india_ industrial policy, liberalization and impact - insights

1/17/2015 India:IndustrialPolicy,LiberalizationandImpactINSIGHTS

http://www.insightsonindia.com/2014/12/09/indiaindustrialpolicyliberalizationimpact/ 1/10

insightsonindia.com http://www.insightsonindia.com/2014/12/09/indiaindustrialpolicyliberalizationimpact/

ByINSIGHTS

INSIGHTSSimplifyingUPSCIASExamPreparation

India:IndustrialPolicy,LiberalizationandImpact

SyllabusmentionsEffectsofliberalizationontheeconomy,changesinindustrialpolicyandtheireffectsonindustrialgrowth.

TableofContent

1. Introduction

2. Whyindustrialpolicy?

3. Argumentsagainstindustrialpolicy

4. CommoninstrumentsofIndustrialPolicy

5. EvolutionandChangesinIndustrialPolicyinIndia



Introduction

Oneofthemostimportanttasksofthegovernmentistomanageeconomyofthecountry.Ithastodecidethemeansandmethodstobeusedtowardsthis.However,thisjobwastakenupbyalmostallcountriesonlyaftergreatdepression.Inpredepressionera,therewasfaithinlaissezFairemodelofeconomy,whichliterallymeansnointerventionandletmarketforcesofdemandandsupplyhavefreehand.Thisisalsoknownascapitalistmodeofeconomy,wheregoodsandservicestobeproducedaredecidedbypurchasingpowerofthepeople.Inthismodelneedofpeopleisnotdeliberatelyconsidered,butitisbelievedthatfreemarketswillautomaticallytakecareofeveryonesneed.Ifthereareanymismatchesindemandandsupply,thenpriceoftheproductswillfluctuateinordertoropeinoroutsuppliersandconsumersandconsequentlytherewillbedemandsupplyequilibrium.Thiskeptgovernmentinterventionawaytilltheendofgreatdepressionof1920s.

Greatdepressionbroughtspiralinghyperinflationwhichrenderedwiderangeofcommoditiesunaffordabletothemasses.Withthisaccompaniedmassiveunemployment.Itbeliedexcessivefaithplacedinfreemarketsanditdemonstratedthatmarketsarenotsacrosanctastherewasabigmarketfailure.FamouseconomistJohnKeynesmadeoutcompellingcaseforgovernmentintervention,throughincurringfiscaldeficittocreatedemand.Itwasclearthatgovernmentwillhavetomanageproductionpatternsofeconomyandpromoteproductionofspecificgoodsininterestofconsumersandemployment.RooseveltsNewDealinUSmadeitquiteclearthatnowUSgovernmentwillinterveneforpromotingkeyindustries.

AnothermajorfactorwasofRussianRevolution.WithestablishmentofsocialistgovernmentinRussia,therewasasentimentalwaveagainstconceptoffreemarkets.Governmentsalloverworldextendedfranchise(votingrights)toworkingclassinthisperiodandlimitedtheinfluenceofcapitalists.Henceforthitbecameeasyandmustforsuchgovernmentstointerveneininterestofall.Thisstartederaofplanningtodifferentdegreeindifferentcountries.Socialistgovernmentswentforimperativeplanningunderwhichproductionwastakenupbystateandwasdistributedaccordingtoneedsonproportionalbasis.Forasocialistcountrythiswasquite



natural,butsurprisinglymanyerstwhileproponentsoffreemarketlikeFrance,USAalsotookupplanninginmilderform,whichiscalledindicativeplanning.Underthis,asalreadyexplained,governmentattemptstopromoteparticularindustriesininterestofconsumersandemployment.

AfterDecolonizationmanycountriesalongwithIndia,haduphilltaskofsocioeconomicdevelopment.Theireconomieswereinpastdeliberatelymadeheavilydependentonrespectivecolonialrulingpowers.Industriesandmarketswereininfancy.Newgovernmentshadtomarkpreferencesforchannelizingtheirscarceresourcestoachievelongtermholisticdevelopment.

Duetoallthesefactors,IndustrialPolicywasadoptedbyvariouscountriesandIndiawasfirstnoncommunistdemocraticcountrytohaveanofficialindustrialpolicy.

