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Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Changes in Industrial Policy and their Effects on Industrial Growth

Changes in Industrial Policy and their Effects on Industrial Growth

The post‐liberalization industrial policy came in the wake of severe balance of payments crunch. The process initiated in the 1980s did bring about some positive results on the industrial growth front. The industrial policy statement of July 1991 stressed that the government would continue to pursue a policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of capital markets and increased competitiveness. It underlines the spread of industrialization to backward areas of the country with active promotion through right kind of incentives, institutions and infrastructure investments.

Objective of Industrial Policy Statement

The prime objective of Industrial Policy Statement was to maintain sustained growth in productivity, enhance gainful employment and achieve optimal utilization of human resources, to attain international competitiveness and transform India into a major player in the global arena. The focus of the policy was to unshackle the industry from bureaucratic controls. This needed policy reforms in many areas. In the first instance, a substantial modification in industrial licensing policy was considered necessary with a view to ease restraints on capacity creation, and respond to emerging domestic and global opportunities by improving productivity. Accordingly, the policy statement included abolition of industrial licensing for most industries, with the exception of a few industries for reasons of security, strategic concerns, and social and environment issues. Compulsory licensing was required only in respect of eighteen industries. These included inter alia coal and lignite, distillation and brewing of alcoholic drinks, cigar and cigarettes, drugs and pharmaceuticals, white goods and hazardous chemicals. Small sector continued to be reserved. Norms for setting up industries (except for industries subject to compulsory licensing) in cities with more than one million populations were further liberalized.

Domestic and Foreign Investment

Recognizing the complementarily of domestic and foreign investment, the FDI was accorded a significant role in the industrial policy of 1991. FDI up to 51 per cent foreign equity in high priority industries requiring large investments and advanced technology was permitted. Foreign equity up to 51 per cent was also allowed in trading companies primarily engaged in export activities. These initiatives were expected to provide a boost to investment besides enabling access to high technology and marketing expertise of foreign companies. With a view to inject technological dynamism in the Indian industry, the government provided automatic approval for technological agreements related to high priority industries and eased procedures for hiring of foreign technical expertise. Major initiatives towards restructuring of public sector units were initiated, in view of their low productivity, over staffing, lack of technological up gradation and low rate of return. In order to raise resources and ensure wider public participation PSU's, it was decided to offer its share holding stakes to mutual funds, financial institutions, general public and workers. Similarly, in order to revive and rehabilitate chronically sick PSU's it was decided to refer them to the Board of Industrial and Financial Reconstruction (BIFR).
The policy was also provided for greater managerial autonomy to the Boards of PSU's.

The Industrial Policy Statement of 1991 recognized that the Government intervention in investment decisions of large companies through MRTP Act has proved to be deleterious for industrial growth. Accordingly, pre‐entry scrutiny of investment decisions of MRTP companies was abolished. The thrust of the policy was more on controlling unfair and restrictive trade practices. The provisions restricting mergers, amalgamations and takeovers were also repealed.

Ever since 1991, industrial policy measures and procedural simplifications have been reviewed on an ongoing basis. Currently, there are only six industries which require compulsory licensing. Similarly, there are only three industries reserved for the public sector. Some of the important policy measures initiated are as follows. Since 1991, promotion of FDI has been an integral part of India’s economic policy. The government has ensured a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. FDI up to 100 per cent has been allowed under automatic route for most manufacturing activities in Special Economic Zones (SEZ’s). More recently in 2004, the FDI limits were raised in the private banking sector (up to 74 per cent), oil exploration (up to 100 per cent), petroleum product marketing (up to 100 per cent), petroleum product pipeline (up to 100 per cent), natural gas and LNG pipeline (100 per cent), printing of scientific and technical magazines and journals (up to 100 per cent). In February 2005, The FDI ceiling in telecom sector in certain services was increased from 49 per cent to 74 per cent.

Reservation of items for exclusive manufacture in small scale sector has been an important tenant of industrial policy. Realising the increased import competition with the removal of quantitative restrictions since April 2001, the government has adopted a policy of dereservation and has pruned the list of items reserved for SSI sector gradually from 821 from 1999 to 506 items in 2005. In 2006, further 108 items were de‐reserved. Now, only 362 items are under reservations. The investment limit in plant and machinery of small units has been raised from time to time. To enable some of the small scale units to achieve required economies of scale, a differential investment limit has been adopted for them since 2001. Presently, there are 41 reserved items which are allowed an investment limit of up to `50 million instead of the limit of `10 million applicable for other small scale units. Equity participation up to 24 per cent of the total share holding in small scale units by other industrial undertakings has been allowed. The objective therein has been to enable the small sector to access the capital market and encourage modernization, technological upgradation, ancillarisation and sub‐contracting, etc.

Disinvestment

The focus of disinvestment process of PSU’s has shifted from sale of minority stakes to strategic sales. Apart from general policy measures, some industry specific measures have also been initiated. For example, Electricity Act 2003 has been enacted which envisaged to de‐license power generation and permit captive power plants. It also intended to facilitate private sector participation in transmission sector and provide open access to grid sector. Various policy measures have facilitated increased private sector participation in key infrastructures such as, telecommunication, roads and ports. Foreign equity participation up to 100 per cent has been allowed in construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private sector financing by large firms in the highway sector.

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