priority areas for the growth of public enterprises in
the future would be the following:

a) Essential infrastructure goods and services.

b) Exploration and exploitation of oil and mineral
resources
c) Technology development and building of manufacturing capabilities in
areas, which are crucial in the long term development of the economy
and where private sector investment is inadequate.
d) Manufacture of the products where strategic
considerations predominate such as defence equipment.

Government would strengthen those public enterprises, which fall in

the reserved areas of operation or are in high priority areas or are
generating good or much greater degree of management autonomy
through the system of memoranda of understanding. Competition
will be induced in these areas by inviting private sector participation.
In the case of selected enterprises part of govt. holdings in the equity
share capital of these enterprises will be disinvested in order to
provide further market discipline to the performance of public
enterprises.

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 There are a large number of chronically sick public enterprises
incurring heavy losses, operating in a competitive market and serving
little or no public purpose. The following measures are being adopted:

i.) Portfolio of public sector investments will be reviewed with

a view to focus the public sector on strategic, high tech and essential
infrastructure. Whereas some reservation for the public sector is
being retained, some areas would be opened upto the private sector
selectively. Similarly, the public sector would also be allowed entry in
areas not reserved for it.
ii.) Public enterprises which are chronically sick and which
are unlikely to be turned around would, be referred to the Board for
Industrial and Financial Reconstruction (BIFR) for
revival/rehabilitation schemes. A social security mechanism is to be
created to protect the interests of the workers likely to be affected by
such rehabilitation packages.
iii.) In order to raise resources and encourage wider public
participation, a part of the government’s shareholdings in the public
sector would be offered to mutual funds, financial institutions, the
general public and workers.
iv.) Board of public sector companies would be made more
professional and given greater powers.
v.) There would be a greater thrust on performance
improvement and managements would be granted greater autonomy
through Memoranda of Understanding (MOU’s) and would be held
accountable.

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 MRTP ACT:
With the growing complexity of industrial structure and the need for
achieving economies of scale for ensuring higher productivity and
competitive advantage in the international market, the interference of
the government through the MRTP Act has to be restricted. Towards
this end:

i.) The pre-entry scrutiny of investment decisions by so-

called MRTP companies will no longer be required. Instead,
emphasis will be on controlling and regulating monopolistic, restrictive
and unfair trade practices rather than making it necessary for the
monopoly houses to obtain prior approval of central Govt. for
expansion, establishment of the new undertakings, merger,
amalgamation and takeover and appointment of certain directors.
ii.) The thrust of policy will be more on controlling unfair or
restrictive business practices.
Liberalization by de-reservation:

The government decided in April 1993 to removes three more items

from the list of 18 industries reserved for compulsory licensing. These
three items were:

1. Motor cars
2. White goods (refrigerators, washing machines, air-conditioners,

etc.)
3. Raw hides and skins and patent leather
The basic purpose for the reservation of these items was to increase
the flow of investments in these industries. With the growth of large

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middle class, ranging between 100 &120 million, the demand for
white goods is growing and these items are no longer viewed as
luxury goods. Similarly, the demand for motorcars by the upper
middle class and affluent sections is also growing, more especially
when the government is providing loans to business executives and
other senior official’s to buy cars. To provide a boost to the motorcar
and white goods industries, the government decided to reserve these
items so that their production improves as a response to market,
instead of remaining shackled by the bureaucratic process of
licensing.

Regarding raw hides and patent leather, the government was

motivated by the desire to push up export potential and the small-
scale units are ill equipped to provide quality goods for the
international market.

In pursuance of the liberalization policy towards foreign investment,

the Government decided in December 1996 to include 16 categories
of industries in respect of which automatic approval would be
accorded to foreign equity participation upto 51 per cent. This
additional list of industries eligible for automatic approval upto 51 per
cent foreign equity covers a wide range of industrial activities in the
capital goods and metallurgical industries, entertainment electronics,
food processing industries, mining (upto 50 per cent), and those
having significant export potential.

The government, however, also added another list of nine industries

for which automatic approval upto 74 per cent would be allowed. The

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nine industries are mining services related to oil and gas field’s
services, basic metal and alloy industries, non-conventional energy
sources, manufacture of navigational, meteorological, geophysical
and related instruments and apparatus, electrical generation and
transmission, construction and maintenance of roads, ropeways,
ports harbors, construction and maintenance of power plants.
Besides, land transport, water transport and storage and
warehousing services have also been included.

