Describe and Assess New Industrial Policy 1991
New Industrial Policy (1991)
The Congress (1) Government led by Mr. Narasimha Rao announced the new Industrial Policy on July 24, 1991. It aimed to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic control, to introduce liberalization with a view to integrate the Indian economy with the world economy, to remove restrictions on direct foreign investment as also to free the domestic entrepreneur from the restrictions of MRTP Act. All these reforms have led the government to take a series of initiatives in respect of policies in the following areas :
1) Foreign Investment,
2) Industrial Licensing.
3) Public Sector Policy.
4) Foreign Technology Policy,
5) MRTP Act.
Foreign Investment:
In order to invite foreign investment in high priority industries, requiring large investment and advanced technology.it has been decided to provide approval for direct foreign investment upto 51 per cent foreign equity in such industries. For the promotion of exports of Indian products in world markets, the government will encourage foreign trading companies to assist Indian exporters in export activities. Besides this, the government will appoint a special board to negotiate with such firms so that purposive avenues may be opened for large investment in the development of industries and technology in the national interest.
Foreign Technology:
In order to inject 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. Similar facilities will be available for other industries as well if such agreements do not require the expenditure of free foreign exchange. Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgement.
Industrial Licensing Policy:
Industrial Licensing Policy is governed by the Industries Development Regulation Act, 1951. Over the years, keeping in view the changing industrial scene in the country, the industrial licensing has undergone modification. Accordingly, a New Industrial Policy (NIP) was announced on 24 July 1991. Government has decided to do away with the industrial licensing for all industries except for a short list of 15 industries specified in Annexure II of the Policy (list at the end of this sub-head) irrespective of the level of investment related to security and strategic concern, social reasons, hazardous chemicals and over-riding environmental reasons and items of elitist consumption. Besides, enterprises would be allowed freely to develop their industries, become more competitive, nationally and internationally, more efficient and modem.
The theme of the policy is continuity with change. While freedom has been given to major industries to grow, reservations of items for small scale will continue so as to promote industrial and agro-industrial employment basis. The areas reserved for the public sector are: a) arms, ammunition and Defence equipment. Defence aircraft, and war ships; b) atomic energy; c) coal and lignite; d) mineral oils; e) minerals specified in the schedule to the Atomic Energy (Control of Production and Use) Order-195.3; f) Railway transport.
The exemption from the licensing and dereservation will be particularly helpful to many dynamic small and medium entrepreneurs who have been unnecessarily hampered by the licensing system. As a whole the Indian economy will benefit by becoming more competitive, more efficient and modern. Under NIP existing units will be permitted to manufacture any new article without additional investment if the article is not otherwise subjected to compulsory licensing. This facility would be available not withstanding any locational conditions. This is an additional facility to existing units. Under the provision of exemption from licensing for substantial expansion, existing units can in any case manufacture any new article not covered by compulsory licensing or locational conditions.
In respect of new projects for manufacture of article not covered by compulsory licensing or their substantial expansion the only requirement would be that the industrial undertaking shall file a memorandum in prescribed form to the Secretariat for Industrial Approvals (SIA) in the Ministry of Industry.
The new policy welcomes foreign investment with its attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques in the country and export promotion. Approval will be given by the Reserve Bank of India for direct investment upto 51 per cent equity in high priority industries which include areas like metallurgy, electrical equipment, transportation, food processing, software, hotel and tourism industry. There shall not be bottlenecks of any kind in this clearance of proposals for foreign equity participation. Such clearance will be available if foreign equity covers the foreign exchange requirement for employed capital goods. Direct foreign investment beyond 51 per cent or in sectors other than those 34 specified industrial sectors is also permissible but would require the approval by the government.
Dividends to the expatriates by companies in consumer goods sector with foreign equity will have to be met through export earning over a period of time. All payments flowing from approval of foreign technology agreements will have to be made through foreign exchange purchased' at market rates. Similarly communes with foreign equity upto 51 per cent will be given automatic approval by the Reserve Bank of India to act as trading houses primarily engaged in export activities. This will generate greater passage of Indian goods to export markets.
There is great need for promoting an industrial environment where acquisition, of technological capability receives priority.
With a view to injecting the desire level of technological dynamism in Indian industry, Government will provide automatic with specified parameters upto a) lump sum payment of Rs one crore; b) five per cent royalty for domestic sale and c) eight per cent for exports, subject to payment of eight per cent of sales over a ten year period from date of agreement and of seven years from the commencement of production.
Similar facilities will be available for other industries as well if such agreements do not require the expenditure of free foreign exchange. Predictability and independence of action that this measure is providing to for the efficient absorption of foreign technology. In pursuance of the decisions contained in the Statement on Industrial Policy, a special empowered Foreign Investment Promotion Board has been constituted. the Indian industry will induce them to develop indigenous competence The objective of this Board is to invite and facilitate investment in India by international companies in projects which are considered to be of benefit to the Indian economy and which do not fall within the parameters of the existing policy for clearance of foreign investment proposals. The investment programmes of such firms are considered in totality free from predetermined parameters of procedures. It provides a single window clearance for all aspects of project proposals considered by it.