IndustrialPolicyisatypicalcharacterofamixedeconomy.Itispolicyofgovernmentinterventionwhichissectorspecificandisaimedatgivingpreferentialtreatmenttoaparticularsectoroverothers.Sectorarerecognizedbypolicymakers,whichareworthyofgovernmentsupportandtargetsareset.Wehavealreadyseengovernmentsupporttowardrenewableenergysector,organicfarming,foodprocessingandexportpromotionofvariousproducts.AllthesearepartofIndustrialpolicy.

WhyIndustrialPolicyisDesirable?

1. KnowledgeSpilloverIndustrieshaveacertaindegreeofknowledgespillovereffectontheeconomy.Degreeofthiseffectvariesfromsectortosector.Anewindustrywillattractrequisiteskill/talent/expertisewhichwillmultiplyovertime.Further,therewillbesomeancillaryindustrieswhichmaycomeuptosupportsuchindustries.Inshort,focusingonacertainindustrycanovertimeresultintoawholeindustrialcomplexwhichderivessynergiesandeconomiesfromeachother.Fore.g.DefenseIndustrycouldbebenefitedimmenselyifaviationindustry,Software,Highereducational,Spaceexplorationcapacitiesarefullydeveloped.SoIndiasspaceprogramprovidessynergytodefensecapacity.

2. InfantIndustryAttimeofIndependence,Indiasindustrywasnonexistentinmostofthesectorsandthoseexistingwereinfant.Theyhadlowcapacitytoadaptnewtechnologiesortoexploiteconomiesofscale.Inthiscasegovernmentprotectionisdesirableininitialstages,sothatacompetitiveindustrydevelopsatlatterstages.WithoutgovernmentsupportorprotectionmanyofthepresentcompetitiveIndustries,wouldneverhavecomeup.Inshort,theseindustriesneedprotectionfromforeigncompetition.

3. CoordinationFailureAnindustrydoesntexistorsurviveinisolation.Itneedsotherindustrieswhichfeedtoitrawmaterialsatreasonablecostsandquality.Further,manyotherindustriesthatwillactascustomerareneededforsurvivalofthisindustry.Fore.g.Iron&SteelIndustryismostimportantsectorofeconomy.Itismustforacompetitiveautomobilesector,constructionsector,Infrastructure,Capitalgoodsmachinerysector,Defensesector.Ontheotherhand,Ironandsteelsectorcanperformonlyifthereisavailabilityofcoalandpower.Agoodtransportsectorfacilitatesinteractionandmovementofgoodsinentireeconomy.Ininitialstagesofaneconomytheresoftenacoordinationfailure,whichgovernmenttriestoaddressbyindustrialpolicy.InIndiathisledtorecognitionofcoreindustrieswhichhavemultipliereffectontheeconomy,theseareIron&steel,Cement,CrudeOil,Gas,PetroRefining,Mining,Power,Fertilizers.

4. InformationalExternalitiesSettingupanIndustryrequirescertaindegreeofconfidenceinfutureofthewholeeconomyandthatindustryinparticular.Thereisreasonableriskwhichresultsinreluctanceonpartofinvestors.Thisriskanduncertaintyishighincaseoffirstmoverinanewlyopenedsector.Thisisbecausemarketsfornewproductareuncharteredanduntested,sotheresnoreliabledataorinformationonbasisofwhichriskreturncalculuscanbedrawn.Consequently,governmentsholdhand



ofafewnewunitsinthatindustrythroughindustrialpolicyandthengraduallyleavethemoftheirown.Aswehaveseeninrenewableenergysector.

Argumentsagainstindustrialpolicy

1. InfluencedbySpecialInterestsTherearealwayspressuregroupsinaneconomythatcompeteforresourcesofthegovernment.Theytrytoinfluencedecisionsofpolicymakerstocorneralargerthandeservedshareofnaturalandeconomicresources.Thisway,often,personalinterestprevailsovernationalinterest.Thisobviouslycreatesavenuesforcorruption,rentseeking,patronage,quidproqueasseeninelections.

