Industrial Policies - 1991 and Recent Updates

The New Industrial Policy of 1991 was introduced on July 24, 1991, with the objective of empowering market forces, improving efficiency, and rectifying distortions and deficiencies in the country's industrial structure that had developed over the preceding four decades. The policy aimed to bring industrial efficiency to international standards and accelerate overall industrial growth by embracing the principles of Liberalization, Privatization, and Globalization (LPG).

NEW INDUSTRIAL POLICY 1991

The industrial policy comprises a set of standards and measures instituted by the government to monitor the progress of industries and related sectors, fostering economic growth and development in India. The 1991 New Industrial Policy primarily aimed at facilitating market forces and enhancing overall efficiency.

Key roles in this policy were denoted by:

• L – Liberalization (Reduction in Government Control): This involved decreasing government control to stimulate a more dynamic and responsive industrial environment.
• P – Privatization (Increasing the Private Sector's Role & Scope): The focus was on expanding the role and influence of the private sector to encourage competitiveness and innovation.
• G – Globalisation (Economic Integration between India and the rest of the world): Emphasizing economic integration with the global community to foster international trade and collaboration.

The government took proactive measures to enhance the competitiveness and capabilities of diverse industries. Initiatives included allowing domestic firms to import advanced technology for improved efficiency and access to superior technology. Additionally, the government increased the Foreign Direct Investment (FDI) ceiling from 40% to 51% in specific sectors, aiming to attract more foreign investment and expertise to bolster industry growth.

In 1991, India found itself compelled to introduce a New Industrial Policy, incorporating elements of privatization, liberalization, and globalization, driven by several critical factors:

• Mounting Fiscal Deficit: The planned economy led to persistent fiscal deficits as expected spending consistently surpassed anticipated revenue. Escalating from 5% in 1981–1982 to 8.5% of GDP in 1991, the fiscal deficit necessitated the government to resort to interest-bearing public borrowings to bridge the financial gap.
• Adverse Balance of Payment: A widening deficit in the balance of payments, reaching Rs. 17367 crores in 1990–91 from Rs. 2214 crores in 1980–81, forced the government to borrow funds externally to cover the deficit arising from foreign payments exceeding receipts.
• Gulf Crisis Impact: The Gulf Crisis of 1990–1991, triggered by the Iran–Iraq war, resulted in a substantial increase in global petrol prices. Despite a decline in exports to Gulf countries, import costs rose significantly, exacerbating the balance of payments situation and necessitating the announcement of a new industrial plan.
• Fall in Foreign Reserves: Foreign exchange reserves briefly plummeted to 2400 crores in 1990–1991, covering only three weeks' worth of imports. To address this crisis, the Chandra Shekhar government had to mortgage gold reserves to meet interest payments and international debts, prompting the need for new policies to bolster foreign exchange reserves.
• Rise in Prices: A significant escalation in the inflation rate from 6.7% to 16.7% added to the economic challenges. The government's extensive enlargement of the public sector from 1951 to 1991 yielded limited results, necessitating a shift from the public sector to the private sector to address the economic downturn and rising prices.

Objectives of the New Industrial Policy of 1991:

Removal of Regulations:

• Elimination of regulations like licenses and controls to foster a more open and dynamic industrial environment.

Support for Small-Scale Sector:

• Providing assistance to the small-scale sector to promote its growth and competitiveness.

Promotion of Competitive Culture:

• Fostering a competitive culture among industries to enhance efficiency and ultimately benefit the general public.

Incentives for Underserved Areas:

• Offering additional incentives to industries in underserved areas and their residents to promote balanced regional development.

Accelerated Industrial Development:

• Quickening the pace of industrial development to keep up with industrialized countries and global economic trends.

Economic Liberalization:

• Freeing the economy from various government limitations to encourage entrepreneurship and market-driven growth.

Autonomy for the Private Sector:

• Allowing the private sector to operate independently, reducing government intervention in business operations.

Promotion of Exports and Import Liberalization:

• Increasing exports by liberalizing imports, encouraging international trade and economic integration.

Job Opportunities:

• Creating more job opportunities through the growth and diversification of industries.

Economic Liberalization:

• Embracing economic liberalization principles to enhance economic efficiency and competitiveness.

Features of the New Industrial Policy of 1991:

Reduction in Government’s Monopoly:

• Number of industries reserved for the public sector reduced from 17 (1956 policy) to 8, including arms and ammunition, atomic energy, coal, mineral oil, and mining of certain ores.

Abolition of Industrial Licensing:

• Industrial Licensing Policy abolished licenses for all industries except for 18, later reduced to 6 industries in 1999, such as drugs and pharmaceuticals, hazardous chemicals, and explosives.

Provision for Foreign Companies:

• Allowed foreign companies to have a majority stake in India, permitting up to 51% of Foreign Direct Investment (FDI) in 47 high-priority industries.

Provision for Non-Residential Indians (NRIs):

• NRIs permitted 100% equity investments on a non-repatriation basis in all activities, except those on a negative list.

