Indian Economic Policy

8/2/2019 Indian Economic Policy

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Indian Economic Policy

India embarked on economic reforms in 1991, in the wake of a balance of payments

crisis. Issues concerning economic policy, impact of the reforms on poverty, sectored

issues relating to agriculture, industry and infrastructure. To become a major player in

world economy, a comprehensive approach was taken through India Economic

Policy. After the liberalization of Indian Economy in the early 1990s, the Indian

economy scenario witnessed a paradigm shift of stance. India Economic Policy has

cast off its protectionism image and became more liberal. Foreign investors were

allowed to invest in Indian business and as a result of which huge foreign direct

investments or FDI flowed into the Indian market. Rationality and consistency among

trade and other economic policies were taken into account for maximizing the

contribution of such policies. And, while implementing the India Economic Policy,

previous economic policies of India were also refereed, to allow developmental scope

of India Economic Policy.

Objectives of the India Economic Policy

Both performance and policy are in some sense best judged in terms of the objectives

of development policy, the more so in an economy in which objectives have been

consciously set in successive national plans. The broad objectives which have guided

Indias development strategy are listed below. Some of them are obviously common

to all developing countries, but others are not so, at least not to the same extent.

1. Achievement of a high rate of economic growth leading to a sustainedimprovement in the levels of living of the population. This is obviously a

common objective of all developing countries.

2. Reduction in inequalities and more especially an accelerated effort to removepoverty at a pace faster than would be achieved solely through the normal growth

process. This objective too is commonly subscribed to in the plans of many

developing countries, though the importance accorded to it varies, as do the

policies adopted in its pursuit.

3. Development of a mixed economy with a strong public sector, especially in keyareas of the economy. The creation of a public sector could be viewed as an

instrument for achieving broader objectives of growth with equity, but Indias


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development strategy has accorded such special importance to the public sector

that t could properly be described as an independent objective of policy. The

creation of a public sector was viewed not merely as an instrument to achieve

other objectives. There was a more basic and widely shared socio-political

commitment to the creation of a mixed economy, in which the state has a

substantial direct control over important production sectors.

4. Achievement of a high order of self-reliance has been an importantindependent objective. The term itself is used in tow senses. In one sense, self-

reliance has meant that development must be financed as far as possible from

domestic savings, avoiding excessive dependence upon external assistance. Self-

reliance has also meant a conscious effort at developing a broad domestic

production base and an indigenous technological capacity, both of which were

felt to be essential requirements for building a strong industrialized economy.

5. Promotion of balanced regional development, with a narrowing of economicdifference across regions. This has tended to be viewed not just as matter of

promoting economic growth but also more specifically as a matter of regional

balance in the degree of industrialization.

6.

Finally, these social and economic objectives were to be pursued in theframework of a constitutional democracy.

The India Economic Policy contains the basic principles and points the direction in

which it propose to move. India Economic Policy cannot be fully comprehensive in

all its details, as it would require modification during the course of time with

changing dynamics of international economy. The main objectives of the India

Economic Policy are to take care of the basic parameters of the Indian Economy as

mentioned below:

1. Growth Performance

The rate of growth of the economy is the most commonly used measure of overall

performance and it is appropriate to begin with this indicator. Up to about the mid-

seventies, Indias trend growth rate of G.D.P ignoring yearly fluctuations seemed

firmly anchored at about 3.5 percent per year, unforgettably characterized by the late

professor Raj Krishna as theHindu rate of growth. There is clear evidence that the

economy broke through this constraint sometime in the mid-seventies. The growth


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rate over the past ten years or so averages about 4.5 percent and this is an average

over a period in which growth was accelerating. The underlying growth rate of the

economy in the mid-eighties is nearer 5 percent per year. This is not high compared

with growth rates achieved in earlier decades by the better-performing developing

countries. Some countries have achieved annual growth rates as high as 10 percent

over sustained periods, and many have grown at rates between 6 percent and 7 percent

in the sixties and early seventies. But this comparison is not wholly fair in assessing

recent economic performance in India.

An obvious point which has to be noted is that India is a relatively large economy and

also among the group of low-income countries of the developing world. The size of

the economy ensures that a process of averaging must be at work. Indias growth

potential cannot therefore be presumed to be equal to the fastest-growing developing

countries, but closer to the average. More important, Indias recent performance

should not be assessed by comparing it with growth rates achieved by developing

countries in an earlier period when the international environment was especially

conducive to rapid growth. The growth potential of the developing world as a whole

has slowed down since the mid-seventies, and when due allowance is made for this

factor, Indias recent growth performance and current growth prospects appear in amuch better light.

2. Turnaround in Agriculture

A key element in the improvement in aggregate performance was improved

performance in agriculture. This not only contributed directly to faster growth of GDP

but also stimulated industrial growth through well-known linkages between the two

sectors.

Conventional wisdom identifies the beginning of the Green Revolution with the

introduction of the Mexican hybrid wheat in the late sixties. The new seeds quickly

led to increased wheat yields in Punjab, where agro climatic conditions were

favourable and effective water management was readily possible. But this was only

the beginning of the story. To achieve an agricultural turnaround, it was necessary to

spread the Green Revolution more widely, both in terms of crops and also in terms of

geographical regions. This required a comprehensive strategy for agricultural change


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requiring active Government intervention in many dimensions. It required a sustained

effort at expanding irrigation with a shift from major to medium and minor irrigation.

