The Industry Policy 1991 - Economics

        The Industrial Policy,1991

New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao. This policy opened the door of the India Economy for the global exposure for the first time. In this New Economic Policy P. V. Narasimha Rao government reduced the import duties, opened reserved sector for the private players, devalued the Indian currency to increase the export. This is also known as the LPG Model of growth.

New Economic Policy of India-1991

New Economic Policy refers to economic liberalisation or relaxation in the import tariffs, deregulation of markets or opening the markets for private and foreign players, and reduction of taxes to expand the economic wings of the country.

Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24,1991.

Main Objectives of New Economic Policy – 1991, July 24 

DO YOU KNOW  Industry Policy BEFORE 1991


The main objectives behind the launching of the New Economic policy (NEP) in 1991 by the union Finance Minister Dr. Manmohan Singh are stated as follows:

1. The main objective was to plunge Indian Economy in to the arena of ‘Globalization and to give it a new thrust on market orientation.

2. It intended to move towards higher economic growth rate and to build sufficient foreign exchange reserves.

3. The NEP intended to bring down the rate of inflation

4. It wanted to permit the international flow of goods, services, capital, human resources and technology, without many restrictions.

5. It wanted to achieve economic stabilization and to convert the economy into a market economy by removing all kinds of un-necessary restrictions.

6. It wanted to increase the participation of private players in the all sectors of the economy. That is why the reserved numbers of sectors for government were reduced. As of now this number is 

Main Measures Adopted in the New Economic Policy

Due to various controls, the economy became defective. The entrepreneurs were unwilling to establish new industries (because laws like MRTP Act 1969 de-motivated entrepreneurs). Corruption, undue delays and inefficiency risen due to these controls. Rate of economic growth of the economy came down. So in such a scenario economic reforms were introduced to reduce the restrictions imposed on the economy.

Following steps were taken under the Liberalisation measure:

(i) Free determination of interest rate by the commercial Banks:

Under the policy of liberalisation interest rate of the banking system will not be determined by RBI rather all commercial Banks are independent to determine the rate of interest.

(ii) Increase in the investment limit for the Small Scale Industries (SSIs):

Investment limit of the small scale industries has been raised to Rs. 1 crore. So these companies can upgrade their machinery and improve their efficiency.

(iii) Freedom to import capital goods:

Indian industries will be free to buy machines and raw materials from foreign countries to do their holistic development.

(iv) Freedom for expansion and production to Industries:

In this new liberalized era now the Industries are free to diversify their production capacities and reduce the cost of production. Earlier government used to fix the maximum limit of production capacity. No industry could produce beyond that limit. Now the industries are free to decide their production by their own on the basis of the requirement of the markets.

(v) Abolition of Restrictive Trade Practices:

According to Monopolies and Restrictive Trade Practices (MRTP) Act 1969, all those companies having assets worth Rs. 100 crore or more were called MRTP firms and were subjected to several restrictions. Now these firms have not to obtain prior approval of the Govt. for taking investment decision. Now MRTP Act is replaced by the competition Act, 2002.

Cess: Meaning and Types in India

1. Liberalisation

Removal of Industrial Licensing and Registration:

Previously private sector had to obtain license from Govt. for starting a new venture. In this policy private sector has been freed from licensing and other restrictions.

Industries licensing is necessary for following industries:

(i) Liquor

(ii) Cigarette

(iii) Defence equipment

(iv) Industrial explosives

(v) Drugs

(vi) Hazardous chemicals

2. Privatisation:

Simply speaking, privatisation means permitting the private sector to set up industries which were previously reserved for the public sector. Under this policy many PSU’s were sold to private sector. Literally speaking, privatisation is the process of involving the private sector-in the ownership of Public Sector Units (PSU’s).

The main reason for privatisation was in currency of PSU’s are running in losses due to political interference. The managers cannot work independently. Production capacity remained under-utilized. To increase competition and efficiency privatisation of PSUs was inevitable.

Step taken for Privatisation:

The following steps are taken for privatisation:

1. Sale of shares of PSUs:

Indian Govt. started selling shares of PSU’s to public and financial institution e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private sector will acquire ownership of these PSU’s. The share of private sector has increased from 45% to 55%.

2. Disinvestment in PSU’s:

The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means that Govt. has been selling out these industries to private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector.

3. Minimisation of Public Sector:

Previously Public sector was given the importance with a view to help in industralisation and removal of poverty. But these PSU’s could not able to achieve this objective and policy of contraction of PSU’s was followed under new economic reforms. Number of industries reserved for public sector was reduces from 17 to 2.

(a) Railway operations

(b) Atomic energy

4. Globalization:

Literally speaking Globalisation means to make Global or worldwide, otherwise taking into consideration the whole world. Broadly speaking, Globalisation means the interaction of the domestic economy with the rest of the world with regard to foreign investment, trade, production and financial matters.

Steps taken for Globalisation:

Following steps are taken for Globalisation:

(i) Reduction in tariffs:

Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India economy attractive to the global investors.

