New Industrial Policy 1991

The New Industrial Policy 1991, came as a rescue to India, grappling with a severe balance of payments crisis. The policy shifted the Indian economy towards a market-oriented structure, encouraging private sector participation, and attracting foreign investments. However, despite positive impacts like the promotion of domestic firms and improved legal framework, the policy had its negatives. For instance, it lacked an efficient export strategy, led to imbalanced investment distribution, and often resulted in labour displacement without offering alternative employment opportunities. In this article, you will learn about what is New Industrial Policy, 1991, its need, key features, and positive & negative impacts. To explore more interesting UPSC Economy topics like New Industrial Policy, 1991 check out other Economic articles and IAS Notes of IASToppers.   

Table of Content

• Introduction
• Need for New Industrial Policy 1991
• Key features of New Industrial Policy 1991
• Positive Impact of New Industrial Policy 1991
• Major Weaknesses of New Industrial Policy 1991
• Conclusion
• FAQs on New Industrial Policy 1991

Introduction

• By the start of the 1990s, it was important for India to remodel the economic blueprint.
• India’s government opted to change the foundational concept of its industrial policy, leading to an inevitable shift in the economy’s scope and essence.
• This resulted in 1991 New Industrial Policy which is often perceived more as a process than a policy.
• The policy advocated for the adoption of market economy principles as the primary operative principle, unless there is a need to safeguard the interests of poorest in the society.

Need for New Industrial Policy 1991

• Balance of paymentCrisis: By mid-1991, India found itself engulfed by a critical balance of payment (BoP) situation. Many unfortunate circumstances in the early 1990s worked against India’s economic stability.
  • Gulf War or 1990–1991 Iran–Iraq war led to soaring oil prices which resulted in increased import costs. This quickly eroded India’s foreign reserves.  y June 1991, India’s foreign exchange reserves had fallen to a mere two week worth of import coverage.
  • Gulf War also resulted in a considerable drop in private remittances from Indians working overseas, particularly from the Gulf region.
  • Inflation shot up to almost 17%.
  • The Central Government’s gross fiscal deficit increased to 8.4% of the GDP.
• Impetus for Market Liberalisation: India narrowly avoided a severe BoP crisis, which served as a catalyst for implementing market liberalisation measures in 1991. Initially, the focus was on macroeconomic stability.
  • However, soon enough, a comprehensive set of reforms rolled out, addressing industrial policy, trade and exchange rate policies, foreign investment policy, financial and tax reforms, and public sector adjustments.
• Conditional IMF Support: The International Monetary Fund (IMF) stepped in to aid India during its 1990-91 BoP crisis, but the financial assistance came with its own set of prerequisites.

As a result, the new industrial policy, announced by the government on 23 July, 1991 had initiated a bigger process of economic reforms in the country, seriously motivated towards the structural readjustment naturally obliged to fulfil IMF conditionalities.

Key features of New Industrial Policy 1991

De-reservation of the industries

• The public sector traditionally monopolized key industries and capital goods.
• However, the New Industrial Policy of 1991 diversified this by welcoming private sector involvement in most industries.
• Industries exclusively managed by the Central Government since the 1956 Industrial Policy Resolution were now reduced to a mere eight.
• The only sectors that remained solely under public sector control were atomic energy, mining, and railways. Every other industry invited the participation of private enterprises.
• Currently, only two sectors are either completely or partially governed by the Central Government:
  • Atomic energy and nuclear research and other activities, i.e., mining, use management, fuel fabrication, export-import, waste management, etc., of radioactive minerals.
  • Railways

De-licencing of the industries

• Before the policy, private businesses required licenses to establish an industry, leading to significant delays. The industrial policy of 1991 has almost abandoned the industrial licensing system.
• The policy reforms continued, and at this time, only four industries must secure a mandatory license:

(i) Aero space and defence related electronics

(ii) Gun powder, industrial explosives and detonating fuse

(iii) Dangerous chemicals

(iv) Tobacco, cigarette and related products

Abolition of the MRTP Limit

• In 2002, Competition Commission Act replaced the MRTP Act.
• The Monopolistic and Restrictive Trade Practices (MRTP) limit of ₹100 crore was discontinued after the Competition Act was enacted in 2002.

Promotion to Foreign Investment

• The 1991 industrial policy marked a significant shift in the Indian economy’s outlook towards foreign capital, transitioning from a traditionally closed economy.
• The policy actively sought to attract foreign investment, both direct and indirect.
• Foreign direct investment (FDI) allowed multinational companies to establish operations in India, with sector-specific ownership ranging from 26% to 100%. This initiative took effect in 1991.
• The policy introduced a portfolio investment scheme (PIS) in 1994 to allow indirect foreign investment into Indian firms’ equity capital.
• Under the PIS, foreign institutional investors (FIIs) with a proven track record can invest in the Indian stock market, provided they register with the Securities and Exchange Board of India (SEBI). However, only institutional investment is permitted, not individual foreign investment.

Reforms related to the public sector enterprises: 

• The reforms aimed to boost the public sector’s efficiency and competitiveness.
• The government pinpointed strategic and priority areas for public sector focus.
• Loss-making public sector units (PSUs) were sold off to private entities.
• The government implemented a disinvestment strategy for public sector restructuring while granting greater autonomy to PSU boards.
• Weak public enterprises were referred to institutions like the Board for Industrial and Financial Reconstruction for the development of revival plans.

