The New Industrial Policy was announced on July 24, 1991 by the government, headed by Prime Minister P.V. Narasimha Rao. The New Industrial Policy (NIP) was a great deviation from the old industrial policy. When all previous industrial policies talked about how to regulate the private sector in a so-called national interest, whereas new industrial policy 1991 talked about deregulation and license elimination. When with each upcoming industrial policy, the role of the public sector increased in the economy and new restrictions were introduced in the private sector, but this new industrial policy 1991 not only limited the role of the PSUs but also talked about disinvestment and sufficient space for the private sector and abroad. Capital to develop and invest.
The new policy has dismantled all unnecessary annoying bureaucratic controls on industrial growth. The new policy has redefined the role of the public sector and asked the private sector to operate even in those areas that until now were reserved for the public sector.
Objectives of the new industrial policy:
- The key objective was the rapid industrialization of the country.
- Increase employment opportunities in the private sector.
- Ensure profitability in the public sector.
- Promote entrepreneurship.
- Improve the balance of payments by promoting export-oriented industries.
- Invite foreign capital for industrialization and boost exports.
- Link the Indian economy with the global economy.
- Deregulate and grant licenses to the industry to achieve rapid industrialization.
- Encourage large companies and projects to achieve economies of scale.
- Promote R&D and provide new technologies to produce world-class products and services.
- Rapid development of infrastructure, especially roads and electricity, with active participation of the private sector and FDI.
Radical steps of the new industrial policy:
The New Industrial Policy took radical measures in the following areas:
1. Industrial licensing
2. Foreign investment
3. Foreign technology agreement
4. Public sector policy
5. MRTP Law
1. Industrial Licensing:
Industrial licensing is governed by the Industries (Development and Regulation) Act of 1951. It is a very effective tool used by the government to regulate the private sector. Over the years it has become an exploitation tool. The new industrial policy eliminated licenses in a big way.
It abolished all industrial licensing, regardless of investment level, except for 18 businesses that deal with safety and strategic concerns, social causes, safety concerns, and environmental issues, hazardous products, and elite consumption. Later, this list was cut and, as of now, only a license is required for 6 items listed in Annex II. These are the following:
List of industries for which the industrial license is mandatory according to the Industries (Development and Regulation) Act, 1951:
Also read: Industrial Policy 1977
- Distillation and preparation of alcoholic beverages.
- Cigars and tobacco cigarettes and manufactured tobacco substitutes.
- Aerospace and defense electronic equipment.
- Industrial explosives, including detonating fuses, safety fuses, gunpowder, nitrocellulose, and fixtures.
- Hazardous chemicals:
(a). Hydrocyanic acid and its derivatives.
(b). Phosgene and its derivatives.
(c). Hydrocarbon isocyanates and dissociates, not specified elsewhere (example: methyl isocyanate).
- Medicines and pharmaceutical products (in accordance with the modified Drug Policy issued in September 1994 and subsequently amended in February 1999).
2. Foreign Investment:
This was a revolutionary step taken by the Rao government. In the first 50 years of India’s economic planning, no one imagined that one day a socialist economy like India would provide free access to foreign equity. Although the Industrial Policy of 1956 accepted the role of foreign equity, since independence we have always considered foreign equity as a kind of economic slavery. But in the last 50 years, the enormous underutilization of resources, unemployment, poor infrastructure, and widespread poverty forced the government to open the doors to foreign equity. Today, India welcomes foreign capital in almost all sectors.
In 1991 it allowed the following:
Also read: Industrial Policy 1956
- Automatic approval for the participation of foreign capital up to 51% granted in high priority industries listed in Annex IV of Industrial Policy, 1991.
- Foreign commercial companies can invest up to 51% in Indian commercial companies engaged in export activities.
- In the hotel and tourism-related industry, up to 51% of foreign capital is allowed.
- Even in the mining sector, foreign investment of up to 50% was allowed.
3. Foreign Technology Agreements:
Foreign technology agreement is allowed through the automatic route under delegated powers exercised by the RBI or by the government. However, cases involving industrial licenses/small quantities of reserved goods do not qualify for automatic approval and may require consideration and approval by the government.
- Automatic Approval: The Reserve Bank of India, through its regional offices, provides automatic approval for foreign technology cooperation contracts for all industries:
(a). Lump-sum payments not exceeding US $ 2 million;
(b). Royalties payable are limited to 5% for domestic sales and 8% for exports, subject to a total payment of 8% on sales for a period of 10 years
(c). The period for the payment of royalties that does not exceed 7 years from the date of commencement of commercial production, or 10 years from the date of the agreement, whichever is earlier (the above-mentioned royalty limits they are net of taxes and are calculated according to the standard conditions).
- Government approval for the following categories, government approval would be necessary:
(a). Proposals that attract compulsory licenses
(b). Manufacturing items reserved for the small-scale sector
(c). Proposals that involve any previous joint venture, or transfer of technology/trademark agreement in the same field or allied in India. The definition of the field “equal” and “ally” would be according to the 1987 4-digit NIC code 1987 and the 3-digit NIC 1987 code
(d). Extension of foreign technology collaboration agreements (including those cases that may have received automatic approval in the first instance)
(e). Proposals that do not meet any or all of the parameters for automatic approval.
4. Public sector policy:
Since the industrial policy of 1956, the public sector played a strategic role in the Indian economy. They enjoyed preferential treatment by the government and played an important role in the country’s GDP. The 1956 policy reserved 17 industries for the public sector, but the 1991 policy reduced this number to eight, which was further reduced to two.
The performance of the public sector was far from satisfactory. Most of the PSUs recorded losses. The lack of responsibility, political interference, excessive work, poor project management, inadequate attention to R&D, socialist objectives, etc., even leads to the erosion of paid capital of some PSUs.
The 1991 industrial policy took the following steps to improve the conditions of the PSU:
Also read: Industrial Policy 1948
- Memorandum of understanding: Memoranda of understanding were signed with the PSU, which gives the PSU more autonomy and responsibility. It was a contract between the government and the PSU. It started in 1987-88 with four public companies. Currently, more than 100 PSUs are covered by the MOU.
- BIFR: The unviable sick units were referred to the Board of Industrial and Financial Reconstruction (BIFR) to advise the government on whether to invest more in the PSUs to close them or get rid of the government stake in them. The National Renewal Fund (NRF) provided assistance to cover the cost of recycling and redistribution of Bonds
work and also provide compensation to work affected by the closure of unviable public sector units.
- Divestments and privatization: The government decided to reduce its stake in the PSUs and also decided to privatize some PSUs in the coming years, many PSUs were privatized and disinvested.
5. MRTP Act:
According to the MRTP act, all companies with assets exceeding a certain size (Rs 100 million since 1985) were classified as MRTP companies. The main objective of the MRTP Act was:
(i.) Prevention of the concentration of economic power and control of monopolies
(ii). Prohibition of monopolistic, restrictive and unfair business practices.
There were many restrictions for MRTP companies, as they were allowed to enter selected industries, that too on a case-by-case basis of approval. In addition to licenses, these companies require a separate permit for any additional investment.