It was necessary to push the banking system into the rural areas to provide credit for

the purchase of biochemical inputs needed for high-yielding varieties (HYVs). These

measures were accompanied by a policy for providing effective price support at

remunerative prices. It was also necessary to strengthen research to adapt high-

yielding varieties to local conditions and to develop new varieties continuously.

Varietal development is particularly important in the case of rice, which is grown in

widely varying agro climatic conditions in the Genetic basin and which requires a

correspondingly larger number of varieties to ensure suitability in different local

conditions.

Agricultural policy evolved along these lines in the seventies, but it took time to have

a noticeable impact. Although yields and production of wheat grew rapidly in Punjab

from an early stage, this was not reflected in a convincing improvement in total

agricultural performance until after the mid-seventies. With the usual lags in

availability of data, and also the fact that it takes time before an upswing can be

statistically established with confidence, there was considerable scepticism about

agricultural performance even in the late seventies. Vaidyanathan found evidence that

Indian agriculture may actually be decelerating, while Srinivasan cautioned that the

Green Revolution was as yet only a wheat revolution.

By the early eighties, however, it became generally accepted that Indian agriculture

had indeed entered a new phase, with a discernible acceleration in agricultural growth.

The compound growth rate of production for all crops has increased from about 2.5

percent in the period 1950-51 to 1967-68, to about 3 percent after the mid-seventies.

The compound annual growth rate of the index of agricultural production in the more

recent period from 1980-81 to 1985-86 is about 3.2 percent. There is also clear

evidence that agricultural production is becoming less vulnerable to variations in

rainfall, itself an important aspect of agricultural performance.

Fortunately there are definite signs that the Green Revolution is indeed spreading to

those areas, and yields are increasing in Uttar Pradesh and also Bihar. It will require a

tremendous improvement in the ground level functioning of the development


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administration to provide the farmer with the full package of support needed. But the

process has definitely taken off, and further acceleration can be expected.

3. Financing Development

An important aspect of performance, which has a direct bearing on the longer-

term growth potential of the economy, is the ability to mobilize resources for

investment. Indias recent performance in this dimension is commendable. The

rate of gross domestic investment in the economy, which increased only

marginally from 17 percent in 1960-61 to 18 percent in 1970-71, then increased

sharply thereafter to reach 24.7 percent in 1980-81. It has stayed at that level in

the eighties. This investment rate is not high compared with rates achieved in the

more rapidly growing middle-income countries, but it is much higher than the

rates achieved in all the other low-income countries except China. What is more,

the high rate of investment is being financed almost entirely from higher domestic

savings, testifyi9ng to the success of self-reliance in this sense of the term. The

gross domestic savings rate, which was 17 percent in 1970-71, had increased to 23

percent by 1985-86.

There is certainly need and scope for further increased the rate of savings and

thereby also the rate of investment. But the levels already achieved, and their

evident sustainability, reflect on important structural transformation in the

economy in terms of its resource mobilization capability. Even if the investment

rate is only maintained at around 24-35 percent, it should be possible not only to

maintain the present 5 percent growth rate, but perhaps even to achieve some

further acceleration. This is because all available evidence suggests that the

incremental capital-output ratio is higher in India than in other countries. These

points to the scope for increased efficiency in resource use, a possibility which isconfirmed by recent studies of total factor productivity such as Ahluwalia and

Golders which show slower growth in these indices of industrial productivity in

India compared with other developing countries.

4. Equity and Social Justice

Considerations of equity and social justice have been extremely important in

Indias development objectives and policies and any evaluation of performance


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must include these dimensions also. This is not an easy task because of the

multidimensional nature of the equity and social justice objective. The concern

with income inequality and the need to increase incomes and levels of living for

the poorest sections of the population is the most commonly discussed aspect of

this objective. However, there are several other dimensions also, which call of

distinct policy interventions. These include provision of basic or minimum

needs for the build of the population (not just the poor) relating to health,

education, drinking water and sanitation, removal of social disparities arising from

caste, providing equality of opportunity at various levels of education to promote

vertical mobility, and reduction in regional disparity, avoiding concentration of

economic power within the private sector. A quantitative assessment of progress

in each of these dimensions is beyond the scope of this chapter, but some broad

features of performance and policies can be documented.

A major problem in assessing performance in reducing inequality is the lack of

reliable time series data on the distribution of income. The only robust

conclusions which can be asserted are that the distribution of income in India, as

measured by the usual indicators of inequality, is among the more equal in the

developing world. There is also no evidence of any increase in income inequality

over time. Data on the distribution of consumption are more readily available and

these show a decline up to the mid-seventies followed by a period in which there

is year-to-year fluctuation but no trend.

Success in reducing poverty is in many respects more important than trends in

relative inequality, and this subject has been extensively investigated in the Indian

literature, especially in the context of rural poverty, which is the bulk of the

problem. A broad consensus is emerging. Studies have shown that up to about the

mid-seventies the percentage of the rural population living below the poverty line

has fluctuated over time, but without any underlying trend. The percentage

appears to have increased in years of poor agricultural performance (allowing for

appropriate lags) and to have declined in response to good agricultural

performance. It has also been argued that the behaviour of prices and inflation has

an important impact on the extent of poverty with rising prices being associated

with an accentuation of poverty.