2. KnowledgeDeficitAnyindustrialpolicyrequirespredictionoffuturetrendsinaneconomy.Ourexperiencetellsusthataneconomyistoughesttopredictandeffortsofplanningandpolicymakingoftenendupbeingfutile.Therearedifferentthinktanksatnationalandinternationallevelthatcomeoutwithdifferenteconomicforecasts.Hence,policymakerschoiceofforecastisasubjectiveoneandsuccessisonlydependentuponotherdevelopmentsineconomy.

3. DistortionofmarketsandproductionpatternsGovernmentsupportdistortspricesofproducts.Pricesaresignalswhichtellconsumersandproducerswhattoconsumeandproduce.So,duetogovernmentprotectionandsupport,producersfailtoadoptlatesttechnologies,newmarketsetc.Thismakesthemuncompetitive.

InstrumentsusedbyIndustrialPolicy

IndiaafterIndependencedeliberatelyoptedtopromoteHeavyCapitalIndustrywhichwastobeunderstatecontrol.Thiswasimplementedthroughfiveyearplans.After2ndfiveyearplan,whatispopularlycalledNehruMahalanobismodelwasadopted.InvestmentsweremadethroughstateownedPSUsinvarioussectorssuchasHydro/Thermal/Nuclearpower,IronandSteelIndustry(SAIL),Miningetc.

Thattime,therewasanotheropinionfromsomeeminenteconomistsinfavorofsupporttotraditionalhandicraftsectorandagroeconomy(whichwasGandhianmodel)inIndiawhichwasemploymentintensiveinthiscase,heavyindustrywillbelefttomarkets.ButCongressgovernmentoptedforMahalanobismodelanddebateoverthischoicestillcontinues.

NehruMahanabolismodelwasinsteadcapitalintensive.Therewasstrongaffinitytoheavyindustryatthattime.Developedcountriesprogressanddecentstandardoflivingendorsedinvestmentinfavorofheavyindustry.AtsametimegovernmentofUSSRwaspursuingrapidindustrializationandourleaderwereinstronginfluenceofsocialistideasoriginatinginUSSR.

Tobalancethisloophole,Indiassmallscaleindustrywasprotectedfromexternalanddomesticcompetition.ForprotectionfromexternalcompetitionhighTariffandnonTariffbarrierswereplacedandincaseofinternalcompetition,andcertainindustrieswerereservedonlyforsmallscalesector.

Letshavealookatcommonmeans,methodsorinstrumentsofIndustrialPolicy

Useoftariffs/nontariffbarriersandSubsidiesTariffsarecustomdutybarrierswhichareusedtoprotectdomesticindustryofacountryfromexternalcompetition.Itrenderscostsofimportedproductsartificiallyhighandgivesadvantagetolocalmanufacturers.Similarlytherearequantitativerestriction(nontariffbarriers)underwhichquotasarefixedlimitingquantitiesofimports.Inpre1990era,thesebothrestrictionswereextremelyhigh.However,StructuralAdjustmentPlanbyInternationalMonetaryFundandnegotiationsatWTOforcedIndiatobringdownthesebarriers.



ExampleofautomobilesectorIndiainpastkeptcustomdutiesonautomobilesashighas100200%.Thisgavedomesticautomobileindustryanadvantageandopportunitytoexploitdomesticmarkets.Nowwehavedomesticindustrywhichisgloballycompetent.ProductsfromMarutiSuzuki,Mahindra,andTataetc.arealsoexportedtomanycountries.Incontrast,Pakistanaffordedforeignautomobilesunrestricted(orlessrestricted)accesstoitsmarketsfromverybeginning.Consequently,itdoesnthaveanycompetitivedomesticAutomobilemanufacturingsector.

Anotherwayofsupportistoprovidesubsidy,eitheronpurchase,sale,orinvestment.Examplesforpurchasesfarmersareprovidedsubsidizedfertilizers,foroutputstheygetpricesupportandanyinvestmentinfarmmechanizationandprocessingindustryiseligibleforcapitalorinterestsubventionsubsidy.

