20. Industrial and Licensing Policy (1951–1991) – Business Environment

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INDUSTRIAL AND LICENSING POLICY (1951–1991)

This chapter discusses independent India's industrial and licensing policy over the years, its philosophy, its components and the change-over that has taken place over the years. After reading this chapter, you will understand and appreciate these developments in the proper context and perspective.

Industry spells growth and development. What distinguishes a developed nation from a developing country is the former's high degree of industrialization which the latter lacks. The traditional pattern of “trade-oriented” development has now given place to “industry-oriented” growth. There are several factors that have contributed to this development: (a) In industry, the scope for internal and external economies are greater than in agriculture. With further industrialization, economies of scale and inter-industrial linkages become more pronounced; (b) It also leads to creation of economic surplus leading to further investment. Eventually, there emerges a self-sustaining economy with continued high levels of investment, incomes and employment; (c) The process of industrialization is also associated with the development of mechanical knowledge, attitudes and skills of industrial work, superior management techniques and other attributes of modern society that percolate, permeate, pervade and benefit agriculture, trade, distribution and other related sectors of the economy and (d) Transfer of labour from agriculture to industry and also money incomes constitute the very essence of economic development. Industrialization is thus inseparable from substantial, sustained economic development because it is both a consequence of higher incomes and a means of higher productivity. However, a balanced development requires the balanced expansion of all appropriate sectors of the economy including agriculture.

INDUSTRIAL DEVELOPMENT IN INDIA

Before the rise of the modern industrial system, Indian manufacturers had a worldwide market. Indian muslin and calicoes were in great demand the world over. The Indian industries not only supplied all local wants but also enabled India to export its finished products. Indian exports consisted chiefly of manufactures such as cotton and silk fabrics, calicoes, artistic ware, and silk and woollen cloth. The impact of the British connection and industrial revolution led to the decrement of Indian handicrafts. Instead, machine-made goods started pouring in. The void created by the decline of Indian handicrafts was not filled by the rise of modern industry in India because of the British policy of encouraging the import of manufactured goods from the UK and Europe and export of raw materials from India.

After the Report of the Industrial Commission (1918), the British government in India provided discriminating protection to some selected industries. This protection was accompanied by the most favoured nation clause for British goods. Despite this factor, some industries such as cotton textiles, sugar, paper, matches and to some extent, iron and steel did make progress. But one thing quite obvious during the British period was that no effort was made to foster the development of capital goods industries. Rather, the British Government put definite hindrances and cold-shouldered their development.

Till India became independent, the government mainly followed the policy of laissez-faire in respect of industrial development. During the inter-war period, the policy of discriminating protection was adopted in early 1920s on the recommendation of the First Fiscal Commission. Besides, during the two world-wars, the government made a slight departure from its laissez-faire policy and actively supported the development of certain war-related industries which was calculated to help the war effort. Rapid industrialization was out of question during the pre-independence period as it would have been detrimental to British interests. More rapid growth of industries was impossible in the absence of an all-round process of development planning.

Once India gained Independence, the country's leaders were in a hurry to industrialize the country and offer its impoverished people the comforts of life that their counterparts elsewhere enjoyed as a matter of right. The first Prime Minister of Independent India, Pandit Nehru, thought that the salvation of the country lay in faster and wider industrialization within the framework of the socialistic pattern of society. He envisaged a centrally planned industrial development based on the Soviet model. The Planning Commission was established in 1950, under the chairmanship of the prime minister. Following this, the First Five Year Plan was commissioned in 1951. Under these arrangements, it became imperative to put in place an industrial policy to give direction to the industrialization of the country.

WHAT IS AN INDUSTRIAL POLICY?

An industrial policy is a comprehensive statement of the government and covers all those procedures, principles, policies, rules and regulations which control the industrial undertakings of a country and shape its pattern of industrialization. It incorporates fiscal and monetary policies, the tariff policy, labour policy and government's attitude towards not only external assistance but also the public and private sectors.

Components

The industrial policy is broadly made up of two components: one is the philosophy that shapes industrial growth; and the other implementation, i.e., rules and principles which give concrete shape to the philosophy of the policy.

The philosophy generally takes the form of objectives which are either explicitly stated or are implicit in the rules and principles of the policy. The philosophy can be that of non-intervention, as was the case during the British rule. Non-intervention on the part of the government expresses implicitly the faith of society in market with private property as a desirable end in itself; or the policy may be that of intervention in the form of simple regulation of market and/or in the form of government also undertaking entrepreneurial functions, as in India, after the adoption of planned economy in 1951 and thereafter.

The motivating philosophy behind market regulation and the government itself undertaking the task of entrepreneurship is that a mixed economy combines the best of the market system and socialism and avoids the evils of both, or the objective can be of complete socialization of all productive activity on the ground that socialism is a higher level economy to which all the systems will ultimately move. Thus, all the three choices—non-intervention, intervention and elimination—form the political objectives of a society. It is these which provide a framework for the industrial policy of a country.

The second component of industrial policy is to provide the wherewithal for its implementation. In the context of the mixed economy of India, the policy was expected to include such things as principles, procedures, rules and regulations intended to control and regulate the industrial undertakings, both large-scale and small-scale policies relating to the division of industries into public, private, joint and cooperative sectors; participation of foreign enterprises, their management, etc.

Importance

A well-designed industrial policy is important for several reasons:

  1. It can help correct the lopsided development of industrial structure and thereby bring about desirable balance and diversification in the country's economic structure.
  2. It can direct the flow of scarce resources in the most desirable areas of investment in accordance with national priorities.
  3. It can prevent duplication or uneconomic use of resources so that the country can ensure conservation and the judicious use of the country's limited resources (both exhaustible and renewable).
  4. It empowers the State to regulate and control the establishment and expansion of the industrial undertakings in the private sector, in accordance with national planned objectives.
  5. It can help to demarcate the areas of economic activity between different sectors of the economy.
  6. It can prevent, through industrial licensing and other supporting measures of fiscal and monetary policies, the concentration of wealth and economic power in few hands so that the emergence and evils of monopoly capitalism can be effectively curbed.
  7. It can also lay down policies towards the import of foreign capital and the conditions on which such capital would be permitted to operate in India.

In short, industrial policy provides guidelines for effective coordination and integration of the activities of the various sectors of the economy with a view to achieving a balanced and self-reliant pattern of development that can ensure rapid growth of output and employment.

THE INDUSTRIAL POLICY RESOLUTION OF 1948

The Industrial Policy Resolution of 1948 contemplated a mixed economy, reserving a sphere for the private sector and another for the public sector. The industries were divided into four broad categories as listed below:

  1. The first category comprised the manufacture of arms and ammunition, production and control of atomic energy, and the ownership and management of railway transport was to be the exclusive monopoly of the Central Government.
  2. The second category covered coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraphs and wireless apparatus excluding radio receiving sets and mineral oils. New undertakings in these industries could henceforth be undertaken only by the State. The inherent right of the State to acquire in public interest any existing industrial undertaking in this category was emphasized.
  3. The third category comprised certain basic industries such as salt, automobiles, tractors, prime movers, electric engineering, heavy machinery, machine tools, heavy chemicals, fertilizers, electro-chemical industries, non-ferrous metals, rubber manufactures, power and industrial alcohol, cotton and woollen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. It was emphasized that the Central Government could take over any existing private sector industry vital for national interest.
  4. The fourth category comprising the “remainder of the industrial field”, was left open to private enterprise, individual, as well as cooperatives.

Besides this, the Resolution indicated lines of policy in many other directions:

  1. The Resolution ascribed a very important role to cottage and small-scale industries in the national economy offering as they provided scope for individual, village or cooperative enterprises and means for decentralizing industries.
  2. It had enunciated a policy of fair labour conditions as an essential basis for harmonious relations between management and labour. The Government proposed to evolve suitable machinery for advising on fair wages and fair remuneration for capital and conditions of labour. Labour was also to be associated with the management of the concerns.
  3. The Policy Resolution had also emphasized the need for securing the participation of foreign capital and enterprise particularly as regards the industrial technique and knowledge so as to foster the pace of industrialization of the Indian economy. But, the participation of foreign capital was to be carefully regulated in the national interest. The Resolution, however, made it amply clear that as a rule the major interest in ownership, and effective control would always be in the Indian hands.

In all cases, however, the training of suitable Indian personnel for the purpose of eventually replacing foreign experts had been insisted upon. Thus while recognizing the need for foreign capital in the industrialization of the economy, the Government insisted upon the progressive Indianization of foreign concerns.

The aim of the Industrial Policy Resolution of 1948 was to clear the foggy atmosphere and help the process of investment (both domestic and foreign) and also to lessen industrial conflicts. The main thrust of the 1948 Industrial Policy was to lay the foundation of a mixed economy in which both the private and public enterprises could march hand in hand to accelerate the pace of industrial development.