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Road ahead for the India Economic Policy

"Economic policy of any nation is a powerful instrument on the part of policy makers

to direct the economy in the desired direction if formulated such a policy properly and

implemented effectively. The India Economic Policy is formulated keeping into

consideration India's immediate as well as long term economic requirements. The

India Economic Policy is adopted so far has given rich dividends.

What are the main Features of New Economic Policy of India?

The main features of the new economic reforms/policy are stated below:

1. Liberalisation:

The fundamental feature of the new economic policy is that it provides freedom to the

entrepreneurs to establish any industry/trade/ business venture. The entrepreneurs are

not required to get prior approval for any new venture. What they need is that they

have to fulfil certain conditions to get into a line of one's choice. The procedure

involving a case by case examination of the proposals for new ventures has been

wiped off. Apart from this the entrepreneurs no longer need licenses to come into

business. The capital markets have also been freed and opened to the private

enterprises.

A new company can now be floated with new issue of shares, debentures etc. In case

the entrepreneurs require imported equipment, they are no longer required to approach

the central authority for foreign exchange. The area of liberalization is (i) licensing

business, (ii) Foreign Investment (iii) Foreign Technology (iv) Establishment, Merger,Amalgamation and taken over, and (v) Simple Exit policies.

2. Extension of Privatization:

Another feature of the new economic policy is the extension in the scope of

privatization. Now, the majority of economic activities will be conducted by the

private sector. In the wave of privatization, out of 17 industries reserved for public

sector, 11 industries have been given to the private sector.


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Moreover, Govt has also privatized the ownership of some public sector undertakings

by the sale of capital of some selected enterprises to the private sector. The field of

privatization has further been extended by offering greater opportunities of investment

to the foreign private investors. Economic Policy seeks to accord priority role to the

private sector. Tendency to expand private sector is evident from the following facts:

(i) Number of industries reserved for public sector has been reduced from 17 to 6.

Private sector can now set up its units in the field of iron and steel, energy, air

transport, etc.

(ii) Till the end of 6th Plan, share of public sector in total investment continued to be

greater than that of the private sector. It is intended to be reduced to 45% in the 8th

Plan. Thus 8th Plan aims at raising the share of private sector investment to 55% of

the total.

(iii) Shares of public enterprises are to be increasingly sold to the workers and general

public, with a view to increasing the participation of private individuals.

(iv) A large part of industrial investment of the private sector to be financed by;

National Industrial Finance Institutions. These institutions, while sanctioning loans

for the new projects, used to exercise their right of 'Conversion' invariably. It implied

the right of converting the loans into share capital by the Financial Institutions.

Thus, the private firms were always under the constant threat of conversion.

According to the New Industrial Policy, the Financial Institutions will not insist on the

conversion clause. With the expansion of privatization there is every possibility of

increase in productivity and efficiency.

3. Globalization of Economy:

The new economic policy has made the economy outwardly oriented. Now, its

activities are to be governed both by domestic market was also the world market. It

means unification of the domestic economy with the world, economy. In fact, this has

become possible by various policy initiatives taken by the Govt. For instance,

devaluation of rupee in June 1991 was intended to do away with the artificially

controlled overvalued exchange rate of the rupee.

Now, the rupee has been made fully convertible on current account of the balance of

payments. Moreover, elimination of licensing of a large number of import items has


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enabled the importers to import anywhere in the world. The reduction in custom

duties on imports has also been done to bring them in line with the duties in other

countries of the world.

In short, globalization means

(a) Reduction of trade barriers with a view to allowing free flow of goods to and from

the country.

(b) Free flow of foreign capital in terms of investment i.e., direct and portfolio for

ensuring conducive atmosphere.

(c) Free flow of technology, and

(d) Free movement of labour and manpower.

4. Market Friendly State:

The role of the state is one that is confined to selected non-market areas and is largely

to ensure a smooth functioning of the market economy. As compared to past, the

ownership of some selected enterprises has been transferred to private sector. Its

activities as owner of resources have been confined to two types of activities. One

covers the activities which are badly needed for the operation of the economy and theother pertains to social services such as education, health, etc. However, more

importantly, the state is to ensure a smooth functioning of the market. For this, the

state has to ensure stability in the market through the use of macroeconomic policies.

The state will also intervene in the market when it fails.

5. Modernization:

New economic Policy accorded high priority to modern techniques. It aims at to

augment the growth rate of sunrise industries. In order to import technical dynamics

to Indian industry, the Govt, decided to clear all foreign collaborations. Private

entrepreneurs will be free to settle the terms of such collaborations on their own

behalf. Moreover, Govt has also been trying to stimulate private entrepreneurs to

establish their own research and development centres by offering them various tax

concessions. Efforts are also being made to revive and modernize the sick industrial

units both within the public and private sectors.


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6. New Public Sector Policy:

Public sector attracted priority. In the words of Dr. Manmohan Singh, Finance

Minister in Congress Govt. that this priority was given to the public enterprises in the

hope that it will help to accumulate capital, industrialization, economic growth and

removal of poverty. But none of these objectives were achieved. Thus, new economic

reforms are trying to shift the emphasis from public to the private sector.

Industrial Policy of India

What is Industrial Policy?