Industries for Compulsory Licensing:
i) Coal and Lignite; ii) Petroleum (other than crude) and its distillation products; iii) Distillation and brewing of alcoholic drinks; iv) sugar; v) animal fats and oils; vi) cigars and cigarettes of tobacco and manufactured tobacco substituted; vii) asbestos and asbestos-based products; viii) plywood, veneers of all types and other wood based products such as particle board, medium density fibre board and block board; ix) tanned or dressed furskins chamois leather; x) paper and newsprint except bagasse-based units xi) electronic aerospace and defence equipment; all types; xii) industrial explosives, including detonating fuse; safety fuse; gun powder, nitrocellulose and matches; xiii) hazardous chemicals; xiv) drugs and pharmaceuticals (according to Drug Policy) and xv) entertainment electronics (VCRs, colour TVs, CD players, tape recorders),
Public Sector Policy:
Since Independence, the public sector in India has been guided by the Industrial Policy Resolution 1956, which had its objectives the acceleration of the rate of economic growth and speeding up of the industrialisation as means of achieving the socialising pattern of society. Since in the initial phase of industrialisation, the capital was scarce, the state sector assumed the predominance and direct responsibility for industrial development. The size of public sector in India is indeed very large. It includes government departments and its companies whether in the Central or state sector, irrigation and power projects, railways, posts and telegraphs, ordnance factories and other departmental undertakings, banking, insurance, financial and other services. The focus here is however, on the Central public sector enterprises established as Government companies or statutory corporations excluding banking units.
After the initial exuberance of public sector entering into new areas of industrial manufacturing, providing technical services, trading, financial and services sector, the public enterprises started facing various problems, some problems were due to historical reasons, while others were related to poor project management, over-manning, obsolete technology, poor order look position etc. All these put together, the public sector as a whole started flowing results far below the desired level in comparison to the investments made in them.
The Government announced a new Industrial Policy on 24 July 1991 which envisages liberalisation, competitive environment. The new Policy has laid down certain specific areas in respect of the public enterprises which are to be emphasized in order to make them better performers and more competitive. The salient features of the new Industrial Policy on the Public Sector are: 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 reasoned, there would be no bar for area exclusively to be opened up to the private sector selectively. Similarly, the public sector will 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 for the formulation of revival, rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. A social security mechanism will be created to protect the interest of workers likely to be affected by such rehabilitation packages; in order to raise resources and encourage wider public participation, a part of the government's share-holding in the public sector would be offered to mutual funds, financial institutions, general public and workers; iv) Boards of public sector communes would be made more professional and given greater powers; v) there will be a greater thrust on performance improvement through the Memorand of Understanding (MoU) system through which management would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MoU negotiations and implementation more effective; and vi) to facilitate a fuller discussion on performance, the MoU signed between Government and the public enterprise would be placed in Parliament. While focussing on major management issues, this would also help place matter on day to day operations of public enterprises in their correct perspective.
As a major step for implementation of the policy, the Government of India has disinvested varying percentage of its share-holdings in some PSUs. So far the shares of 39 PSUs have been disinvested in favour of the financial institutions, mutual funds, banks, foreign institutional investors and the public. This resulted in disinvestment of 152.07 crore share in 39 public sector undertakings and a sum of Rs 9,794 crore was realised. The shares of these companies are not listed on the stock exchange. The valuation of the equity of these enterprises on the stock exchanges reflects the perceptions of the public in general and investors in particular of the. Besides, the Government has also offered a part of its equity holdings, in performance and the expectations of the public from these enterprises.some of this enterprises in favour of the employees, in order to encourage the employees participation in the managements, a sense of commitment and belonging to an enterprise.
Over a period of time, the public enterprises have been faced with the chronic sickness and mounting losses. In the case of some of the enterprises, which have incurred huge losses and had eroded their network, in order to formulate the revival/rehabilitation packages, a number of these enterprises have been referred to the Board for Industrial and Financial Reconstruction (BIFR). So far. 54 sick enterprises have been referred to BIFR for revival/ rehabilitatio... BIFR makes an independent assessment of the viability or otherwise of a particular enterprise after keeping in the view points of the owner (Government), the employees, the financial institutions and the other concerned. Under the New Industrial Policy greater thrust has been laid on the evaluation of the performance, through the system of MoUs which has also started yielding positive results in the form of better performance from the public enterprises.
There has been-appreciable growth in the investments in the public sector over the year. In 1951, the investment in five Central Public Sectors was Rs 29 crore. This investment has gone up Rs 147.587 crore in 245 enterprises as on 31 March 1993 and at to Rs 164,332 crore in 246 enterprises in 1993-94. Thus, during 1993-94, the investment in public sector has increased by Rs 16,745 crore registering an increase of 11.35 per cent.
It is not necessary for the monopoly houses to obtain prior approval of Central Government for expansion, establishment of new undertakings, merger/amalgamation and takeover and appointment of certain directors.
Monopolies and Restrictive Trade Practices Act (MRTP) Act:
Due to 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 in investment decisions of large companies has become deleterious in its effects on Indian industrial growth. The pre-entry scrutiny of investment decisions by so-called MRTP companies is no longer required. Instead, emphasis is laid on controlling and regulating monopolistic, restrictive and unfair trade.
Critical Evaluation:
The New Industrial Policy of 24th July 1991 fulfils a long felt demand of the industry. Licensing has been abolished for all industries except 18 which include coal, petroleum, sugar, motor cars, cigarettes, hazardous chemicals, pharmaceuticals and some luxury items. Besides it proposes to remove the limit of assets fixed for MRTP Companies and dominant undertakings. Thus, business houses intending to float new companies or undertakings substantial expansion are not required to seek clearance for the MRTP Commission. Numerous cases of bottlenecks created by the bureaucracy have been given a go-buy by this singular decision of the Government. The industrial policy is welcomed because it has taken a bold decision to end the licence-permit raj and save the enterpreneurs from the harassment of seeking permission from the babu-dom (the bureaucracy) of the country to start an undertaking This Policy enables MRTP Companies to establish new effect plans of expansions, mergers, amalgamations and takeovers without prior government approval. They have the right to appoint sectors. Thus, the new industrial policy has unshackled many of the provisions which acted as brakes on the growth of the large private corporate sector. The business circles have welcomed these provisions.