ImportSubstitutionAforesaidpoliciesaregenerallytargetedtowardimportsubstitution.Thismeansimportsaretobeavoidedandproductsaretobemanufactureddomestically,eveniftheircostsaresubstantiallyhigherorqualityislacking.ThispolicyledtodevelopmentofcapacityintechnologyandinnovationtogreatextentinIndia.

ReservedIndustries

BythisgovernmentreservescertainkindofstrategicIndustriesforitselfandothersforSmallscalesector(moreonthislater)

ApartfromthesethereareothercontrolssuchasLicensingRequirements,underwhichoperationscanbecommencedonlyafterlicensehasbeengrantedandtermsofoperationofbusinesswilldependuponthosementionedinlicense.

EvolutionofIndustrialPolicy

Indiawasneverindustriallydevelopedcountrypriortoindependence.Itwasanagrariancountrywhereinhandicraftsattainedsupremacyunmatchedanywhereelseintheworld.Thereareveryfewlinesofeconomicactivitywhichbecametraditionalinnatureandcouldbeincludedundertheproductsproducedunderthefactorysystemof19thand20thcentury.Forinstancesilkmanufacturing,utensilmanufacturing,woodworks,someproductsunderpharmaceuticalsetccouldbecategorizedasindustrialactivity,butmethodswereoftentraditionalandtheyhadtocompetewithcontinuingindustrialrevolutionofwest.

IndustrialpoliciesandeconomicpolicieswereshapedbytheBritishGovernmentinfavourofBritishinterests.ThetariffpolicypursuedbyBritishinIndiawasbasedontheprincipalofonewayfreetradewhiletheIndianinterestforindustrializationinIndiaremaineddeliberatelyneglected.WhileBritishproducershadunrestrictedaccesstoIndianmarkets,IndianproductswerekeptatbaybyBritishindustrialpolicy.Onlyaccesswasallowedtorawmaterials.

ThoughtheBritishGovernmentestablishedDepartmentofCommerceandIndustryin1905buttheactivitiespursuedthroughthisdepartmentfavoredindustrialactivityinEngland.Thereafter,theprevailingGovernmentestablishedboardofScientificandIndustrialResearchin1940butnotmuchcouldcomeoutofit.Bythistimetherewerenumerousplanssuchasonebycongressworkingcommittee,Bombayplan,Visvesariyaplanetc.Almostallofthempropagatedheavyindustrieswithdominantroleofstate.

InIndependentIndiavariousresolutionswerepassedinParliamentfromtimetotime,landmarkshifthappenedin1991whenIndiawasforcedtoopenupitseconomytoglobalcompetitionandgovernmenthadtoderegulatesectorstoleavespaceforprivateindustry.HerearementionedsomelandmarkshiftsinIndustrialpolicyofIndia.



IndustrialPolicyResolution,1948

Aftergainingindependence,itwasnecessarytohavenewpolicyforindustryofthecountry,todecidepriorityareasandcleardoubtsinthemindsofprivateentrepreneursregardingnationalizationofexistingindustries.

InIndustrialPolicyResolutionof1948,bothpublicandprivatesectorswereinvolvedtowardsindustrialdevelopment.Accordingly,theindustriesweredividedintofourbroadcategories:

(a)Exclusivegovt.MonopolyThisincludesthemanufactureofarmsandammunition,productionandcontrolofatomicenergyandtheownershipandmanagementofrailwaytransport.TheseindustriesweretheexclusivemonopolyoftheCentralGovernment.

(b)GovernmentMonopolyforNewUnitsThiscategoryincludedcoal,ironandsteel,aircraftmanufacture,shipbuilding,manufactureoftelephone,telegraphsandwirelessapparatus(excludingradioreceivingsets)andmineraloils.NewundertakingsinthiscategorycouldhenceforthbeundertakenonlybytheState.

(c)RegulationThiscategoryincludedindustriesofsuchbasicimportancelikemachinetools,chemicals,fertilizers,nonferrousmetals,rubbermanufactures,cement,paper,newsprint,automobiles,electricengineeringetc.whichtheCentralGovernmentwouldfeelnecessarytoplanandregulate.