It means rules, regulations, principles policies and procedures laid down bythe government for regulating, developing and controlling industrial

undertaking in the country.

It prescribes the representative role of the public, private, joint and cooperativesectors for the development of the industries.

Post 1990s have seen a sea of change in the Industrial Policy of India. The

overprotective Indian Market was opened to foreign companies and investors. Thus

Indian Industry registered an impressive growth during the last decade and half. The

number of industries in India have increased manifold in the last fifteen years. Though

the main occupation has been agriculture for the bulk of the Indian population, it was

realized that India would become a prosperous and a modern state with

industrialization. Therefore different programs were formulated and initiated to build

up an adequate infrastructure for rapid industrialization and improve the industrial

scenario in India.

Industrial Policy revolves around the core parameters like -

Industrial Licensing. Industrial Entrepreneurs Memorandum. Locational Policy. Policy Relating to Small Scale Undertakings. Environmental issues.


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The Industrial Policy of India fuelled rapid increase in the various sectors in all

verticals. But the striking factor was observed in the IT, Telecommunication and

Pharmaceutical Industry. The Indian software industry has grown at a massive rate

from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion (including

over $4 billion worth of software exports) in 1999-2000. No other Indian industry has

performed this well against the global competition. The telecommunication industry

also marked stupendous growth, so is the pharmaceutical industry. The Industrial

Policy of resurgent India has helped Indian industry to grow in leaps and bounds.

The Government of India's liberalized Industrial Policy aims at rapid and substantial

economic growth, and integration with the global economy in a harmonized manner.

The Industrial Policy reforms have reduced the industrial licensing requirements,

removed restrictions on investment and expansion, and facilitated easy access to

foreign technology and foreign direct investment.

When India achieved Independence in 1947, the national consensus was in favour of

rapid industrialization of the economy which was seen not only as the key to

economic development but also to economic sovereignty. In the subsequent years,

India's Industrial Policy evolved through successive Industrial Policy Resolutions and

Industrial Policy Statements. Specific priorities for industrial development were also

laid down in the successive Five Year Plans.

Building on the so-called "Bombay Plan" in the pre-Independence era, the first

Industrial Policy Resolution announced in 1948 laid down broad contours of the

strategy of industrial development. At that time the Constitution of India had not

taken final shape nor was the Planning Commission constituted. Moreover, the

necessary legal framework was also not put in place. Not surprisingly therefore, the

Resolution was somewhat broad in its scope and direction. Yet, an important

distinction was made among industries to be kept under the exclusive ownership of

Government, i.e., the public sector, those reserved for private sector and the joint

sector.

Subsequently, the Indian Constitution was adopted in January 1950, the Planning

Commission was constituted in March 1950 and the Industrial (Department and


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Regulation) Act (IDR Act) was enacted in 1951 with the objective of empowering the

Government to take necessary steps to regulate the pattern of industrial development

through licensing. This paved the way for the Industrial Policy Resolution of 1956,

which was the first comprehensive statement on the strategy for industrial

development in India.

Industrial policies

Industrial Policy Resolution of 1948 Industrial Policy Resolution of 1956 Industrial Policy Resolution of 1973 Industrial Policy Resolution of 1977 Industrial Policy Resolution of 1980 Industrial Policy Resolution of 1991

INDUSTRIAL POLICY RESOLUTION OF 1948

This was the first industrial policy resolution announced by government of India.

Highlights

1. It visualized a mixed economy.2. Division of the Industrial sector into 4 major categories.3. Small and Cottage Industries were given privileges.4. Considered the importance of private participation.

CATEGORIES

1. State Monopoly

Arms and ammunition Atomic Energy Rail Transport

2. Mixed Sector

Six industries were specified Coal Iron & Steel Aircraft Mfg Ship Building


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Telephone, Telegraph & Wireless (Excluding Radio) Mineral Oils The existing can continue and after 10 years, the government will take

over those undertakings by paying a compensation which is fair and

equitable.

3. The field of government control

The government will regulate Industries in this category Automobiles Heavy Machinery Heavy Chemicals Fertilizers Sugar Paper Cement Cotton Woolen textiles etc

4. The field of private enterprises

All other Industries

INDUSTRIAL POLICY RESOLUTION1956

General Focus

To accelerate the rate of economic growth and to speed up industrializationand, in particular, to develop heavy industries and machine making industries,

to expand the public sector, and to build up a large and growing co-operative

sector.

To provide opportunities for gainful employment and improving livingstandards and working conditions of the people.

To reduce disparities in income and wealth. To prevent private monopolies and the concentration of economic power in

different fields in the hands of small numbers of individuals.

All industries are categories in three schedules


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Industries placed under schedule A were treated as the exclusiveresponsibility of the state.

Industries in schedule B was progressively state owned. Industries owned in schedule C were left for private sector.

The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis Model of

growth, which suggested that emphasis on heavy industries would lead the economy

towards a long term higher growth path. The Resolution widened the scope of the

public sector. The objective was to accelerate Bombay Plan prepared by leading

Indian industrialists in 1944-45 had recommended government support for

industrialization, including a direct role in the production of capital goods.

Economic growth and boost the process of industrialization as a means to achieving a

socialistic pattern of society. Given the scarce capital and inadequate entrepreneurial

base, the Resolution accorded a predominant role to the State to assume direct

responsibility for industrial development. All industries of basic and strategic

importance and those in the nature of public utility services besides that requiring

large scale investment were reserved for the public sector.