Internal Agreements on Foreign Technologies:

• International agreements facilitated acquisition of foreign technologies, allowing high-priority industries a lump sum payment of up to Rs. 1 crore, with 5% royalty for domestic sales and 8% for exports.

Restructuring of Public Sector Investments:

• Portfolio of public sector investments restructured, with non-viable Public Sector Undertakings (PSUs) referred to the Board for Industrial and Financial Reconstruction (BIFR).

Removal of Prior Approval Requirement:

• Amended the MRTP Act to eliminate the need for prior approval from the Central Government for activities like establishing new undertakings, expansion, mergers, and amalgamations.

Changes in Standards for Small Units:

• Revised criteria for small units to those with an investment limit of less than Rs. 5 Lakh.

Establishment of National Renewal Fund (NRF):

• Government announced the creation of the NRF to provide a social safety net for labor, ensuring support for those affected by industrial changes.

Impact of the New Industrial Policy of 1991:

1-Removal of Restrictions (License, Permit, and Quota Raj):

• Impact: It eliminated bureaucratic restrictions on industrial growth.
• Result: Liberalized the economy and paved the way for a more dynamic industrial landscape.

2-Public Sector Role and Disinvestment:

• Impact: Reduced the role of the public sector, with only two sectors reserved for public enterprises. Disinvestment process initiated in Public Sector Undertakings (PSUs).
• Result: Increased efficiency, stimulated private sector participation, and brought about a shift in the ownership structure of some PSUs.

3-Entry of Multi-National Companies:

• Impact: Removal of restrictions facilitated the entry of multinational companies, privatization, and the relaxation of asset limits on Monopolistic and Restrictive Trade Practices (MRTP) companies.
• Result: Increased competition, technology infusion, and improved global integration.

4-Increment in Domestic and Foreign Investment:

• Impact: Witnessed a rise in both domestic and foreign investment across various sectors.
• Result: Boosted economic activities, modernization, and capacity expansion.

5-Increment in Exports and Related Activities:

• Impact: Efforts to increase exports led to the emergence of Export Oriented Units (EOU), Export Processing Zones (EPZ), and Agri-Export Zones (AEZ).
• Result: Enhanced export competitiveness, increased international trade, and diversified economic activities.

6-Establishment of a Separate Ministry for MSMEs:

• Impact: A new act and a separate ministry were established in 2006 to address issues related to Micro, Small, and Medium Enterprises (MSMEs).
• Result: Focused attention on the needs of MSMEs, fostering their development and contributing to economic growth and employment generation.

Frequently Asked Questions (FAQs) - New Industrial Policy of 1991

1. What is the New Industrial Policy of 1991?

Ans. The New Industrial Policy of 1991 was a comprehensive set of reforms introduced on July 24, 1991, aimed at empowering market forces, enhancing efficiency, and rectifying distortions in India's industrial structure over the previous four decades. It emphasized Liberalization, Privatization, and Globalization (LPG) principles.

2. What were the key roles denoted by LPG in the New Industrial Policy?

Ans. LPG stands for Liberalization (reduction in government control), Privatization (increasing the private sector's role), and Globalization (economic integration with the world). These principles were central to the policy's objective of fostering a dynamic and responsive industrial environment.

3. What proactive measures did the government take to enhance industrial competitiveness?

Ans. The government undertook various measures, including allowing domestic firms to import advanced technology for improved efficiency and increasing the Foreign Direct Investment (FDI) ceiling from 40% to 51% in specific sectors. These steps aimed to attract foreign investment and expertise.

4. Why was the New Industrial Policy introduced in 1991?

Ans. The policy was introduced in response to mounting fiscal deficits, adverse balance of payments, the impact of the Gulf Crisis, falling foreign reserves, rising inflation, and the need to keep pace with industrialized countries. It was a strategic move to address economic challenges and promote sustainable growth.

5. What were the objectives of the New Industrial Policy of 1991?

Ans. The objectives included the removal of regulations, support for the small-scale sector, promotion of a competitive culture, incentives for underserved areas, accelerated industrial development, economic liberalization, autonomy for the private sector, promotion of exports, job creation, and embracing economic liberalization principles.

6. How did the policy impact the public sector and disinvestment?

Ans. The policy reduced the role of the public sector, with only two sectors reserved for public enterprises. It initiated the disinvestment process in Public Sector Undertakings (PSUs), leading to increased efficiency and private sector participation.

7. Did the New Industrial Policy attract foreign investment?

Ans. Yes, the policy led to a significant increment in both domestic and foreign investment across various sectors. This influx of funds contributed to economic activities, modernization, and capacity expansion.

8. How did the policy impact exports and related activities?

Ans. The policy facilitated efforts to increase exports, leading to the emergence of Export Oriented Units (EOU), Export Processing Zones (EPZ), and Agri-Export Zones (AEZ). This contributed to enhanced export competitiveness, increased international trade, and diversified economic activities.

9. Was there any specific provision for the Micro, Small, and Medium Enterprises (MSMEs)?

Ans. Yes, in 2006, a new act and a separate ministry were established to address issues related to MSMEs, reflecting the policy's commitment to fostering the development of these enterprises and contributing to economic growth and employment generation.