THE INDUSTRIAL POLICY RESOLUTION OF 1956

The adoption of a Socialistic Pattern of Society as the national objective and the programme of rapid industrialization, contemplated in the Second Five-Year Plan, necessitated a clear and positive formulation of industrial policy in relation to planned economic development the country had adopted since 1951. The Second Five-Year Plan, bent on developing heavy industries, envisaged INR 8.90 billion for industrial development and mining. In the context of this bold industrial programme, there was an urgent necessity for reformulation and re-orientation of the 1948 Industrial Policy Resolution. Therefore, almost simultaneously with the launching of the Second Five-Year Plan, Government of India's Second Industrial Policy was announced. The 1956 industrial policy, though not very different in content, did take into account the new ground realities such as the adoption of socialistic pattern of society and a bold new thrust on heavy industries in the Second Five Year Plan.

The important provisions of the Industrial Policy Resolution, 1956 are listed in detail below:

  1. New classification of industries: The Resolution laid down three categories of industries which bore a close resemblance to the earlier classification, but were sharply defined and were broader in coverage as to the role of the State. These categories were: (i) Schedule A: those industries which were to be an exclusive responsibility of the State; (ii) Schedule B: those which were to be progressively State-owned and in which the State would generally set up new enterprises, and private enterprise was expected only to supplement the effort of the State; and (iii) Schedule C: all the remaining industries and their future development would in general be left to the initiative and enterprise of the private sector.
  2. Fair and non-discriminatory treatment for the private sector: In order that the private sector may feel confident and function efficiently, the State was to facilitate and encourage the development of industries in the private sector by ensuring the development of transport, power and other services and by appropriate fiscal and other measures. The State would continue to foster institutions with a view to providing financial aid to these industries, and special assistance would be given to enterprises organized on cooperative lines for industrial and agricultural purposes. When both private- and public-owned units exist in the same industry, it would continue to be the policy of the State to give full and non-discriminatory treatment to both of them.
  3. Encouragement to village and small-scale enterprises: The State had constantly been endeavouring to support cottage and village and small-scale enterprises by restricting the volume of production in the large-scale sector, by differential taxation, or by direct subsidies. The State would concentrate on measures designed to improve the competitive strength of the small-scale producer by constantly improving and modernizing the technique of production.
  4. Removing regional disparities: The Resolution stressed the necessity of reducing the regional disparities in levels of development in order that the industrialization benefits the country as a whole. The Resolution fully supported the idea that only by securing a balanced and coordinated development of the industrial and agricultural economy in each region, could the entire country attain higher standards of living.
  5. The need for the provision of amenities for labour: The Resolution also recognized that in a socialist democracy, labour was a partner in the common task of development which should participate in the development process with enthusiasm and for this, the maintenance of industrial peace was one of the essential conditions. It stressed that the living and working conditions of workers should be improved and their standard of efficiency raised. There should be joint consultation and workers and technicians should, whenever possible, be associated progressively in managements. The Resolution expected the enterprises in the public sector to set an example in this respect.
  6. Attitude towards foreign capital: The Government's attitude to foreign capital was the same as was enunciated in Industrial Policy Resolution of 1948.

The redeeming feature of the 1956 policy was that it brought about an excellent synchronization between Government's industrial policy and the industrial programmes included in the Plan. The objective of a socialistic pattern and mixed economy was given expression in terms of industrial development through this Resolution. It had not only stated clearly the inherent right of the State to acquire an industrial undertaking, but also expressed doubts in the ability of the private sector to bring about fast economic development by itself. Therefore, with the announcement of the 1956 Policy, industrialists in the private sector raised strong protests on the grounds that strengthening of the restrictive powers of Government and indirect threats of nationalization would curb incentives and retard capital formation in the private sector. This fear was based on a misreading of the Resolution. The Policy did not aim at nationalizing the existing units but on the contrary envisaged adequate steps for their growth and development.

THE INDUSTRIAL POLICY OF 1973

Though the Government was going ahead with programmes of progressive nationalization and expansion of the public sector, it was unable to develop an efficient public sector. This created uncertainty in the investment climate and thus discouraged the private sector investment, resulting in a slow rate of growth of industrial production. The Government, therefore, decided to modify its policy. The Industrial Policy Statement of 2 February, 1973 indicated the direction of change. The following are the main features of the new policy:

  1. The Industrial Policy Resolution of 1956 would continue to provide the base for the policy of 1973.
  2. In the context of the approach to the Fifth Five Year Plan, the State industrial sector would cover a wider field to promote growth with social justice, self-reliance and satisfaction of basic minimum needs.
  3. The Industrial Licensing Policy of 1970 brought forward by the Government earlier would be amended from time to time to have a greater clarity in the investment climate that would facilitate the priorities and production objectives in the Fifth Plan.
  4. The Industrial Licensing Policy ordinarily excluded the larger industrial houses from participating in sectors other than the core and heavy investment sectors. The larger industrial houses referred to industrial concerns having assets, including the assets of inter-connected undertakings exceeding INR 350 million. The Industrial Policy of 1973 considered that the definition of larger industrial houses for the purpose of licensing restrictions should conform in all aspects to the definition adopted in the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act). The Act defined a larger unit to be one having assets including assets of inter-connected undertakings exceeding INR 1 billion.
  5. The core industries, industries having direct linkages with such core industries, and industries with a long-term export potential would fall under basic, critical and strategic industries important for the growth of the economy.
  6. The 17 strategic and basic industries, comprising the first category of industries mentioned in the 1956 Industrial Policy would continue to be reserved for the public sector.
  7. Large Industrial houses were eligible to participate in basic, critical and strategic industries, along with other applicants, provided that the item of manufacture was not one which was reserved for production in the public sector. This would be easier if production is predominantly for export. Foreign concerns and subsidiary branches of foreign companies would also be eligible to participate in such industries, particularly when the production was for export purpose.
  8. The existing policy of reservation for the small-scale sector (involving investment in machinery and equipment up to INR 750,000, and in the case of ancillary industries up to INR 1 million) was to continue. The area of such reservation was to be extended consistent with potentialities and performance of the small-scale sector.
  9. The joint sector would not be permitted to be used for the entry of larger houses, dominant undertakings and foreign companies in areas precluded to them. In a joint sector unit, the government would play an effective role in guiding policies, management and operations, the actual pattern and mode being decided as appropriate in each case. The joint sector would be used mainly as a promotional instrument and would benefit the small investor.

The 1973 Policy Resolution had kept the concept of joint sector as hazy as ever. Though it was intended to largely associate the middle and small firms in the joint sector, the participation of large industrial houses in the joint sector had not been entirely ruled out. The Industrial Policy of 1973 should be viewed as a supplement to the Industrial Licensing Policy of 1970. It had paid greater attention in defining the role of the private sector with particular reference to the larger industrial houses but failed to identify the joint sector with a view to making use of private expertise and resources in line with governments’ socio-economic objectives.

THE INDUSTRIAL POLICY OF 1977

The government policy in the sphere of industry since mid-1956 had been governed by the Industrial Policy Resolution of 1956. But the results in the industrial field had fallen far short of the desired objectives. The growth of industrial output during the period 1967 to 1977, except for the year 1976 had been no more than 3 to 4 per cent per annum on an average. The incidence of industrial sickness had been widespread and some of the major industries had been worst affected. Unemployment had increased, rural urban disparities had widened and the rate of real investment had stagnated. The Industrial Policy, announced in December 1977, was, therefore, primarily directed towards removing these distortions of the past so that the goal of faster economic development could be achieved within a time bound programme.

The broad objectives of the 1977 industrial policy were as follows:

  • Doubling the rate of growth of national income from 3.5 per cent to 7 per cent per annum
  • A rapid increase in the rate of growth of industrial production
  • Creating much larger employment opportunities
  • Reducing wide regional disparities and imbalances

Let us now discuss the important provisions of the industrial policy of 1977.