The Industrial Policy Resolution - 1956 classified industries into three categories. The

first category comprised 17 industries (included in Schedule A of the Resolution)

exclusively under the domain of the Government. These included inter alia, railways,

air transport, arms and ammunition, iron and steel and atomic energy. The second

category comprised 12 industries (included in Schedule B of the Resolution), which

were envisaged to be progressively State owned but private sector was expected to

supplement the efforts of the State.

The third category contained all the remaining industries and it was expected that

private sector would initiate development of these industries but they would remain

open for the State as well. It was envisaged that the State would facilitate and

encourage development of these industries in the private sector, in accordance with

the programmes formulated under the Five Year Plans, by appropriate fiscal measures

and ensuring adequate infrastructure. Despite the demarcation of industries into


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separate categories, the Resolution was flexible enough to allow the required

adjustments and modifications in the national interest.

Another objective spelt out in the Industrial Policy Resolution 1956 was the

removal of regional disparities through development of regions with low industrial

base. Accordingly, adequate infrastructure for industrial development of such regions

was duly emphasized. Given the potential to provide large-scale employment, the

Resolution reiterated the Governments determination to provide all sorts of

assistance to small and cottage industries for wider dispersal of the industrial base and

more equitable distribution of income. The Resolution, in fact, reflected the prevalent

value system of India in the early 1950s, which was cantered on self sufficiency in

industrial production. The Industrial Policy Resolution1956 was a landmark policy

statement and it formed the basis of subsequent policy announcements.

INDUSTRIAL POLICY MEASURES IN THE 1960S AND 1970S

Monopolies Inquiry Commission (MIC) was set up in 1964 to review various aspects

pertaining to concentration of economic power and operations of industrial licensing

under the IDR Act, 1951. While emphasizing that the planned economy contributed to

the growth of industry, the Report by MIC concluded that the industrial licensing

system enabled big business houses to obtain disproportionately large share of

licenses which had led to pre-emption and foreclosure of capacity. Subsequently, the

Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967,

recommended that larger industrial houses should be given licenses only for setting up

industry in core and heavy investment sectors, thereby necessitating reorientation of

industrial licensing policy.

In 1969, the monopolies and restrictive Trade Practices (MRTP) Act was introduced

to enable the Government to effectively control concentration of economic power.

The Dutt Committee had defined large business houses as those with assets of more

than Rs.350 million. The MRTP Act, 1969 defined large business houses as those

with assets of Rs. 200 million and above. Large industries were designated as MRTP


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companies and were eligible to participate in industries that were not reserved for the

Government or the Small scale sector.

The new Industrial Licensing Policy of 1970 classified industries into four categories.

First category, termed as Core Sector, consisted of basic, critical and strategic

industries. Second category termed as Heavy Investment Sector, comprised projects

involving investment of more than Rs.50 million. The third category, the Middle

Sector consisted of projects with investment in the range of Rs.10 million to Rs.50

million. The fourth category was Deli censed Sector, in which investment was le ss

than Rs.10 million and was exempted from licensing requirements. The industrial

licensing policy of 1970 confined the role of large business houses and foreign

companies to the core, heavy and export oriented sectors.

THE INDUSTRIAL POLICY STATEMENT1973

It was an extension of the industrial policy 1956.

Features:-

a) role of public sector stressed in attaining a socialistic pattern of society.

b) Foreign investment was allowed only in specific industries, subject to FERA &

FEMA restrictions.

c) Small-scale and cooperative sectors were assigned a special role to play.

d) In the area of agriculture cooperative enterprises were encouraged.

With a view to prevent excessive concentration of industrial activity in the large

industrial houses, this Statement gave preference to small and medium entrepreneurs

over the large houses and foreign companies in setting up of new capacity particularly

in the production of mass consumption goods. New undertakings of up to Rs.10

million by way of fixed assets were exempted from licensing requirements for

substantial expansion of assets. This exemption was not allowed to MRTP companies,

foreign companies and existing licensed or registered undertakings having fixed assets

of Rs.50 million and above.


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THE INDUSTRIAL POLICY STATEMENT -1977

The Janta party govt. Presented this industrial policy

Main objectives were:-

1. Preventing monopoly2. Maximizing production of consumer goods3. Making industry responsive to social needs4. It aimed at maintaining the close interaction of agriculture & industrial sector5. Thrust area was generation of rural employment opportunities

This Statement emphasized decentralization of industrial sector with increased role

for small scale, tiny and cottage industries. It also provided for close interaction

between industrial and agricultural sectors. Highest priority was accorded to power

generation and transmission. It expanded the list of items reserved for exclusive

production in the small scale sector from 180 to more than 500. For the first time,

within the small scale sector, a tiny unit was defined as a unit with investment in

machinery and equipment up to Rs.0.1 million and situated in towns or villages with a

population of less than 50,000 (as per 1971 census). Basic goods, capital goods, high

technology industries important for development of small scale and agriculture sectors

were clearly delineated for large scale sector. It was also stated that foreign companies

that diluted their foreign equity up to 40 per cent under Foreign Exchange Regulation

Act (FERA) 1973 were to be treated at par with the Indian companies. The Policy

Statement of 1977 also issued a list of industries where no foreign collaboration of

financial or technical nature was allowed as indigenous technology was already

available. Fully owned foreign companies were allowed only in highly export oriented

sectors or sophisticated technology areas. For all approved foreign investments,

companies were completely free to repatriate capital and remit profits, dividends,

royalties, etc. Further, in order to ensure balanced regional development, it was

decided not to issue fresh licenses for setting up new industrial units within certain

limits of large metropolitan cities (more than 1 million population) and urban areas

(more than 0.5 million population).