(d)Unregulatedprivateenterprisetheindustriesinthiscategorywereleftopentotheprivatesector,individualaswellascooperative.

Themainthrustofthe1948IndustrialPolicywastolaythefoundationofamixedeconomywhereboththeprivateandpublicenterprisesweretobegivenimportanceandworktogethertodevelopeconomytoacceleratethepaceofindustrialdevelopment.

IndustrialPolicyResolution,1956

ThiswasmeanttogiveaconcreteshapetothemixedeconomymodelandtheideologyofSocialistpatternofsociety.

TheIndustrialPolicyResolutionof1956classifiedtheentireindustrialsectorinthreeSchedules:

ScheduleA:Inthefirstcategory,thoseindustrieswereincludedwhosefuturedevelopmentwastheexclusiveresponsibilityoftheState.17industrieswereincludedinthiscategory.ThisincludedheavyandstrategicindustriessuchasdefenseequipmentAtomicenergyIronandSteelHeavycastingsandforgoingofironandsteelHeavyplantandmachineryrequiredforironandsteelproductionformining.

ScheduleB:InthiscategorythoseindustrieswereincludedwhichwereprogressivelyStateownedandinwhichtheprivateenterpriseswouldbeexpectedonlytosupplementtheeffortsoftheState.Inthiscategory12industrieswereincluded.

ScheduleC:AllindustriesnotlistedinscheduleAorBwereincludedinthethirdcategory.Theseindustrieswereleftopentotheprivatesector.Hence,theresponsibilitywithregardtoestablishment,functionanddevelopmentwasofprivatesector,thoughevenherethestatecouldstartanyindustryinwhichitwasinterested.

SmallScaleSectorToencouragesmallsector,inthepolicyresolution,variousstepswereproposedsuchas:(a)Directsubsidywasprovidedtosmallscalesector,(b)Suitabletaxationreliefwasgiventothissector,and(c)ItwasmadeobjectiveoftheStatetoprotectsmallscalesectorbyadvancingtechnicalassistance.



However,governmentfailedtointegratetheseindustriesandtheirprogramswiththeproductionprogramofthelargescalesector.

ForeignInvestmentallowedforeigncapitalparticipationinIndianeconomicdevelopmentbutthemajorshareshouldbelongtoIndia.Incaseofalreadyexistingforeignestablishments,thesewillbereplacedbyIndiantechniciansgradually.

Oneofthemajorobjectivesofresolutionwasreductioninregionalinequalitiesandimbalances.Butcontrarytothis,theactualoperationofthispolicyresultedinincreasedregionalinequalities.ThisbecomesevidentfromvariousreportswhichnotedthatthefourindustriallyadvancedStatesofMaharashtra,Gujrat,WestBengalandTamilNadubenefitedthemostfromtheoperationofthispolicy.

Mostimportantsectorswerereservedforgovernment,butgovernmentfailedtodeveloponthesereservedsectors.Occasionally,privatesectorwasallowedtooperateintheseareas.Asalreadymentioned,thiswasduetosystemofrentseekingandkickbackswhichdevelopedduringthisperiod.

TheMonopolisticandRestrictiveTradePracticesAct,1969

Thisactwashallmarkofinfamouslicensequotapermitsystem.Companieshavingmorethanspecifiedvalueofassetsneededtotakepermission/licensebeforeanyexpansionandcommencementofoperations.

Itsobjectiveswere

1. Toprohibitmonopolisticandrestrictivetradepractices(exceptbygovernment)

2. Topreventconcentrationofeconomicpowerinfewhands

3. TocontroltheMonopolies

4. ToprotectconsumerInterest

MRTPActbecameeffectiveinJune1970.Emphasiswasplacedonincreasingproductivityofindustry.Thereweremajoramendmentsin1980sandaMRTPcommissionwasalsosetup.Thisactwasincompatiblewithneweconomicpolicyafter1991andconsequently,itwasrepealedin2009.NowCompetitionActandCompetitionCommissionofIndiaareinplaceinstead.

IndustrialPolicyResolution1977

Thisresolutionwasresultofchangeingovernmentatcenter.Consequently,ithadmorefocusonsmallscaleindustry,cottageandvillageindustry.ThiswasmoveawayfromNehruvianMahalanobisideologytogandhianideologyofeconomicdevelopment.