  1. Development of small-scale sector: The main thrust of the new Industrial Policy would be an effective promotion of cottage and small-scale industries widely dispersed in rural areas and small towns. The policy statement categorically mentioned: “The emphasis on industrial policy has been mainly on large industries, neglecting cottage industries completely, relegating small industries to a minor role….” It is the policy of the government that whatever could be produced by small and cottage industries must only “be so produced”. The small sector was further classified into the following categories: (i) cottage and household industries which provide self-employment on a wide scale, (ii) tiny-sector which comprises units whose investment in machinery and equipment was up to INR 100,000, and situated in towns and villages with a population of less than 50,000. The new industrial policy intended to simultaneously develop all the categories mentioned above.
  2. Protecting the interest of cottage and household industries: This is done through the introduction of special legislation with a view to ensuring that these activities which provide self-employment in large numbers get due recognition in our industrial development.
  3. Promotion of Khadi and village industries: This is done by adopting modern techniques. For this purpose the government proposed to draw up special programmes to progressively increase the production of footwear and soaps in the small sector. It had also proposed to revamp the Khadi and Village Commission with a view to enlarging its area of operation. In the programme of development of village industries, the government intended to give special place to Khadi and especially “Nai Kadi” as it was hoped that the productivity and earnings of khadi spinners and weavers would improve.
  4. Development of appropriate technology: It would be an integral part of the government's policy to ensure that the development and application of technology appropriate to the country's socio-economic conditions receive adequate attention. Special arrangements were to be made to ensure an effective coordinated approach for the development and widespread application of suitable, small and simple machines, and devices for improving the productivity and earning capacity of workers in small and village industries.
  5. Role of large-scale industries: The role of large-scale industries will be essentially related to the programme for meeting the basic minimum needs of the population through wider dispersal of small-scale and village industries and strengthening of the agricultural sector. The government would not favour large-scale industry merely for demonstration of sophisticated skills or as movements of irrelevant foreign technology. The Industrial Policy, therefore, prescribed the following areas for large-scale sector: (a) basic industries which were essential for providing infrastructure as well as for development of small-scale and village industries, such as steel, non-ferrous metals, cement, oil refineries; (b) capital goods industries for meeting the machinery requirements of basic industries as well as small-scale industries; (c) high technology industries which required large-scale production and which were related to agricultural and small-scale industrial development such as fertilizers, pesticides, petrochemicals, etc. and (d) other industries which were outside the list of reserved items for the small-scale sector, and which are considered essential for the development of the economy such as machine tools and organic and inorganic chemicals.
  6. Expanding role for the public sector: The new Industrial Policy specified that the public sector would not only be the producer of important and strategic goods of basic nature, but would also be used effectively as a stabilizing force for maintaining essential supplies for the consumer. It would be charged with the responsibility of encouraging the development of a wide range of ancillary industries and contribute to the growth of decentralized production by making available its expertise in technology and management to small-scale and cottage industry sectors. The government would also endeavour to operate public sector enterprises on profitable and efficient lines in order to ensure that investment in these industries pay an adequate return to society.
  7. Foreign investment: The provisions of the Foreign Exchange Regulation Act (FERA) would be strictly enforced so far as the existing foreign companies were concerned. After dilution of equity, companies with direct non-resident investment not exceeding 40 per cent would be treated generally on par with Indian companies, and their future expansion would be guided by the same principles as those applicable to Indian companies.
  8. Take over of sick units: The Industrial Policy suggested that in future, the take over of the management of sick units would be resorted to on a selective basis and this would be done only after a careful examination of the steps required to revive the units. The government in cooperation with the Reserve Bank of India had instituted arrangements for monitoring incipient sickness in industrial units so that corrective action could be initiated as soon as there was evidence of mismanagement or financial or technical weakness.
  9. Restricting family control of industry: The Industrial Policy Statement mentioned “family control of business, particularly in the field of large-scale industry, was an anachronism, and it would be the government's policy to insist on professionalization in management”. The government decided to examine the possibilities of encouraging workers’ participation in the equity of industrial units without in any way, adversely affecting their interests.

The 1977 Industrial Policy was framed with the idea that it would “help in the creation of a just and equitable society in which the benefits of industrial development would be shared by all the people”. The objective was undoubtedly laudable but was difficult to fulfil. The policy was somewhat harsh to the large units in the private sector when it stipulated that they would have to rely on internally generated resources for financing new projects or expanding existing projects. The financing of large-scale sector did not have to be at the cost of other sectors but at the same time it would certainly hurt the economy if the large-scale sector was not able to function effectively due to shortage of funds. Most of the large industries were not doing well for various reasons. To enable these units to increase profitability, the government should not have closed the door of outside financial resources to large units. A welcoming feature of the policy was the expanding role assigned to the public sector and the government's determination to run public sector enterprises on profitable basis in order to ensure that investment in these industries paid an adequate return to society.

THE INDUSTRIAL POLICY OF 1980

The Indira Gandhi Government which replaced the Janata/Lok Dal, Congress (U) Alliance Governments at the Centre in January 1980 understandably came up with its own alternative to the Janata Party's Industrial Policy Statement of December 1977 more particularly in view of the industrial stagnation that had marked the preceding year. While generally endorsing the philosophy of the 1956 Industrial Policy, the government announced a new industrial policy on 23 July, 1980 which included major relaxations and concessions benefiting the small, medium as well as large-scale sectors with the triple objects of modernization, expansion, and development in the backward areas.

The thrust of the concessions is in doubling the investment limit of tiny, small and ancillary sectors, regularization of the excess capacity and permitting automatic expansion facility for large units in the priority sector and setting up of several nucleus industrial centres in industrially backward areas. Broadly speaking, this new policy of integrated industrial development sought to promote the concept of economic federalism, offered a new deal to the private sector, promised to improve the efficiency of the public sector, sought to reverse the trend of the previous three years towards creating artificial divisions between small- and large-scale industries and re-affirmed its faith in MRTP Act and the FERA.

Important Provisions

The following sections discuss the main features of the new policy:

Socio-economic Objectives

The new policy has spelt out the main socio-economic objectives as under

  1. Optimum utilization of the installed capacity
  2. Maximizing production and achieving higher productivity
  3. Higher employment generation
  4. Correction of regional imbalances through a preferential development of industrially backward areas
  5. Strengthening of the agricultural base by according a preferential treatment to agro-based industries and promoting optimum inter-sectoral relationship
  6. Faster promotion of export-oriented and import substitution industries
  7. Promoting economic federalism with an equitable spread of investment and the dispersal of returns amongst widely spread small, but growing, units in rural as well as urban areas

Revival of the Economic Infrastructure

The main emphasis of the new policy was on the revival of the economy which had by then been inhibited by infrastructural gaps and inadequacies in performance. This put the economy into a vicious circle of shortages of major industrial inputs such as energy, transport and coal. To normalize the situation, government, through this policy, sought to break this vicious circle and to put the economy again on its feet.

Revamping of the Public Sector

The new policy re-affirmed its faith in the primacy of the public sector and sought to restore the people's faith in it, as “People's sector” and not as “nobody's sector”. With this end in view, it proposed to evolve effective operational systems of management in the public sector undertakings. More specifically, such industrial undertakings would be closely examined on a unit-by-unit basis and corrective action would be taken in terms of a time bound programme. Priority would be accorded to convert losing concerns into viable ones through a broad restructuring of the system and by providing dynamic and competent management. Since one of the main reasons for the unsatisfactory performance of public undertakings has been identified as the absence of proper management cadre, the new policy envisages the development of management cadres in functional fields such as operations, finance, and marketing and information systems.

Role of the Private Sector

Rather than running down the private sector, the government would pursue the goal of a vibrant, self-reliant and modern economy in which all sectors and segments of the society had a positive role to play. Government recognized that it would be, in general, desirable to allow private sector undertakings to develop in consonance with targets and objectives of national plans and policies but, should not permit the growth of monopolistic tendencies or concentration of economic power and wealth in a few hands.

Economic Federalism

According to the Policy statement, it would be the governments’ endeavour to reverse the trend towards creating artificial divisions between the small- and large-scale industries under the misconception that these interests were essentially conflicting. While making all efforts towards integrated industrial development, the policy proposes to promote the concept of economic federalism with the setting up of a few nucleus plants in each district identified as industrially backward to generate as many ancillaries and small and cottage units as possible.

Nucleus Plants

The Policy had introduced a new concept—nucleus plants. A nucleus plant is one which would concentrate on assembling the products of the ancillary units falling within its orbit, on producing the inputs needed by a large number of small units and making adequate marketing arrangements. The nucleus plant would also ensure a widely spread pattern of investment and employment and would distribute the benefits of industrialization to the maximum possible extent. The nucleus plants would work for upgrading the technology of small units. A carefu1ly worked out time-bound programme for greater ancillarization in certain industries would contribute considerably towards dispersal of industry and growth of entrepreneurship.

Policy Changes and Initiatives

  1. Redefining of small-scale units: In order to boost the development of small-scale industries and to ensure their rapid growth, government had decided
    • To increase the limit of investment in the case of tiny units from INR 100,000 to INR 2 million.
    • To increase the limit of investment in the case of small-scale units from INR 1 million to INR 2 million.
    • To increase the limit of investment in the case of ancillaries from INR 1.5 million to INR 2.5 million.

    The Policy contemplated that, the upward revision of limits of investment for the small units would eliminate the tendency to circumvent the existing limit by underestimating the value of machinery and equipment, falsification of accounts or resort to benami units. The enhancement of the limit in terms of investment in plants and machinery would also help genuine small-scale units particularly those being set up by young and technically qualified entrepreneurs to come up. This measure would also facilitate modernization of the existing small-scale units which was long overdue.

