New Industrial Policy 1991

On July 24, 1991, Government of India announced its new industrial policy with an aim to correct the distortion and weakness of the Industrial Structure of the country that had developed in 4 decades; raise industrial efficiency to the international level; and accelerate industrial growth.

Salient Features

We can study the features of the new industrial policy 1991 under different heads as follows:

Government Monopoly

The number of industries reserved for public sector was reduced from 17 (as per 1956 policy) to only 8 industries viz. Arms and Ammunition, Atomic Energy, Coal, Mineral Oil,  Mining of Iron Ore, Manganese Ore, Gold, Silver, Mining of Copper, Lead, Zinc, Atomic Minerals and Railways.

Current Position

Currently only two categories from the above viz. atomic energy and Railways are reserved for public sector. Further, Atomic minerals come within the purview of Atomic Energy Act. Government of India does not grant license to private sector for mining of atomic minerals and mineral sand also. However, for mining of mineral present in beach sand deposits, the state governments can grant license to private parties subject to prior consent of the Department of Atomic Energy. There have been proposals to open the atomic energy sector for private sector, but so far it has not been done.

Further, the policy had implied threat of closure of sick public sector enterprises to increase efficiency of the public sector.

Industrial Licensing Policy

This policy abolished the Industrial licensing for all industries except for a short list of 18 industries. This list of 18 industries was further pruned in 1999 whereby the number reduced to six industries viz. drugs and pharmaceuticals, hazardous chemicals, explosives such as gun powder and detonating fuses, tobacco products, alcoholic drinks, and electronic, aerospace and defence equipment. The compulsion for obtaining prior approval for setting units in metros was also removed.

However, in this policy, industries reserved for the small scale sector were continued to be so reserved.

Foreign Investment and Capital

This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, up to 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed. Today, there are numerous sectors in the economy where government allows 100% FDI.

34 Industries were placed under the automatic approval route for direct foreign investment up to 51 percent foreign equity. It was promised that there will be no bottlenecks of any kind in this process provided that foreign equity covers the foreign exchange requirement for imported capital goods. A promise to carry out some amendments in Foreign Exchange Regulation Act (1973) was also made. (The act was later replaced by FEMA in 1999)

NRIs were allowed to 100% equity investments on non-repatriation basis in all activities except the negative list.

A provision was made that in cases where imported capital goods are required, automatic clearance is given, provided there is foreign exchange availability is ensured through foreign equity.

The government also established a special empowered board called Foreign Investment Promotion Board (FIPB) to negotiate with international firms and approve FDI in selected areas.

Foreign Technology Agreements

Automatic permission was given for foreign technology agreements in high priority industries up to a lump sum payment of Rs. 1 crore, 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production. Further, government eased hiring of foreign technicians.

Review in Public Sector Investments

A promise was made to review the portfolio of public sector investments with a view to focus the public sector on strategic, high-tech and essential infrastructure. This indicated a disinvestment of the public sector. The PSUs which were chronically sick and which are unlikely to be turned around were to be referred to the Board for Industrial and Financial Reconstruction (BIFR). It was promised that Boards of public sector companies would be made more professional and given greater powers.

Amendments to MRTP Act

The MRTP Act will be amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. This eliminates the requirement of prior approval of Central Government for establishment of new undertakings, expansion of undertakings, merger, amalgamation and takeover and appointment of Directors under certain circumstances. The MRTP Limit for MRTP companies was made Rs. 100 Crore. Currently, MRTP act is replaced by Competition Act 2002.

Definition of Tiny Sector

The definition of Tiny Unit was changed as a unit having an investment limit of Less than Rs. 5 Lakh.

National Renewal Fund to provide safety net for labourers

Via this policy, the Government announced to establish a National Renewal Fund (NRF) to provide a social safety net to the labour. This fund was established in 1992 and two schemes were brought under this- first Voluntary Retirement Scheme (CRS) and another re-training scheme for rationalised workers in organised sector. The fund monies would be used to make payments under these two schemes. This fund was later abolished in 2000.

Why NRF was abolished?

The NRF was established to provide relief to the workers affected by technological changes, privatisation of public sector units and closure of public sector units. Those who lost their jobs would be either paid money under VRS scheme or will be retrained / rehabilitated. The VRS scheme was under DIPP at that time. What happened was that for around 10 years, bulk of the payments in NRF was paid for VRS only; the fund did not adequately serve the stated objective of “re-training and rehabilitation”. Further, initially the private sector was also listed as its beneficiary, but later it was felt that only public sector should be exclusively benefitted from this fund. This, this fund was no more than a “golden handshake scheme”. Due to this NRF was abolished and the VRS was shifted to Department of Public Enterprises (DPE).

Tangible outcomes of the Industrial Policy 1991

  • This policy made Licence, Permit and Quota Raj a thing of past. The process of liberalization is continuing. The 1991 policy attempted to liberalise the economy by removing bureaucratic hurdles in industrial growth.
  • The role of public sector was limited. Only 2 sectors were finally left reserved for public sector. This reduced burden on the government. A process of either transforming or selling off the sick units started. The process of disinvestment in PSUs also started.
  • The policy provided easier entry of multinational companies, privatisation, removal of asset limit on MRTP companies, liberal licensing. All this resulted in increased competition, that led to lower prices in many goods such as electronics prices. This brought domestic as well as foreign investment in almost every sector opened to private sector.
  • The policy was followed by special efforts to increase exports. Concepts like Export Oriented Units (EOU), Export Processing Zones (EPZ), Agri-Export Zones (AEZ), Special Economic Zones (SEZ) and lately National Investment and Manufacturing Zones(NIMZ) emerged. All these have benefitted the export sector of the country.
  • Gradually, a new act was passed for MSMEs in 2006 and a separate ministry was established to look into the problems of MSMEs. Government tried to provide better access to services and finance to MSMEs.

If we were to evaluate the reform process in the Indian economy over the last two decades or so, the results have been nothing short of dramatic. Those of us who have managed businesses in India before the 1990s realise this only too well. The abolition of industrial licensing, dismantling of price controls, dilution of reservations for small-scale industries and virtual abolition of the monopolies law, relaxation of restrictions on foreign investment, lowering of corporate and personal tax rates, removal of restrictions on managerial remuneration, etc. were very bold steps, all of which have enabled industry to blossom. Today’s younger generation of business managers cannot even believe that we had such an array of restrictions and handicaps.