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INDUSTRIAL POLICY STATEMENT -1980

Congress Govt. on July 1980 announced new industrial policy:-

1. Development of industrially backward areas2. Consumer protection against high prices and bad quality3. Promoting the process of rural industrialization4. Efficient operational management of public sector5. Dealing with industrial sickness

This policy focused attention on the need for promoting competition in thedomestic market, technological up gradation and modernization.

The policy laid the foundation for an increasingly competitive export basedand for encouraging foreign investment in high-technology areas. This found

expression in the Sixth Five Year Plan which bore the distinct stamp of Smt.

Indira Gandhi. It was Smt. Indira Gandhi who emphasized the need for

productivity to be the central concern in all economic and production

activities.

These policies created a climate for rapid industrial growth in the country. Thus on the eve of the Seventh Five Year Plan, a broad-based infrastructure

had been built up.

Basic industries had been established. A high degree of self-reliance in a largenumber of items - raw materials, intermediates, finished goods - had been

achieved.

New growth centre of industrial activity had emerged, as well as a newgeneration of entrepreneurs.

A large number of engineers, technicians and skilled workers had also beentrained.

The industrial Policy Statement of 1980 placed accent on promotion of competition in

the domestic market, technological upgradatrion and modernization of industries.

Some of the socio-economic objectives spelt out in the Statement were i) optimum

utilisation of installed capacity, ii) higher productivity, iii) higher employment levels,

iv) removal of regional disparities, v) strengthening of agricultural base, vi)


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promotion of export oriented industries and vi) consumer protection against high

prices and poor quality.

Policy measures were announced to revive the efficiency of public sector

undertakings (PSUs) by developing the management cadres in functional fields viz.,

operations, finance, and marketing and information system. An automatic expansion

of capacity up to five per cent per annum was allowed, particularly in the core sector

and in industries with long-term export potential. Special incentives were granted to

industrial units which were engaged in industrial processes and technologies aiming at

optimum utilization of energy and the exploitation of alternative sources of energy. In

order to boost the development of small scale industries, the investment limit was

raised to Rs.2 million in small scale units and Rs.2.5 million in ancillary units. In the

case of tiny units, investment limit was raised to Rs.0.2 million.

INDUSTRIAL POLICY MEASURES DURING THE 1980S

Policy measures initiated in the first three decades since Independence facilitated the

establishment of basic industries and building up of a broad based infrastructure in the

country. The Seventh Five Year Plan (1985-1900), recognized the need for

consolidation of these strengths and initiating policy measures to prepare the Indian

industry to respond effectively to emerging challenges. A number of measures were

initiated towards technological and managerial modernization to improve

productivity, quality and to reduce cost of production. The public sector was freed

from a number of constraints and was provided with greater autonomy. There was

some progress in the process of deregulation during the 1980s. In 1988, all industries,

excepting 26 industries specified in the negative list, were exempted from licensing.

The exemption was, however, subject to investment and locational limitations. The

automotive industry, cement, cotton spinning, food processing and polyester filament

yarn industries witnessed modernization and expanded scales of production during the

1980s.

With a view to promote industrialization of backward areas in the country, the

Government of India announced in June, 1988 the Growth Centre Scheme under


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which 71 Growth Centres were proposed to be set up throughout the country. Growth

centres were to be endowed with basic infrastructure facilities such as power, water,

telecommunications and banking to enable them to attract industries.

INDUSTRIAL POLICY STATEMENT- 1991

Industrial Policy announced in July 1991, besides liberalization of economy and

globalization, also aimed at building upon the gains achieved, to correct the

distortions, maintain a sustained growth in productivity and gainful employment and

attains international competitiveness. It envisaged pursuit of these objectives to be

tempered by the need to preserve the environment and ensure the efficient use of

available resources.

All sectors of industry whether small, medium or large, belonging to public, private or

cooperative sectors were to be encouraged to grow and improve on their post

performance. The New policy also encompasses encouragement of entrepreneurship,

development of indigenous technology through investment in research and

development, bringing in new technology, dismantling of the regulatory system,

development of the capital markets and increasing competitiveness for the benefit of

the common man.

The Industrial Policy Statement of 1991 stated that the Government will continue to

pursue a sound 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 the capital markets and increased competitiveness for the benefit of

common man". It further added that "the spread of industrialization to backward areas

of the country will be actively promoted through appropriate incentives, institutions

and infrastructure investments.

The objective of the Industrial Policy Statement - 1991 was to maintain sustained

growth in productivity, enhance gainful employment and achieve optimal utilization

of human resources, to attain international competitiveness, and to transform India


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into a major partner and player in the global arena. Quite clearly, the focus of the

policy was to unshackle the Indian industry from bureaucratic controls. This called for

a number of far-reaching reforms:

A substantial modification of Industry Licensing Policy was deemed necessary with a

view to ease restraints on capacity creation; respond to emerging domestic and global

opportunities by improving productivity. Accordingly, the Policy Statement included

abolition of industrial licensing for most industries, barring a handful of industries for

reasons of security and strategic concerns, social and environmental issues.