  2. Financial support to small units: One of the major constraints to the growth of the decentralized sector had been the difficulties of finance experienced, particularly by, industrial entrepreneurs in small, cottage and rural sectors. Although, there was adequate network of institutional finance, yet there was a need for coordinating the flow of capital both short and long-term. The government would evolve a system of coordination to ensure the flow of credit to the growing units in the decentralized sector at the right time and on appropriate terms. The new policy envisaged the strengthening of the existing arrangements and making such changes as may be necessary to facilitate the availability of credit to the growing units in the small-scale sector.
  3. Buffer stocks of critical inputs for small-scale industries: In order to assist the growth of small-scale industries, it was proposed to introduce a scheme for building up buffer stocks of essential materials which were often difficult to obtain.
  4. Marketing support and reservation of items for small-scale industries: Policies regarding marketing support to the decentralized sectors and reservation of items for small-scale industries would continue to be in force in the interest of growth of the small-scale industries.
  5. Greater attention to village industries: Government would promote such a form of industrialization in the country that would generate economic viability in the villages: Promotion of suitable industries in rural areas would be accelerated to generate higher employment and higher per capita income for the villagers in the country without disturbing the ecological balance. Handlooms, handicrafts, khadi and other village industries would receive greater attention to achieve a faster rate of growth in villages.

Correcting Regional Imbalances

Particular emphasis would also be laid on correcting the regional disparities in industrial growth in the country which, instead of being narrowed down had actually been accentuated over the years of planned economic development. For the achievement of this goal, government had decided to encourage dispersal of industry and setting up of units in industrially backward areas. Special concessions and facilities would be offered for this purpose and these incentives would be growth and performance oriented.

Generation of Employment and Higher Production

Industrial development had to be viewed in the broader context of generating higher production and employment. Overcoming the problems of poverty and backwardness needed a multi-pronged approach. An integral part of this approach would be to create new focal points of industrial growth which had the maximum effect on the quality of life. This would have to be based essentially on the utilization of local materials and locally available manpower. The ripple effect of substantial investments in backward districts in the past had, in many cases, not been adequate mainly because such investments did not have effective linkages with local resources. The new policy therefore proposed to encourage investment by public and private sectors which would meet these criteria and would also promote a network of spread out ancillaries.

Liberalization of Existing/Licensed Capacities

A very important feature of the new policy related to the recognition as well as liberalization of the productive capacity of industrial units in the interest of raising industrial production in the country. There were several industries which are important from the point of view of national economy or were engaged in the production of articles of mass consumption. Their productive capacity might have greatly improved as a result of increased labour productivity or technological improvements, but they could not avail of this increased productive capacity because of the constraint imposed by the original industrial licence. The new policy proposed to recognize and endorse such enhanced productive potential. Where the industrialists had exceeded their original licensed capacities, these would also be regularized on a selective basis.

Provision for Automatic Growth

A very notable feature of the new policy related to the provision for automatic growth of the existing capacities. Realizing the constraint on resources on the one hand and the high prices of new capital goods on the other, the government had in 1975, allowed to 15 selected industries the facility for automatic expansion (limited to 5 per cent per annum or 25 per cent in a 5 year period). The 15 industries fell either in the category of core industries or under those which had direct linkages with them or which had long-term potential. This expansion was to be in addition to the normal permissible expansion in production by 25 per cent of the approved capacity. In terms of the new policy, this facility would also be extended to all other industries included in Appendix 1 of the Industries (Development and Regulation) Act 1951.

Streamlining Licensing Procedures

There had already been considerable simplification and streamlining of licensing procedures. Nevertheless, there was scope for further improvement in reducing the period of time taken for disposal of applications for the creation of new capacities or proposals for the production of new items. The new policy proposed to speed up the process of examination and decision making and also to examine the possibilities of further rationalization and simplification of the system of industrial licensing.

Encouraging Export-oriented Units

Realizing the key role of exports in development, the new policy provides for sympathetic consideration of requests for setting up 100 per cent export-oriented units, or for the expansion of existing units exclusively for purposes of export and for allowing higher production for exploiting fully, the emerging export opportunities.

Permitting Larger Capacities to Reap Economies of Scale

In a number of cases Indian industry had not been able to compete in markets abroad because of the scale of output that was related to the level of domestic demand which was too small to give them the advantages of modern technology and economies of scale. In cases where a larger production would increase competitiveness of Indian Industry abroad, government would consider favourably the induction of advanced technology, and would permit creation of capacity large enough to make it competitive in world markets, provided substantial exports were likely to materialize.

Encouragement to Research and Development (R&D)

Research and Development is essential to constantly update technologies with a view to obtaining optimal utilization of scarce resources, better service to the consumer and achieving greater exports. Greater emphasis would be laid on bringing the benefits of the latest R&D to the medium and small units.

Transfer of Technology

Government would take active measures to facilitate the transfer of technology from efficiently operating units to new units. Companies which had well-established R&D organizations and had demonstrated their ability to absorb, adopt and disseminate modern technology would be permitted to import such technology as would increase their efficiency and cost-effectiveness.

Modernization Packages and Energy Industry Dovetailing

“Modernization packages” would be evolved to suit the requirements of each industry, and would include all aspects, i.e. appropriate location and optimum use of energy and the adoption of the right kind of technology in order to minimize costs and improve efficiency in the use of scarce materials. It would be Government's endeavour to ensure that the process of modernization percolated down to small units and villages, as thus far little effort had been made in dovetailing the industry and energy policies. Accordingly, because such industrial processes and technologies would aim at optimal utilization of energy or the exploitation of alternative sources of energy, they would be given special assistance, including finance on concessional terms.

Monitoring System and Data Bank

The new policy also proposed that in future, the agencies connected with the issuance of letters of intent/industrial licences would not merely concern themselves with letters of intent/industrial licences, but would also evolve a comprehensive system of monitoring the implementation of the schemes through the establishment of the Data Bank.

Evaluation of Incentives

It was the government's considered view that all incentives given to industry should be performance-oriented. This desire of the government was emphasized in the new policy. It was, therefore, proposed that a regular periodic assessment would be made of the impact of these incentives to see the extent to which they had fulfilled their initial purpose.

Devising an Early Warning System to Identify Industrial Sickness

The government was concerned at the growing problem of sickness in a large number of industrial undertakings. While it was recognized that it would be in the national interest to protect the investments in these undertakings by appropriate remedial action, it was also the view of the government that deliberate mismanagement and financial improprieties leading to sickness should be dealt with firmly. Various financial institutions had made arrangements to detect sickness in undertakings at an early stage with a view of taking necessary corrective action. To ensure this, the government proposed to introduce a checklist to serve as “an early warning system” for identifying symptoms of sickness.

Mergers and Amalgamations

In case of existing sick undertakings which showed adequate potential for revival, it would be the policy of the government to encourage their merger (through liberalizing tax concessions) with healthy units which were capable of managing the sick undertakings and restoring their viability.

Takeover to Be in Exceptional Cases

Recourse to the takeover of management under the Industries (Development and Regulation) Act would be had only in exceptional cases on grounds of public interest where other means for the revival of sick undertakings were not considered feasible.

Industrial Relations

Deteriorating industrial relations in the previous 3 years had affected a number of important sectors of the economy and have led to a fall in the industrial production. The new policy, therefore, while attaching great importance to the interests and welfare of labour, also considered that the maintenance of constructive and cordial industrial relations in which both labour and management had to cooperate in a responsible manner, was essential for the sustained growth of the economy. The new industrial policy envisaged the revival of the tripartite labour conference and it was hoped that, through an attitude of mutual understanding and constructive cooperation, it would be possible to establish higher standards of productivity and industrial harmony.

Industrial Pricing Policy

It was the government's policy that while all reasonable facilities and incentives would be provided to the industry, it should recognize and accept its social responsibility particularly in terms of maintaining the price line, avoiding hoarding and speculation, and maximizing production on an efficient basis.

Scrapping of District Industries Centres

The new policy stated that the government should review the scheme of district industries centres and scrap those centres which had not produced benefits commensurate with the expenditure incurred.

The announcement of the new industrial policy came not a day too soon. The industrial situation in the country had been deteriorating fast; not only was there a deceleration of the index of industrial production but also it actually showed a negative rate. The deterioration on the price front had been worse still, with the rate of price-rise rising to 4.5 per cent in a single month immediately preceding the announcement of this new policy (19 June to 19 July, 1980). A major cause for this was the industrial stagnation in the country. The new policy set out to pull the economy out of this morass.