(ii) Long term Trade Policy:

Forcing trade policy was enforced for longer duration.

Main features of the policy are:

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged.

(iii) Partial Convertibility of Indian currency:

Partial convertibility can be defined as to convert Indian currency (up to specific extent) in the currency of other countries. So that the flow of foreign investment in terms of Foreign Institutional Investment (FII) and foreign Direct Investment (FDI).

This convertibility stood valid for following transaction:

(a) Remittances to meet family expenses

(b) Payment of interest

(c) Import and export of goods and services.

(iv) Increase in Equity Limit of Foreign Investment:

Equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without any restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced.If the Indian economy is shining at the world map currently, its sole attribution goes to the implementation of the New Economic Policy in 1991.

The important strength of the new policy can be identified as follows.

i. The New Industrial Policy made a bonfire of the industrial licensing system through various provisions. There has been a move away from extensive physical controls and an increase in the role of financial incentives in channelling investments in the desired direction. This, plus the lowering of the tax rates combined with better administration of the revenue collection system, is expected to attract more economic enterprise and investment.

ii. There is considerable internal deregulation aimed at strengthening the more efficient domestic firms and encouraging them to invest and expand. This is expected to inject much more competition into the system, creating incentives for reducing costs.

iii. Measures have also been taken to improve the legal framework. The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 gives powers to banks and financial institutions to enforce their claims on collateral for delinquent secured credit, without going through a long and cumbersome judicial process.

The Competition Act 2003 aims at promoting competition through prohibition of anti-competitive practices, abuse of dominance and through regulation of companies beyond a particular size. In Companies (Second Amendment) Act 2002, industrial sickness has been redefined, a revival and rehabilitation fund has been set up, and protection from creditors has been withdrawn.

iv. The internal liberalisation has been accompanied by a policy of maintaining an open access to imports to permit modernisationand technological upgrading in Indian industry, which again will reduce costs and promote international competition.

v. An important feature of the process of policy reform underway in India is that it is gradualist as against the ‘big bang’ type adopted in some other countries. The system is being subject to much stronger pressures for efficiency and modernisation, but at a controlled pace. The rationale for this gradualist approach lies in the perception that the system should be subjected to pressure commensurate with its ability to respond. Pressure beyond this point will only be disruptive.

In sum, the aim of the sweeping policy changes is to evolve an integrated economic package that can be implemented in stages to create an appropriate environment so as to encourage and promote greater efficiency, higher productivity and faster industrial growth in desired directions through a well-coordinated system of incentives.

Major Weaknesses of NewIndustrial Policy, 1991:

The new industrial policy suffers from a number of weaknesses. Among these, the more important are as follows:

i. Absence of suitable policy for exports:

Today, the high-tech industries are receiving a similar emphasis as was granted to their basic industry counterparts in the past based on the infant industry argument. In the environment of limited export incentives and regulated labour markets there seems little reason to believe that today’s infants will provide an engine for growth consistent with the present targets.

ii. Distortions in industrial pattern owing to selective inflow ofinvestments:

In the current phase of investment following liberalisation, while substantial investments have been flowing into a few industries, there is concern over the slow pace of investments in many basic and strategic industries such as engineering, power, machine tools, etc. This is mainly due to the low rate of return in these sectors, which is less than that in the new or ‘sunrise’ industries (e.g. IT sectors). Such distortions in the investment pattern need to be rectified for ensuring balanced growth of industries in the country.

iii. Need for strengthening inter-linkages between new and oldsectors:

New sectors should have strong linkages with the old ones and should push up the latter towards modernisation and new product development. Unless such inter-linkages are strengthened, a part of the impetus given by the new sectors could be lost through leakage to other industries where the comparative advantage is stronger.

iv. Labour questions:

Restructuring and modernisation of industries as a sequel to the new industrial policy, often leads to displacement of labour. This would call for redeployment of labour through rehabilitation schemes. Thus, while modernising a particular industry, simultaneous efforts should also be made to identify areas of operations in which labour could be redundant.

v. Absence of incentives for raising efficiency:

Studies have shown that the incentive structure in the 1980s was somewhat perverse leading to industrial growth moving away from the sectors in which the country had comparative advantage and strength. Such polices encouraged industries with high domestic resource cost.Focussing attention on internal liberalisation without adequate emphasis on trade policy reforms resulted in ‘consumption-led growth’ rather than ‘investment’ or ‘export-led growth’. The resultant growth process was therefore not sustainable in a longer timeframe.

vi. Absence of incentives for technological innovations:

The policy of liberalisation appears to have failed to achieve one of its major objectives, vis. creating more innovative firms.

vii. Improperly defined industrial location policy:

The New Industrial Policy, while emphasised the detrimental effects of damage to environment, failed to define a proper industrial location policy, which could ensure a pollution free development of industrial climate. In its absence, the new industries have gravitated towards the already well established industrial centres with a well developed infrastructure. To sum up, there is a need for reviewing certain provisions of the policy to make it more meaningful and effective.


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