Compulsory licensing was required only in respect of 18 industries. These included,

inter alia, coal and lignite, distillation and brewing of alcoholic drinks, cigars and

cigarettes, drugs and pharmaceuticals, white goods, hazardous chemicals. The small

scale 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 liberalised.

Recognising the complementarily of domestic and foreign investment, foreign direct

investment was accorded a significant role in policy announcements of 1991. Foreign

direct investment (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 important 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 (PSUs) 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


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PSUs, it was decided to offer its shareholding stake to mutual funds, financial

institutions, general public and workers. Similarly, in order to revive and rehabilitate

chronically sick PSUs, it was decided to refer them to the Board for Industrial and

Financial Reconstruction (BIFR). The Policy also provided for greater managerial

autonomy to the Boards of PSUs.

The Industrial Policy Statement of 1991 recognized that the Governments

intervention in investment decisions of large companies through MRTP Act had

proved to be deleterious for industrial growth. Accordingly, pre-entry scrutiny of

investment decisions of MRTP companies was abolished. The thrust of policy was

more on controlling unfair and restrictive trade practices. The provisions restricting

mergers, amalgamations and takeovers were also repealed.

While recognizing the role of public sector, the new policy seeks to ensure that the

public sector is run on business lines envisaging privatization, disinvestments and

public sector restructuring. It was decided to take a series of initiatives covering the

following areas:

(a) Industrial Licensing

(b) Foreign Investment

(c) Foreign Technology Agreements

(d) MRTP Act (Monopoly and Restrictive Trade Practices Act)

(e) Public Sector Policy

Industrial Licensing

Industrial Licensing was governed by the Industries Development &Regulation Act, 1951.

Industrial Licensing policy and procedures have been liberalized andcontinuously changed.

Industrial licensing has been abolished for all projects except for a short list ofindustries

All excepting 18 industries were free from licensing. The number was laterreduced to five. Distillation and brewing of alcoholic drinks; cigars and


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cigarettes; electronic aerospace; hazardous chemicals and industrial

explosives.

Industries are free to select the location of the industry. However, in cities with a population of over 1 million, the industries are to be

located in the areas designated as industrial areas or 25 kms away from the

Standard Urban area limits of the city.

However, industries of a non polluting nature were exempt. The locational policy was abolished in 2008.

Liberalization of Foreign Investment

Policy towards foreign capital and technology has been modified verysignificantly. Foreign investment will bring advantages of technology transfer,

marketing expertise, introduction of modern managerial techniques and new

possibilities for promotion of exports.

FDI is allowed in all industries, except industries falling in a small negativelist.

Foreign Technology Agreements:

Government will provide automatic approval for technological agreementsrelated to high priority industries within specified parameters.

Indian companies will be free to negotiate the terms for technology transferwith their foreign counterparts according to their own commercial judgement.

No permission is necessary for hiring of foreign technicians and foreigntesting of indigenously developed technologies. Government will encourage

foreign trading companies to assist in our export activities

Removal of MRTP Restrictions:

Most of the MRTP restrictions pertaining to concentration of economic power(those requiring permission for establishment of new undertaking, substantial

expansion, manufacture of new items and mergers and acquisitions) were

scrapped.

Existing units will be provided a new broad branding facility to enable them toproduce any article without additional investment.


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The thrust of the policy is on controlling and regulating monopolistic,restrictive and unfair trade practices.

INDUSTRIAL POLICY MEASURES SINCE 1991

Since 1991, industrial policy measures and procedural simplifications have been

reviewed on an ongoing basis. Presently, there are only six industries which require

compulsory licensing. Similarly, there are only three industries reserved for the public

sector. Some of important policy measures initiated since 1991 are set out below:

Since 1991, promotion of foreign direct investment has been an integral part of

Indias 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 also been allowed under automatic route for most manufacturing

activities in Special Economic Zones (SEZs). 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

pipelines (up to 100 per cent), natural gas and LNG pipelines (up to 100 per cent) and

printing of scientific and technical magazines, periodicals 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 of manufacture exclusively in the small scale sector has been an

important tenet of industrial policy. Realizing 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 items as at end March 1999 to 506 items as on April 6, 2005.

Further, the Union Budget 2005-06 has proposed to derisive 108 items which were

identified by Ministry of Small Scale Industries.

Equity participation up to 24 per cent of the total shareholding in small scale units by

other industrial undertakings has been allowed. The objective therein has been to


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enable the small sector to access the capital market and encourage modernization,

technological up gradation, ancillarisation, sub-contracting, etc

Under the framework provided by the Competition Act 2002, the Competition

Commission of India was set up in 2003 so as to prevent practices having adverse

impact on competition in markets.

In an effort to mitigate regional imbalances, the Government announced a new North-

East Industrial Policy in December 1997 for promoting industrialization in the North-

Eastern region. This policy is applicable for the States of Arunachal Pradesh, Assam,

Manipur, Meghalaya, Mizoram, Nagaland and Tripura. The Policy has provided

various concessions to industrial units in the North Eastern Region, e.g. development

of industrial infrastructure, subsidies under various schemes, excise and income-tax

exemption for a period of 10 years, etc. North Eastern Development Finance

Corporation Ltd. has been designated as the nodal disbursing agency under the

Scheme.