The overall impression one got from this new industrial policy was that it believed in the working of a mixed economy in which the private sector was destined to play a more effective role. All in all, the new policy was to be welcomed without any reservations as being pragmatic and sensible. It fit well into the prevailing situation of industrial stagnation.

Amendments in Appendix I

In amending Appendix 1 of the Industrial Policy Statement of 1980 the government had in fact carried out a major revision of the Industrial Licensing Policy. The series of measures announced during the course of the year 1981–82 represented a new and pragmatic approach towards industry and trade. By conceding most of the demands for which the organized industry in the country had been pleading, the ball had now been played squarely in the court of the private sector. Steering clear of a system of controls and procedural regulations in many areas, the Indian Government's measures of 1980 policy had exhibited a definitely positive attitude towards liberalization for both domestic and overseas investors.

The new policy threw open five more core sector industries to large houses and FERA companies and allowed the industry to enhance capacity by 33.33 per cent over the best production during the 5 years ending 1981–82. This enhancement was over and above the 25 per cent excess production permitted already. Large houses and FERA companies would moreover be permitted to set up units outside Appendix 1 list, if the units were predominantly export oriented. In case of those exporting items reserved for the small-scale sector, exports would have to be as high as 75 per cent and only 60 per cent in the case of others.

The government had simultaneously liberalized facilities available to non-residents of Indian nationality/origin, for investment in shares of Indian companies. This facility of investing which was available only to resident individuals so far was now also extended to overseas companies, partnership firms, societies, etc. Non-residents of Indian nationality and origin had been allowed to make investments up to 74 per cent in any of the priority industries. The incentive of higher interests on deposits of one year and above for Non-Resident (External) Rupee Account Scheme and Foreign Currency Non-Resident Account Scheme, was expected to give a fillip to such deposits.

The Reserve Bank of India on 21 April, 1981 also announced steps liberalizing the norms for investment by non-resident Indians. They could now invest, with repatriation rights, in any new or existing company up to 40 per cent of the capital issued by such a company provided (a) the shares were purchased through a Stock Exchange, (b) the purchase of such shares in any one company did not exceed INR 100,000 in face value or 1 per cent of the paid-up capital of the company, whichever was lower. Such investments could be made in any industry including those in the “negative” list of industries as well as in hotel industry. Further non-residents could also invest in shares through Stock Exchanges in India without any limit on the quantum and value of investment, but the repatriation of capital and income earned thereon would not be allowed. They could also freely invest in six year National Savings Certificates and such investments and income earned thereon would be free from wealth tax, gift tax and income tax.

Overseas companies, firms, societies and trusts could also freely invest in units of the UTI, securities of Central and State governments, National Savings Certificates, etc. Such investments would enjoy benefits of repatriation of capital as well as income earned thereon.

Thus, the major shift in the policy of the government, through the introduction of the new policy, had not only enlarged the scope of operations for foreign as well as large Indian companies, but also promoted a better climate for investment and widened the ground for international cooperation.

THE NEW INDUSTRIAL POLICY OF 1991

In 1985, Rajiv Gandhi outlined a series of measures in the economic policy his government would pursue. In early 1991, a major economic crisis had occurred in the country the like of which people had never experienced since Independence. The widening gap between the revenue and expenditure of the government resulting in growing fiscal deficits had to be met by heavy internal borrowing. As a result of this attempt to live beyond means, the economy was pushed into a deep economic crisis. The Gulf crisis in the late 1990s sharply accentuated the already prevalent macro-economic problems. There was also political instability in the country at this juncture. The price situation also was alarming with the rate of inflation rising to 11.2 per cent per annum in terms of consumer price index. The most disquieting feature was that the prices of food items rose substantially, shortages of consumer goods became the order of the day, adding a scare to the scarcity of goods, all of which caused concern. The balance of payments position was on the brink of disaster and by late June 1991, the level of foreign exchange reserves dropped to precarious levels. Rupee depreciated by 26.7 per cent against the dollar. Foreign lenders were unwilling to fund us any further and were insisting on devaluation of the rupee and opening up of the economy. The crisis made economic reforms absolutely necessary.

Some of the early major steps taken to manage the crisis were the following: (i) Fiscal correction aimed at reducing fiscal deficit by about INR 77 billion in 1991–92 (compared to 1990–91); (ii) Announcement of New Industrial Policy in July 1991 seeking to deregulate the industry with the view to promote the growth of a more efficient and competitive industrial economy; (iii) Abolition of industrial licensing for all industrial projects except 18 industries of high strategic and environmental importance and with high import content. About 80 per cent of the industries were delicensed; (iv) MRTP Act amended to eliminate the need for prior approval by large companies for capacity expansion and diversification; (v) Nine areas in basic and core industries earlier reserved for public sector, opened to private sector; (vi) Limit of foreign equity holding raised from 40 per cent to 51 per cent in a wide range of priority industries; (vii) Foreign Investment Promotion Board (FIPB) established to negotiate proposals from large international firms and expedite clearances of the investment proposals; (viii) Rupee devaluation by 18 per cent during 1–3 July, 1991 supported by a standby credit of USD2.3 billion from the International Monetary Fund over a 20 months period, negotiated in October 1991; (ix) Negotiation of USD500 million Structural Adjustment Loan from the World Bank in April 1992 and a loan totalling SDR 1.3 billion from the IMF between January and September, 1991; (x) Introduction of India Development Bond Scheme and Immunity Scheme for repatriation of funds held abroad in October 1991, under which more than USD2 billion was mobilized during 1991–92; (xi) Bringing back of gold earlier pledged to the Bank of England and Bank of Japan; Continuance of the measures of import control and credit squeeze; (xii) Administered licensing of imports replaced by freely tradeable import entitlements (called EXIMSCRIPS) linked to export earnings. The measure was expected to introduce self-balancing mechanism in India's foreign trade; (xiii) Introduction of Liberalized Exchange Rate Management System (LERMS) under which a dual exchange rate system was established, one rate being effectively floated in the market and (xiv) Import licensing in most capital goods, raw materials, intermediates and components eliminated. Advance Licensing System considerably simplified.

In a historic reversal of several postulates of Nehruvian Socialism and in the context of a rigid role of the State that brought the economy of the State to the brink of collapse, the Congress Government headed by Narasimha Rao announced a new Industrial Policy in July 1991. This policy statement is historical and a watershed in the economic history that spelt far-reaching changes in every aspect and sector of the economy the way people looked at development and even in the mindsets of people and the government.

The major objectives of the new industrial policy package were (i) to build on the gains already made (ii) to correct the distortions or weaknesses that might have crept in (iii) to maintain a sustained growth in productivity and gainful employment and (iv) to attain international competitiveness. The pursuit of these objectives would be tempered by the need to preserve the environment and ensure efficient use of the available resources. All sectors of industry whether small, medium or large, belonging to the public, private or cooperative sector would be encouraged to grow and improve on their past performances.

In pursuit of the above objectives, the government had decided to take a series of initiatives in respect of the policies relating to the following areas: (i) Industrial Licensing; (ii) Foreign Investment; (iii) Foreign Technology Agreements; (iv) Public Sector Policy and (v) MRTP Act.

Industrial Licensing

Industrial Licensing was governed by the Industries (Development & Regulation) Act, 1951. Over the years, keeping in view the changing industrial scene in the country, the policy had undergone modifications. Industrial licensing policy and procedures had also been liberalized from time to time. A full realization of the industrial potential of the country called for a continuation of this process of change.

In order to achieve the objectives of the strategy for the industrial sector for the 1990s and beyond it was necessary to make a number of changes in the system of industrial approvals. Major policy initiatives and procedural reforms were called for in order to actively encourage and assist Indian entrepreneurs to exploit and meet the emerging domestic and global opportunities and realization of the industrial potential of the country called for a continuation of this process of change.

The bedrock of any such package of measures must be to let the entrepreneurs make investment decisions on the basis of their own commercial judgement. The attainment of technological dynamism and international competitiveness required that enterprises must be enabled to swiftly respond to fast-changing external conditions that had become characteristic of today's industrial world. Government policy and procedures must be geared to assisting entrepreneurs in their efforts. This could be done only if the role played by the government were to be changed from that of only exercising control to one of providing help and guidance by making essential procedures fully transparent and by eliminating delays.

Industrial licensing would henceforth be abolished for all industries, except those specified, irrespective of levels of investment. These specified industries (Annexure-II), would continue to be subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. The exemption from licensing would be particularly helpful to the many dynamic small and medium entrepreneurs who had been unnecessarily hampered by the licensing system. As a whole the Indian economy would benefit by becoming more competitive, more efficient and modern and would take its rightful place in the world of industrial progress.

Foreign Investment

While freeing Indian industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited.