The basic thrust of these changes is that there will be no case-by-

case approval for various proposals lying before the government. The
main aim of the major policy initiative is to facilitate foreign direct
investment in infrastructure sectors, core and priority sectors,
exporting oriented industries, and linkage with agro and farm sectors.

Curtailment of phased Manufacturing program:

The NIP 1991 suggested the abolition of PMP. Under PMP there
was a compulsion to utilize a certain proportion of domestic
content in production. However, due to liberalize import policy the
PMP became insignificant and was finally abolished.

Increased influence of Financial institution investment by

Mandatory Convertibility Clause to be removed:

The mandatory convertibility clause granted power to banks and FI

to convert their loans into the share capital (equity) of the
defaulter co. this would lead to transfer and control of power into

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the hands of banks and FI’s. Regarding the day to day activities of
co. this reduces the flexibility and independence of companies.
Hence, keeping in mind the principle of liberalization, the MCC
was abolished.

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 The main objectives of the policy are as follows:
1) To unshackle the Indian industrial economy from the cobwebs of
unnecessary bureaucratic control.

2) To introduce liberalization with a view to integrate the Indian

economy with the world economy,

3) To remove restrictions on direct foreign investment as also to free

the domestic entrepreneur from the restriction of MRTP Act.

4) The policy aimed to shed the load of the public enterprises, which
have shown a very low rate of return or were incurring losses over the
years.

5) To introduced liberalization.

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PRE-NIP:
The Government of India has laid emphasis on development of Indian
Industries since the time of Independence. Hence, at regular intervals
the Government has put for certain plans &policies for the
development of industries.

The following are some of the major industrial policies since

independence.

Industrial Policy Resolution 1948:

Immediately after independence the Government announced

Industrial Policy Resolution 1948. The main aim of IPR1948 was to
increase the number of public &private sector enterprises.

The Indian Industry was classified into four heads.

Industrie
s

FIELD OF GOVT STATE PRIVATE

MIXED SECTOR
CONTROL MONOPOLY MONOPOLY

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Industrial Policy Resolution 1956:
India announced IPR 1956 on 30th April 1956.

The policy aimed at:

Higher importance to public sector and lower importance to private
sector. Thus the emphasis was laid on public sectors

The classification of Indian industries was revised. There was hardly

any differentiation between field of government control and
government monopoly in IPR 1948.Thus government merged the two
sectors in1956

INDUSTRIES

GOVT PRIVATE
MIXED SECTOR
MONOPOLY MONOPOLY

Various incentives and development schemes for SSI AND cottage

industries were introduced to promote the growth of SSI and cottage
industries. Special emphasis was laid on removal of regional
disparities.

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Industrial policy 1977:
The industrial policy of 1977, was introduced by janata party
government in December 1977

It aimed at:
Improving the SSI and cottage industries.Hence, 807 items were
exclusively reserved for SSI

The Indian industry was now classified in following manner

INDIAN INDUSTRIES

LARGE SCALE INDUSTRY SMALL SCALE INDUSTRY

1) Basic industries for e.g. 1) cottage and household

Steel, cement. Industries

2) Capital goods industry for e.g. 2) Tiny sector (investment up to 1

Machinery lakhs)

3) High technology (fertilizers) 3) small scale industries

4) Other industries not reserved

For SSI

Importance:
The government laid special emphasis on the co-ordinate of SSI and
LSI .central government has set up various credit facilities for SSI and
cottage industries

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Industrial policy 1980:
The 1980 industrial policy revised the limits of SSI from 10 lakhs to 20
lakhs and tiny industries from 1 lakhs to 3 lakhs

The policy aimed at increase in number of SSI and cottage industries

in the backward area

The government laid importance on export promotion and import

substitution

Revival of sick units can be done by merging them with healthy (profit
making) units

Sanction was given for automatic expansion of capacities from 5%

per year and 25% in the period of 5 years

Industrial policy statement, 1985:

The aimed at liberalization of Indian industry.MRTP limit was raised
from 20 crs to 100 crs.The investment limit of SSI was raised from 20
lakhs to 25 lakhs

The numbers of industries requiring compulsory licencing were

reduced from 56 to 26

Income tax holiday for 10 years was granted for setting up of factories
in backward areas

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Achievement of new industrial policy:
(1) Technology for foreign countries: The NIP 1991 has liberalized the
foreign technology. In IPR 1948, there were too many restrictions
on import of foreign technology which resulted in slowdown of
industrial growth. The NIP 1991, announced the following

(a) Automatic sanction for foreign technology up to Rs. 1 crore.