The focus of disinvestment process of PSUs has shifted from sale of minority stakes

to strategic sales. Up to December 2004, PSUs have been divested to an extent of

Rs.478 billion.

Apart from general policy measures, some industry specific measures have also been

initiated. For instance, Electricity Act 2003 has been enacted which envisaged to

delicense power generation and permit captive power plants. It is 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 infrastructure sectors 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.

Evidently, in the process of evolution of industrial policy in India, the Governments

intervention has been extensive. Unlike many East Asian countries which used the

State intervention to build strong private sector industries, India opted for the State


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control over key industries in the initial phase of development. In order to promote

these industries the Government not only levied high tariffs and imposed import

restrictions, but also subsidized the nationalized firms, directed investment funds to

them, and controlled both land use and many prices.

In India, there has been a consensus for long on the role of government in providing

infrastructure and maintaining stable macroeconomic policies. However, the path to

be pursued toward industrial development has evolved over time. The form of

government intervention in the development strategy needs to be chosen from the two

alternatives: Outward-looking development policies encourage not only free trade

but also the free movement of capital, workers and enterprises. By contrast, inward-

looking development policies stress the need for ones own style of development.

India initially adopted the latter strategy.

The advocates of import substitution in India believed that we should substitute

imports with domestic production of both consumer goods and sophisticated

manufactured items while ensuring imposition of high tariffs and quotas on imports.

In the long run, these advocates cite the benefits of greater domestic industrial

diversification and the ultimate ability to export previously protected manufactured

goods, as economies of scale, low labour costs, and the positive externalities of

learning by doing cause domestic prices to become more competitive than world

prices. However, pursuit of such a policy forced the Indian industry to have low and

inferior technology. It did not expose the industry to the rigours of competition and

therefore it resulted in low efficiency. The inferior technology and inefficient

production practices coupled with focus on traditional sectors choked further

expansion of the India industry and thereby limited its ability to expand employment

opportunities. Considering these inadequacies, the reforms currently underway aim at

infusing the state of the art technology, increasing domestic and external competition

and diversification of the industrial base so that it can expand and create additional

employment opportunities.

In retrospect, the Industrial Policy Resolutions of 1948 and 1956 reflected the desire

of the Indian State to achieve self sufficiency in industrial production. Huge


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investments by the State in heavy industries were designed to put the Indian industry

on a higher long-term growth trajectory. With limited availability of foreign

exchange, the effort of the Government was to encourage domestic production. This

basic strategy guided industrialization until the mid-1980s. Till the onset of reform

process in 1991, industrial licensing played a crucial role in channelling investments,

controlling entry and expansion of capacity in the Indian industrial sector. As such

industrialization occurred in a protected environment, which led to various distortions.

Tariffs and quantitative controls largely kept foreign competition out of the domestic

market, and most Indian manufacturers looked on exports only as a residual

possibility. Little attention was paid to ensure product quality, undertaking R&D for

technological development and achieving economies of scale. The industrial policy

announced in 1991, however, substantially dispensed with industrial licensing and

facilitated foreign investment and technology transfers, and threw open the areas

hitherto reserved for the public sector.

The policy focus in the recent years has been on deregulating the Indian industry,

enabling industrial restructuring, allowing the industry freedom and flexibility in

responding to market forces and providing a business environment that facilitates and

fosters overall industrial growth. The future growth of the Indian industry as widely

believed, is crucially dependent upon improving the overall productivity of the

manufacturing sector, rationalisation of the duty structure, technological upgradation,

the search for export markets through promotional efforts and trade agreements and

creating an enabling legal environment.

Conclusion

It is appropriate to conclude this overview of Indias economic performance and

policies with a summary assessment of prospects. The past record shows an

economy which has gained in strength and structural maturity in many

dimensions. It has certainly emerged from the pattern of sluggish growth evident

up to the mid-seventies, to a much better performance subsequently, especially in

the most recent years. A growth rate of 5 percent is now definitely sustainable and

could even be bettered in future if the considerable unutilized potential built up

form past investment in the economy is effectively exploited. There is


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considerable scope for reaping such benefits both in agriculture and in industry,

with present levels of the rate of investment or modest improvements therein.

Management of the balance of payments will remain an important problem

especially if the objective is to achieve a balance which can finance the sort of

growth in imports that is needed to sustain technological modernization in

increasing numbers of sectors of the economy. These points to the extreme

importance of exports in the years on the industrial front and the changes made in

policies towards exporters should help to strengthen Indias export capability.

A major factor which will help stimulate virtuous cycles in the Indian economy in

future is the expected slowdown in the rate of growth of population. With

population growing at over 2 percent per year. Much of the growth in production

in the past has been absorbed by rising population. However, the prospect of a

decline in the rate of growth in population is now at hand. Although fertility levels

are declining, the age composition is such that the child-bearing population is

expected to increase, and this will affect declining fertility foe some time.

Nevertheless, the rate of growth of population is likely to slow down from 2.2

percent expect a faster deceleration.

Documents

Indian Economic Policy