In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it had been decided to provide approval for direct foreign investment up to 51 per cent foreign equity in such industries. There would be no bottlenecks of any kind in this process. This group of industries had generally been known as the “Appendix I industries” and were areas in which FERA companies had already been allowed to invest on a discretionary basis.

Promotion of exports of Indian products called for a systematic exploration of world markets possible only through intensive and highly professional marketing activities.

Attraction of substantial investment and access to high technology, often closely held, and to world markets involved interaction with some of the world's largest international manufacturing and marketing firms. The government would appoint a special board to negotiate with such firms so that we could engage in purposive negotiation with such large firms, and provide the avenues for large investments in the development of industries and technology in the national interest.

Foreign Technology Agreements

There was a great need for promoting an industrial environment where the acquisition of technological capability received priority.

With a view to injecting the desired level of technological dynamism in Indian industry, government would provide automatic approval for technology agreements related to high priority industries within specified parameters. Similar facilities would be available for other industries as well if such agreements did not require the expenditure of free foreign exchange. Indian companies would be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgement.

The hiring of foreign technicians and foreign testing of indigenously developed technologies, would also not require prior clearance as prescribed so far, individually or as a part of industrial or investment approvals.

Public Sector

It was the time, therefore, that the Government adopted a new approach to public enterprises. There must be a greater commitment to the support of public enterprises which were essential for the operation of the industrial economy. Measures must be taken to make these enterprises more growth oriented and technically dynamic. Units which might be faltering but were potentially viable must be restructured and given a new lease of life. The priority areas for growth of public enterprises in the future would be the following:

  • Essential infrastructure of goods and services
  • Exploration and exploitation of oil and mineral resources
  • Technology development and building of manufacturing capabilities in areas which were crucial in the long-term development of the economy and where private sector investment was inadequate.
  • The manufacture of products where strategic considerations predominated such as defence equipment. At the same time, the public sector would not be barred from entering areas not specifically reserved for it.

Government would strengthen those public enterprises which fell in the reserved areas of operation or were in high priority areas or were generating good or reasonable profits. Such enterprises would be provided a much greater degree of management autonomy through the system of Memoranda of Understanding. Competition would also be induced in these areas by inviting private sector participation. In the case of selected enterprises, part of government holdings in the equity share capital of these enterprises would be disinvested in order to provide further market discipline to the performance of public enterprises.

The Monopolies and Restrictive Trade Practices (MRTP) Act

With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity and competitive advantage in the international market, the interference of the government through the MRTP Act in investment decisions of large companies had become deleterious in its effects on Indian industrial growth. The pre-entry scrutiny of investment decisions by the so-called MRTP companies was no longer required. Instead, emphasis would be on controlling and regulating monopolistic, restrictive and unfair trade practices rather than making it necessary for the monopoly houses to obtain prior approval of Central government for expansion, establishment of new undertakings, merger, amalgamation and takeover and appointment of certain directors. The MRTP Act would be restructured by eliminating the legal requirement for prior governmental approval for expansion of present undertakings and establishment of new undertakings. The provisions relating to merger, amalgamation, and takeover would also be repealed. Similarly, the provisions regarding restrictions on acquisition of and transfer of shares would be appropriately incorporated in the Companies Act.

Simultaneously, provisions of the MRTP Act would be strengthened in order to enable the MRTP Commission to take appropriate action in respect of the monopolistic, restrictive and unfair trade practices. The newly empowered MRTP Commission would be encouraged to require investigation suo moto or on complaints received from individual consumers or classes of consumers.

In a further liberalization drive, the government delicensed manufacturers of motor cars, white goods such as refrigerators and air conditioners, raw hides and skins, leather and patent leather, excluding chamois leather. Pruning the list of industries requiring compulsory licensing from eighteen to fifteen gave greater freedom to entrepreneurs.

The policy changes during 1994–95 inter alia included extension of MOD VAT to more sectors, a thorough overhaul of the excise tax structure, further rationalization and reduction of customs duties, deregulation of bank lending rates, delicensing of most drugs and pharmaceutical products and liberalization of the telecommunications sector.

REFORMS IN THE INDUSTRIAL SECTOR
  • Industrial licensing for almost all bulk drugs was abolished.
  • Automatic approval of foreign investment up to 51 per cent and foreign technology agreements permitted for all bulk drugs and formulations, barring only a few.
  • Basic telecommunication services opened to private participation, including foreign investments.
  • Minimum lending rates for amounts over INR 200,000 abolished. The rate for advances between INR 25,000 and INR 200,000 reduced to 13.5 per cent.
  • SLR reduced to 31.5 per cent to make more credit available for the commercial sector.
  • Import duties on capital goods reduced to 15 per cent on export-related capital goods, 25 per cent for project imports and most capital goods, and continuation of concessional duties at 20 per cent for power projects and nil for fertilizer projects.
  • MODVAT extended to capital goods and petroleum products.
  • Corporate tax reduced from 45 per cent for widely held companies and 50 per cent for closely held companies to 40 per cent for domestic companies and from 65 to 55 per cent for foreign companies.
  • The five-year tax holiday to new industrial undertakings initially allowed for industrially backward state in the Budget for 1993–94, extended to all backward areas to be notified by the Department of Revenue.
  • Major overhaul of the excise tax structure, including rationalization of rates, elimination of most end use exemptions and a general shift from specific to ad valorem duties.
  • Continued reforms in customs duties, including reduction of the peak tariff rate, elimination of most end-use exemptions and removal of exemptions from countervailing duties.
INDUSTRIAL LICENSING

Industrialization is a sine qua non for economic progress. The government of free India was committed to rapid and balanced industrialization of the country with a view to benefiting the common man in the shape of increasing availability of goods at fair and reasonable prices, large employment opportunities and higher per capita incomes. Keeping in view the resources and the national priorities, establishment of industries were regulated through a system of licensing so that the government could scrutinize substantial investment proposals and examine the nature of industry to be set up, its importance and linkage effects to other sectors of the economy.

The Industries (Development and Regulation) Act 1951 was the central legislation which provided the basic framework for directing the flow of investment into various industries for achieving the planned targets. Various administrative bodies had been set up to process the applications for industrial licence, import of capital equipment, foreign collaboration, etc. These bodies were expected to decide the requests within a stipulated time limit. As a matter of general practice, initially a letter of intent was issued stipulating condition subject to which a licence would be issued. An industrial licence was issued on furnishing evidence that the prescribed conditions had been fulfilled.

Under the Act, the entrepreneur was required to obtain prior permission from the technical authorities such as the Directorate General of Technical Development (DGTD) for setting up industries, to manufacture any of the items included in the first schedule of the Act. The schedule covered a number of industries such as metallurgical industries, electrical equipment, prime movers, industrial machinery, medical and surgical appliances, scientific instruments, machine tools, textiles, chemicals and fertilizers, leather, ceramics, etc. The Act was applicable to a factory wherein 50 or more workers were working with the aid of power and where 100 or more workers were working without the aid of power.

Industries Covered

The licence was issued for a specific product quantity and location. It was also necessary for the following purposes:

  1. Taking up the manufacture of a new article in an existing undertaking.
  2. Substantially expanding the capacity of an industrial undertaking in an existing line of manufacture.
  3. Carrying on the business of an existing undertaking to which licensing provisions did not originally apply on account of an exemption order issued by the Government and became applicable thereafter as a result of cancellation of the exemption order and under certain circumstances as provided in the Act. Such licences were referred to as COB (carrying on business) licenses.
  4. Changing the location of an existing industrial undertaking. There were, however, certain industries which were exempted from the provision of licensing on the basis of the investment involved in them, the nature of industry, foreign exchange requirements, etc.

Industries Exempted

The following are the categories of industrial undertakings exempted from licensing:

  1. Small-scale industries, i.e. industrial undertakings with investments in plant and machinery not exceeding INR 3.5 million.
  2. Ancillary units with investments in plant and machinery not exceeding INR 4.5 million.
  3. Undertakings other than small-scale and ancillary units with investments, in land, building, plant and machinery not exceeding INR 30 million.
  4. Certain notified industries, subject to the condition that (a) the item was not reserved for exclusive development in the small-scale sector, (b) the undertaking was not within the purview of either MRTP Act or FERA and (c) the industrial undertaking did not require imported capital goods or raw materials or foreign collaboration.
  5. Industrial undertakings (other than those falling under the purview of the MRTP Act and FERA) which took up the manufacture of any items based on the technology developed by any of the laboratories established by the Council of Scientific and Industrial Research and laboratories approved by the Department of Science and Technology. The item of manufacture should not be one reserved for development in public sector or small-scale sector or governed by special regulations.

How to Apply for a Licence?