Thisclassifiedthesmallsectorintothreecategories:

a)Cottageandhouseholdindustrieswhichprovideselfemploymentonawidescale.

b)TinysectorincorporatinginvestmentinindustrialunitinmachineryandequipmentuptoRs.1lakhansituatedintownswithapopulationoflessthan50000

c)SmallscaleindustriescomprisingindustrialunitswithaninvestmentofRs.10lakhandincaseofancillarieswithaninvestmentinfixedcapitaluptoRs.15lakh.



SmallScalesectorspecificpoliciesweremade.Numberofitemsreservedforthissectorwasincreased(105to807).DistrictIndustriesCenterswereestablishedineverydistrict,whichareinstrumentalforsupporttosmallscaleindustry.Thisagencywouldprovideunderasingleroofalltheservicesandsupportrequiredbysmallandruralentrepreneurs.KhadiandVillageIndustriesCommissionwasrevamped.

ThisresolutioncategorizedlargeindustriesonthelinesofBasic/coreindustry,CapitalGoodsindustry,HighTechnologyindustryandotherIndustries.

Itwasalsoenvisagedthatallpossibleeffortsbemadeinthedirectionofdevelopmentofindigenoustechnology,whichshouldensureefficientproduction,continuedinflowoftechnologyinsophisticatedandhighpriorityareaswhereIndianskillsandtechnologyareyetnotadequatelydeveloped.

Further,foreigninvestmentwouldbeencouragedonlyforsomeindustriesinthenationalinterestasdecidedbytheGovernment.Thisclearlymeantthatinareaswheretheforeigncollaborationwasnotrequired,suchcasewouldnotbereviewed.ForthistherewasdraconianForeignExchangeRegulationActinplace.

IndustrialPolicyresolution,1980

Congressmadecomebackandsoonrestoreditsownindustrialpolicy.

MajorChangeswere

1. Someoftheitemsreservedforsmallscaleindustryweredereserved.

2. Manyunits/companieswereoperatingonexcesscapacities,thanallowedbylaw.Theseexcesscapacitieswereregularized.

3. ForeignInvestmentwasallowedwithtechnologytransfer

4. Regulations,Licensing,restrictionswereeasedabitsignalinginclinationtowardsprivatesector.

NewIndustrialPolicy,1991

Theyear1991witnessedadrasticchangeintheindustrialpolicygoverningindustrialdevelopmentinthecountrysinceindependence.Thislandmarkchangewasentirelyanewchapterwhichwastoenforcetotallyopeneconomicsystemascomparedtotheearliermixedsystem.Thecountrydecidedtofollowthelinesofcapitalism.Itisalsosaidthattherewasshiftfromimperativetoindicativeplanningundernewsystem.

FeaturesofNewIndustrialPolicy

1. IndustriallicensingpolicyNewindustrialpolicyabolishedallindustriallicensing,irrespectiveofthelevelofinvestment,exceptforashortlistof18industriesrelatedtothesecurityandstrategicconcerns,socialreasons,hazardouschemicalsandoverridingenvironmentalreasonsanditemsofelitistconsumption.However,ofthese18industries,13categorieshavebeenremovedfromthelistgraduallyandcurrentlyonly5categoryofhealth,strategicandsecurityconsiderationsindustriesneedslicenseviz.Alcohol,cigarettes,hazardouschemicals,electronic,aerospaceandalltypesofdefenseequipment.

2. PolicyonPublicSectorThe1956Resolutionhadreserved17industriesforthepublicsector.The1991industrialpolicyreducedthisnumberto8.Asofnowonly3industriesarereservedforgovernment



1)AtomicEnergy2)MiningofAtomicMinerals3)RailwayTransport.

Thepolicyalsosuggestedthatthosepublicenterpriseswhicharechronicallysickandwhichareunlikelytobeturnedaroundwill,fortheformationofrevival/rehabilitationschemes,bereferredtotheBoardforIndustrialandFinancial

Reconstruction(BIFR),orothersimilarhighlevelinstitutionscreatedforthepurpose,inordertoprotecttheinterestsofworkerslikelytobeaffectedbysuchrehabilitationpackage,asocialsecuritymechanismwillbecreated.