(b)Automatic approval for hiring foreign technicians.

This has resulted in better quality products at a reduced price.

(2) Approval of Foreign Direct Investment: FDI up to 51% of equity

has enabled the flow of foreign funds into India. This has resulted
in faster industrial growth.

(3) Recovery of Industrial Growth: The Indian Industry which has a

miserable growth rate of 0.6% in 1991 reached a growth rate of
13% by 1995 due to the NIP 1991.

Year % growth rate

1991 0.6%

1992 2.3%
1993 6.0%

1994 9%
1995 13%

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(4) Improved foreign exchange reserves: The Foreign Exchange
Reserve position Forex reserve has improved considerably since
1991. This is due to this globalization of Indian Industries.

Year Forex in dollars

1992 9.2
2002 73.6

(5) Favorable Capital Market: The liberalization, privatization and

globalization of the Indian industry have resulted in a boost of
Indian capital markets. The overseas investment. Has increased
from 4 million to 2 billion U.S. dollars

Year Foreign Investment

1991 4 Million dollars
2001 2 billion dollars

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Criticisms / Failures of NIP 1991:
(1) Growth of Unemployment: the total no. of unemployed in India in
2001 was 27 million. The unemployment percentage over the last
decade has increased in the following manner

Year Annual growth rate of

Unemployment
1991 6% p.a.
2001 7% p.a.

This is due to increased foreign technology which leads to

lesser dependence on machines.

(2) Accelerates Problems for domestic firms: Due to the entry of Multi
National Concerns (MNC) into the domestic market, there is cut
throat competition. The quality of product of MNC’s is better,
services are superior and prices are competitive compared to
Indian films. This has led to the reduced demand for Indian
goods.

(3) Lack of Infrastructure Development: The MNC’s are interested

only in profits. They refrain from investing their money into
infrastructure projects that involve long gestation periods. This
leads to slower growth of Indian Economy.

(4) Industrial delicencing program: The automatic approval for

expansion production capacities in all industries except six has
resulted in heavy expansion of Industries in 1990’s. This has led
to recession as supply exceeds demand due to over-production.

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(5) Arrears of Foreign Technology: Critics point out that an
overdependence on foreign technology shall lead to
underdevelopment of domestic technology. This shall prove to be
dangerous in future.

(6) Neglect role of public sector: Due to reduced importance to public

sector and increase in privatization the overall economic welfare
has received a severe blow. This is because the Private sector
exploits the consumers as well as workers.

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 Evaluation of The New Industrial Policy
(1991)
The New industrial Policy announced by the govt. of India in July
1991 fulfilled a long-felt demand of the corporate sector for declaring
in very clear terms that licensing was abolished for all industries
except 18 industries which included coal, petroleum, sugar, motor
cars, cigarettes, hazardous, chemicals, pharmaceuticals and some
luxury items. Besides this, the industrial policy proposed to remove
the limit of assets fixed for MRTP Companies and dominant
undertakings.

Thus, business houses intending to float new companies or

undertake substantial expansion were not required to seek clearance
from the MRTP Commission. Numerous cases of the bottlenecks
created by the bureaucracy were struck down by this singular
decision of the govt. in this sense the industrial policy was welcome
because it took the bold decision to end the license- permit raj and
save the entrepreneurs from the clutches of the bureaucracy of the
country to start an undertaking. This step enabled MRTP Companies
establish new undertakings, and effect plans of expansion, mergers,
amalgamations and takeovers without prior govt. approval. In other
words, the new industrial policy unshackled many of the provisions,
which acted as brakes on the growth of large private corporate
sector. The business circles welcomed all these provisions. There
was thus an overall relief in the dismantling of industrial licensing and
regime of controls.

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Conclusion:
It is clear from above analysis that by and large the economists have
welcomed the initiatives of New Industrial Policy to promote
competition, improve efficiency of Public sector enterprise and
encourage research and development activities. However the fear
have been expressed by various economist regarding creation of
massive unemployment, elimination of small scale industrial and
destruction of social and culture fabric of the nation.

Besides, excessive freedom to foreign capital may ultimately affect

our economic sovereignty and as also push the country into debt trap
further.

These are gloomy forebodings, but the recent East Asian economic
sovereignty as well as the happenings in Russia and the South
American countries point out to the dangers of too much dependence
on market mechanism, uncontrolled liberalization and globalization
and unfettered freedom to import foreign capital.

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