The Government of India had constituted an Inter-ministerial Committee of Secretaries, known as the Foreign Investment Board (FIB) which had the responsibility for scrutinizing the foreign collaboration proposals and recommending acceptance or rejection of these proposals. Similarly, there is a Licensing Committee for industrial licences, Capital Goods Committee for import of capital goods and Licensing-cum-MRTP Advisory Committee for cases involving both licence and MRTP clearance. There is also a Project Approval Board (PAB) which deals with composite applications for industrial licence, foreign collaboration and import of capital goods. These committees are serviced by a common office called Secretariat for Industrial Approvals (SIA) in the Department of Industrial Development (Ministry of Industry). The SIA receives applications for various approvals, processes them through the concerned approval committees and technical agencies and issues final order of the government to each applicant.

  1. In order to obtain an industrial licence from the government, an application should be made in the prescribed form. Application forms can be obtained from the Entrepreneurial Assistance Unit, Secretariat for Industrial Approvals, Udyog Bhavan, New Delhi or from offices of the Indian Investment Centre, or from any of the authorized dealers in Government publications.
  2. An application for industrial licence should be addressed along with 10 spare copies to the Secretariat for Industrial Approvals (SIA), Department of Industrial Development, Udyog Bhavan, New Delhi along with an “Account Payee’ crossed Bank Draft for INR 500 towards licence fee drawn on the State Bank of India, Nirman Bhavan Branch, New Delhi, in the name of Pay & Accounts Officer, Department of Industrial Development, Ministry of Capacity Utilisation and Growth in Capacity Industry.
  3. Applicants who are registered under Section 26 of the MRTP Act, 1969 should necessarily submit their applications under the said Act along with their industrial licence application, or, in the alternative, clearly state the reasons for not submitting the MRTP application. Applications under the MRTP Act, 1969 should be submitted directly to the Secretary, Department of Company Affairs, ‘A’ Wing, 5th Floor, Shastri Bhavan, Rajendra Prasad Road, New Delhi-I. A copy of the application should be furnished along with the industrial licence application to the Secretariat for Industrial Approvals.
  4. For expeditious issue of industrial approvals, entrepreneurs are advised to apply to SIA simultaneously, wherever possible, for various approvals such as industrial licence! Letter of intent, foreign collaboration, and import of capital goods. In the case of such composite applications the time limit for a simultaneous disposal of the application for licence, foreign collaboration and capital goods, is 90 days. Even in cases involving MRTP clearance the time limit now is 90 days. In the case of non-MRTP and non-FERA units which require only industrial licence, the time limit is 60 days.

Registration

Small-scale and ancillary units do not require any industrial licence or other approval except when the item of manufacture is governed by special regulations. However, undertakings which are exempted from licensing are expected to register themselves with the Directorate General of Technical Development (DGTD) in the Ministry of Industry. Application for registration should be made in the prescribed form. Those who require approval for foreign collaboration and/or import of capital goods must obtain the same before registration by the technical authority is accorded.

It is recognized that actual production of an industrial unit may not always conform to the licensed capacity. Efficient utilization of production facilities may result in actual production exceeding the licensed capacity. Similarly, the need for meeting growth in demand for particular items as well ‘as the’ necessity to allow existing units to produce more have to be kept in mind. For these reasons, certain concessions have been allowed for production in excess of licensed capacity. These are briefly discussed below:

  1. Excess production up to 25 per cent: Industrial undertakings can increase production of articles, for which they are licensed or registered, up to 25 per cent of the capacity so licensed or registered without obtaining a substantial expansion licence provided, (a) no additional plant and machinery is installed; (b) no additional expenditure of foreign exchange is involved; (c) the extra production does not result in additional demand for scarce raw materials (d) the item is not reserved for the small-scale sector.
  2. Excess production without limit: Entrepreneurs who do not come under the purview of the MRTP Act, 1969 or FERA 1973, are allowed to utilize their installed capacity without limit, even though this may be in excess of their licensed capacity. The articles manufactured in these industries should not, however, be those reserved for development in the small-scale sector, and further, no additional machinery should be required to be installed. This facility is also available to those undertakings coming under the purview of MRTP Act, 1969 and FERA 1973 provided; the excess production is exported or sold in accordance with the directions of the Government.
  3. Automatic growth of capacity: Industrial undertakings operating in the industries included in Appendix-I of the Government Press Note dated 2 February, 1973 can increase their capacity at the rate of 5 per cent per annum and up to a limit of 25 per cent in a 5-year plan period without obtaining a “substantial expansion” licence under the Industries (Development & Regulation) Act. This is, however, subject to certain conditions which are specified in this behalf by the government. Any increase in capacity under this facility will be over and above the normal permissible limit of 25 per cent in production over the authorized licensed capacity mentioned in sub-para (i) above.
  4. Additional capacity in certain cases: In cases where a large production base would increase the competitiveness of Indian industry abroad, government will consider favourably the induction of advanced technology and will permit creation of capacity large enough to make it competitive in world markets provided substantial exports are likely.
  5. Recognition of existing capacity: Taking note of the substantial increase in the productive capacity in several industries as a result of higher labour productivity and technological improvements in the last several years, the government had decided to regularize such capacity in excess of licensed capacity in 34 specified industries. This is subject to the conditions that the concerned industrial undertakings would not install any additional machinery and the items of manufacture are not those reserved for development in the small-scale sector. The facilities mentioned under (i) and (ii) above will also be available on such regularized capacity. In the case of companies coming under the purview of the FERA and the MRTP Act, the question of regularization of excess capacity would be considered by the Administrative Ministries concerned, only in consultation with the Directorate General of Technical Development (DGTD) and the Department of Company Affairs.

Special Procedure for Diversification

The facilities for diversification without having to obtain an industrial licence were subject to certain restrictions as to foreign exchange requirements, status of the entrepreneurs, etc. In addition to such facilities, certain specified industries were allowed full freedom for diversification of their production on the basis of a special approval procedure. The specified industries were machinery and machine tools industries, electrical equipment industry, steel castings, forgings and steel ingots, steel pipes and tubes. Diversification was allowed in respect of other items under the name major industry or related industry as specified by the government. Certain industries having special problems were also allowed to diversify into other industries. For example, in view of the then prevailing demand problem faced by passenger car industry, the government has allowed units engaged in the manufacture of passenger cars to diversify into other motor vehicles. Similarly, industries falling under the group's industrial machinery and machine tools could be allowed to diversify their production. Likewise, producers of cement may be permitted to fabricate cement machinery and equipment for captive use if the party had necessary facilities to do so. The simplified procedure adopted in all these cases ensured quick disposal of applications for permission for diversification.

In a further liberalization of the licensing policy, the government had under the new policy permitted the manufacture of any type of motorized two-wheelers without prior official permission. None of the two-wheeler manufacturers would, however, be allowed to produce vehicles beyond an engine capacity of 350 CC without obtaining prior approval.

The concept of broad-banding for licensing purposes, which was introduced sometime ago with regard to selective industries such as machine tools, two- and four-wheelers, chemical, pharmaceutical, petrochemical and fertilizers, machinery and paper and pulp industry has now been extended to 14 more product groups. These include steel pipes and tubes, metallurgical machinery including steel plant equipment, earth moving machinery, agricultural machinery, auto ancillaries, instruments of all types of automobiles, diesel engines, aerial ropeways, marine freight containers, railway wagons and coaches, vacuum and air-brakes, steel fabricated structures, offshore platform and cranes.

The main objective of the scheme was to provide flexibility to manufacturers for adjusting their product-mix in tune with the market demand. Also, such a policy would encourage optimum utilization of manufacturing facilities and lead to economies of scale. However, this scheme of broad-banding would not be available to items reserved for small-scale sector. MRTP and FERA companies also could avail this facility if the items were not included in Appendix. 1.

MRTP Clearance

Under the provisions of the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, all the companies having, singly or together with inter-connected undertakings, assets worth not less than INR 100 million or which are dominant undertakings (i.e. those undertakings which produce, distribute, supply or otherwise control one-third or more of any goods or services, with assets of the value of not less than INR 10 million) have to get themselves registered as such with the Government. Such companies, commonly called MRTP companies, have to obtain the permission of the Central Government for any substantial expansion of their activities.

Establishment of any new undertaking which would become an inter-connected undertaking of a large or dominant company referred to above would also require the previous permission of the Central Government. The Act does not make any distinction between foreign companies and domestic companies in the matter of applicability of these provisions. Applications under MRTP Act for substantial expansion or establishment of new undertaking, as mentioned above, should be made in the prescribed form with 11 copies thereof and evidence of payment of prescribed fee of INR 200 to the Secretary, Department of Company Affairs, Government of India, ‘A’ Wing, 5th Floor, Shastri Bhavan, Rajendra Prasad Road, New Delhi. If the fee is paid by means of a bank draft it should be drawn in favour of the Pay & Accounts Officer, Department of Company Affairs, (Ministry of Law, Justice & Company Affairs), drawn preferably on Punjab National Bank, Barakhamba Road, New Delhi.