Privatization/disinvestment

Governmentannounceditsintentiontoofferapartofgovernmentshareholdinginthepublicsectorenterprisestomutualfunds,financialinstitutions,thegeneralpublicandtheworkers.Abeginninginthisdirectionwasmadein199192themselvesbydivertingpartoftheequitiesofselectedpublicsectorenterprises.

3. MonopolisticandRestrictiveTradePracticelimit

UndertheMonopolisticandRestrictiveTradePracticeAct,allfirmswithassetsaboveacertainsize(Rs.100croresince1985)wereclassifiedasMRTPfirms.Suchfirmswerepermittedtoenterselectedindustriesonlyandthisalsoonacasebycaseapprovalbasis.Inadditiontocontrolthroughindustriallicensing,separateapprovalswererequiredbysuchlargefirmsforanyinvestmentproposals.TheNewIndustrialPolicyremovedthethresholdlimitinassetsinrespectofMRTPcompanies.

4. PolicyonForeigninvestmentandTechnologyagreements

TheNewIndustrialPolicy,preparedaspecifiedlistofhightechnologyandhighinvestmentpriorityindustries,whereinautomaticpermissionwastobemadeavailablefordirectforeigninvestmentupto51percentforeignequity.Theindustriesinwhichautomaticapprovalwasgrantedincludedawiderangeofindustrialactivitiesinthecapitalgoodsandmetallurgicalindustries,entertainmentelectronic,foodprocessingandtheservicessectorshavingsignificantexportpotential.Listisbeingexpandedsincethen.CurrentsituationofFDInormswillbediscussedinnextarticle.

5. AbolitionofPhasedManufacturingProgramsforNewProjectsTheseprogramswasaimedatindigenizationoftechnology.Thesewereinforceinanumberofengineeringandelectronicindustries.Thenewpolicyabolishedsuchprogramforfuture.

6. RemovalofMandatoryConvertibleClauseInpreliberalizationera,therewasamandatoryconvertibleclauseinloanagreementwithborrower(industriesinthiscase).Asperthisclause,bankshadrighttoconverttheirloanamountintoequitywhenevertheyfeelso.Thiswillmakethemownerfromlenderinthatenterprise.Thisclausewasusedbygovernmentasaninstrumenttonationalizeprivatefirms.Thiswasremovedunderneweconomicpolicy.



Neweconomicpolicywasculminationoflongeraofinefficientdominanceofpublicsector.Nevertheless,publicsectorbythistimehadbuiltstrongindustrialbaseonwhichotherindustriescanthriveinfuture.ThiswasoneoftheobjectivesofNehruvianmodel.Unsurprisingly,Industrialandeconomicgrowthremaineddismalduringthisperiod.Processofliberalizationbegunin1980swhichshowedupinbetterperformanceofeconomy.Recenthighgrowth(aspersomeeconomists)cantbeattributedtoinitiativesofNewindustrialandeconomicpolicyasstatisticalevidencesuggestbetterperformancefromearly1980s.SomuchcreditcantgotointerventionofInternationalMonetaryFund.

Inpostliberalizationera,governmenttookuptheroleoffacilitatorandregulator.SomeconclusiveindicationstowardthisarereplacingForeignExchangeRegulationActwithManagementAct,latteronebeingmoreliberalandlessharsh.Similar,MRTPactwasreplacedbycompetitionAct.NowFDIisallowedinwidearrayofsectors,inmanyofthemthroughautomaticroute.However,post1991growthisaccusedoflopsidedgrowthwithdevastatingsocialimpactasgovernmentrolledbackexpenditurefromsocialsectorstoo.

NoteEffectsofLiberalizationonvariousaspectsofIndianeconomyandSocietywillbediscussedinnextarticle,alongwithpost1991andcurrentIndustrialpolicies.

INSIGHTS2015.AllRightsReserved.

india_ industrial policy, liberalization and impact - insights

Documents