FERA Replaced by FEMA

• As part of its commitment in the 1991 industrial policy, the government replaced the stringent Foreign Exchange Regulation Act (FERA) with the more liberal Foreign Exchange Management Act (FEMA) in 1999, which took effect in 2000–01 with a two-year sun-set clause.

Location of Industries

• The new industrial policy of 1991 introduced a more straightforward approach for location of industries, replacing the old, complicated, and time-consuming process.
• A clear distinction was made between industries that cause pollution and those that don’t, with straightforward rules for their placement:

(i) Non-polluting industries might be set up anywhere.

(ii) Polluting industries to be set up at least 25 kms away from the million cities.

Compulsion of Phased Production Abolished

• The requirement for phased production was done away with under the new policy, providing private companies with the flexibility to manufacture various goods and models at the same time.
• This change enabled industries to utilize their capacity and capital more effectively and to their fullest extent.

Establishment of National Renewal Fund: 

• As a part of the policy, the government set up a National Renewal Fund (NRF). This fund was established to provide a social safety net for workers.

Definition of Tiny Sector

• The policy redefined the Tiny Unit category, setting the investment limit for such a unit at less than Rs. 5 Lakh.

Positive Impact of New Industrial Policy 1991

• Transformation by 1991 Industrial Policy: The 1991 Industrial Policy brought significant changes, primarily discarding the complex industrial licensing system. Financial incentives began to play a more prominent role in directing investments. Coupled with reduced tax rates and more efficient revenue collection, it paved the way for greater business activity and investment.
• Promotion of Domestic Firms: Significant internal deregulation was introduced, empowering domestic firms to invest and grow. This change induced an increase in competitiveness.
• Improvement in Legal Framework: Changes were made to better the legal structure. The Act of Securitization, Reconstruction of Financial Assets and Enforcement of Security Interest, 2002, allowed banks and financial institutions to assert their claims on collaterals for overdue secured credit without extensive legal proceedings.
• Promoting Fair Competition: The Competition Act 2003 was designed to boost competition by outlawing practices that stifle competition and regulate large corporations. The Companies (Second Amendment) Act 2002 revised the definition of industrial sickness, set up a revival and rehabilitation fund, and removed creditor protection.
• Open-Door Import Policy: The internal liberalization resulted in technological advancement and modernization of the Indian industry. This approach further reduced costs and nurtured international competitiveness.
• Balanced Reform Approach: Contrary to drastic overhauls seen in some countries, India opted for a gradual approach in its policy reform. The intent was to apply adequate pressure for efficiency and modernization without disrupting the system. The idea was to exert pressure that aligns with the system’s capacity to adapt, as undue pressure could lead to system instability.

Major Weaknesses of New Industrial Policy 1991

• Export Policy Concerns: It doesn’t have a viable strategy for exports, even though it prioritizes high-tech industries like previous policies did for basic ones. Considering the limited export incentives and controlled labour markets, it’s uncertain if these new industries will drive the anticipated growth.
• Imbalanced Investment Distribution: Post-liberalization, significant investments are pouring into select sectors, leaving important areas like engineering, power, and machine tools underinvested due to their lower returns. This creates an imbalance in the industrial development and needs correction to ensure an even growth across all sectors.
• Integration of New and Old Industries: Strong connections between new and old sectors are vital for industrial modernization and product innovation. Without these links, gains from the new sectors could seep into industries with stronger comparative advantages, causing loss of potential benefits.
• Labor Displacement Issues: Industrial modernization, as a result of the new policy, often leads to labor displacement. Therefore, while upgrading industries, it’s crucial to also find alternative employment opportunities for the potentially affected workers.
• Lack of Efficiency Incentives: Research indicates that the incentive structure of the 1980s diverted growth from sectors where the country had a competitive edge. Policies that encouraged industries with high domestic resource costs must be reviewed.
• Misdirected Growth Focus: The emphasis on internal liberalization without adequate trade policy reforms led to ‘consumption-led growth’ instead of ‘investment’ or ‘export-led growth’, making the growth unsustainable over a longer period.
• Inadequate Innovation Encouragement: Despite the liberalization policy, there is a failure in stimulating more innovative firms, suggesting a need to reassess the incentives for technological advancements.
• Environmental Consideration in Industrial Location: The new industrial policy, while acknowledging environmental impacts, failed to provide a concrete plan for industrial location that guarantees pollution-free development. Therefore, it’s crucial to revise the policy to ensure industries are not merely clustering in established industrial centers but are distributed in an eco-friendly manner.

Conclusion

While the implementation of New Industrial Policy of 1991 was a bold step for India’s economy. It unquestionably opened up avenues for investment, improved competitiveness, and promoted the growth of domestic firms. However, it also led to several challenges like labor displacement, imbalanced investment distribution, and inadequacies in encouraging innovation. Therefore, the Indian government should not just rest on these past reforms but continually work towards making necessary adjustments in line with changing circumstances. This could include developing a robust export strategy, promoting balanced industrial growth, and encouraging innovative enterprises while also addressing social issues like labor displacement

Ref: Source-1

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