In a major liberalization move, the Government has decided to exempt the larger industrial houses and companies falling within the purview of the FERA from seeking prior approval from the Company Law Board for either implementation of new projects or expansion of existing capacities. This was intended to serve the twin purposes of channelizing investment from large houses and FERA companies into areas where there was a need and to cut down procedural delays. This liberalization would be available for a period of 5 years. However, this facility was subject to two conditions: firstly, the proposal does not relate to any article that might be reserved for exclusive production by the small-scale industrial undertakings and secondly, the owner of the undertaking making the proposal should submit to the Department of Company Affairs, a memorandum containing the detailed proposal along with a copy of their application wherever required to be made under the Industries (Development and Regulation) Act.

The government had drawn up a list of 25 industries in keeping with certain specified priorities, where neither the large industrial houses falling within the purview of the MRTP Act nor the FERA companies would be required to submit their applications to the Company Law Board prior to submitting them to the Secretariat of Industrial Approvals (SIA). In other words, these companies would be exempt from making applications under Sections 21 and 22 of the MRTP Act. They had to file only a memorandum and a copy of the licence application which was submitted to the SIA.

The schedule enlisted 27 industries which included pig iron, castings and forgings, alternative energy devices and systems, transmission line towers, electrical motors with starters and internal combustion engines. Electronic components and equipments required for the electronic industry other than the specified type of integrated circuits, viz., VLSL and LSI, computer peripherals computer software, magnetic tapes for use in computers and video equipment, hard discs, floppy discs and diskettes for computers, test and measuring instruments, materials for electronics, computers, broadcasting equipment, control instrumentation and industrial and professional electronics, communication equipment. However, exemption in respect of the above electronic components and equipments would be available only if the MRTP house establishes in-depth production facilities vertically integrated; it should not be allowed to do mere assembly work from the imported kits with regard to the above exempted items.

Motorized two/three/four wheelers automotive components, spares and ancillaries, pollution control equipment, process pumps; process equipment for utilization of recycling of wastes, chemical process plants, machinery for chemical industry as listed below: (i) rupture discs; (ii) special pneumatic calibrators; (iii) karbate pumps; (iv) centrifugal gas compressors, air compressors, industrial valves (v) dairy industry equipment, namely, homogenizers.

Printing machinery such as (i) Web for high speed letter press rotary and off-set rotary printing machines having output of 30,000 or more impressions per hour, i.e. cylinder speed of 30,000 per hour; (ii) photo/composing/type setting machines and ancillaries key boards, editing terminals and film/paper processors and (iii) four colour/two colour off-set machines.

Machine tools, tool room products and industrial machinery for drilling and production of mineral oil/natural gas, mechanized sailing vessels up to 10,000 DWT for units with capacity for meeting the requirements of the oil industry in particular. Oil field services, inorganic fertilizers under “18-fertilizers” in the first schedule to the Industries (Development and Regulation) Act, 1951, excluding fertilizer industry dealing with single superphosphate, drugs/drug intermediates.

High technology bulk drugs from basic stages and formulations based thereon with an overall ratio of drugs consumption (from own manufacture) to formulation from all sources of 1:5 as listed below: (i) Rifampicin, (ii) Dapsone, (iii) Clofazimine, (iv) Primaquine, (v) EMME (ethoxy methylene malonic diethyl ester), (vi) Novaldiamine, (vii) insulin, (viii) anticancer drugs, (ix) vitamin B6, (x) Norgestrel, (xi) Piperazine, and (xii) new bulk drugs developed through indigenous research, and Newsprint and Portland Cement.

In addition to 12 bulk drugs and drug intermediates which were delicensed under the scheme of delicensing of 25 broad industries, the Government has further delicensed 82 essential and mass consumption bulk drugs and formulation based thereon. The industrial units engaged in the manufacture of these items need not obtain a licence as required under the IDR Act, subject however to the condition that they did not fall within the purview of the MRTP Act or FERA and the article of manufacture is not reserved for the small-scale sector. Another condition is that industrial unit should not be located or proposed to be located within the standard urban limits of a city, having a population of more than 1 million or within the municipal limit of a city with a population of more than 500,000.

The delicensed industrial units would however be required to register themselves with the Secretariat for Industrial Approvals, Department of Industrial Development. The eligible units would be required to submit to the SIA the application for registration in the prescribed form. The registration of the delicensed industrial undertakings would be subject to other clearances from the concerned State and Central authorities with regard to the pollution control, foreign collaboration and capital goods.

SUMMARY
  • The Industrial Policy is a comprehensive statement of the government and covers all those procedures, principles, policies, rules and regulations, which control the industrial undertakings of a country and shape its pattern of industrialization. The industrial policy is broadly made up of two components. One is the philosophy of a given society to shape industrial growth. Second is its implementation i.e. rules and principles which give concrete shape to the philosophy of the policy.
  • A well-designed industrial policy is important since (1) It can help correct the lop-sided development of industrial structure; (2) It can direct the flow of scarce resources in the most desirable areas of investment; (3) It can prevent duplication or uneconomic use of resources; (4) It empowers the State to regulate and control the establishment and expansion of the industrial undertakings in the private sector; (5) It can help to demarcate the areas of economic activity; (6) It can prevent the concentration of wealth and economic power in few hands and (7) It can also lay down policies towards the import of foreign capital.
  • The Industrial Policy Resolution of 1948 contemplated a mixed economy under it, the industries were divided into four broad categories: (a) The first category comprised the manufacture of arms and ammunition, production and control of atomic energy, and the ownership and management of railway transport were to be the exclusive monopoly of the Central Government; (b) the second category covered coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraphs and wireless apparatus and these industries could henceforth be undertaken only by the State; (c) the third category comprised certain basic industries; and (d) the fourth category comprising the “remainder of the industrial field”, was left open to private enterprise, individual as well as cooperatives.
  • The 1948 Resolution ascribed a very important role to cottage and small-scale industries in the national economy. It had enunciated a policy of fair labour conditions as an essential basis for harmonious relations between management and labour, The Policy also emphasized the need for securing the participation of foreign capital and enterprise particularly as regards industrial.
  • Important Provisions of the Industrial Policy Resolution 1956 were (i) new classification of industries into (a) Schedule A: industries which were to be an exclusive responsibility of the State; (b) Schedule B: those which were to be progressively State-owned and in which the State would generally set up new enterprises, and private enterprise was expected only to supplement the effort of the State; and (c) Schedule C: all the remaining industries and their future development would in general be left to the initiative and enterprise of the private sector; (ii) the policy envisaged fair and non-discriminatory treatment for the private sector; (iii) encouragement to village and small-scale enterprises; (iv) removing regional disparities; (v) the need for the provision of amenities for labour and (vi) attitude towards foreign capital was the same as was enunciated in industrial policy resolution of 1948.
  • The Industrial Policy Statement of 1973 stated: (i) The Industrial Policy Resolution of 1956 would continue to provide the base for the policy of 1973; (ii) The State industrial sector would cover a wider field to promote growth with social justice, self-reliance and satisfaction of basic minimum needs; (iii) The policy earlier would be amended from time to time in order to have a greater clarity in the investment climate that would facilitate the priorities and production objectives in the Fifth Plan; (iv) The Policy relaxed licensing restrictions as per the revised MRTP Act; (v) The core industries and industries with a long-term export potential would fall under basic, critical and strategic industries important for the growth of the economy; (vi) 17 strategic and basic industries continued to be reserved for the public sector; (vii) Large industrial houses were eligible to participate in basic, critical and strategic industries, along with other applicants, provided that the item of manufacture was not the one reserved for production in the public sector; (viii) The existing policy of reservation for the small-scale sector was to continue and (ix) The joint sector would not be permitted to be used for the entry of larger houses, dominant undertakings and foreign companies in areas precluded to them.
  • The Industrial Policy of 1977 was primarily directed towards removing these distortions of the past so that the goal of faster economic development could be achieved within a time bound programme. The broad objectives of the 1977 industrial policy were (i) Doubling the rate of growth of national income from 3.5 to 7 per cent per annum; (ii) A rapid increase in the rate of growth of industrial production; (iii) Creating much larger employment opportunities and (iv) Reducing wide regional disparities and imbalances. The salient features of 1977 Industrial Policy were: (a) The main thrust of the new Industrial Policy would be an effective promotion of cottage and small industries widely dispersed in rural areas and small towns; (b) Protecting the interest of cottage and household industries through the introduction of special legislation; (c) Promotion of khadi and village Industries; (d) Development and application of technology appropriate to the countrys socio-economic conditions receive adequate attention; (e) Role of large-scale Industries will be essentially related to the programme for meeting the basic minimum needs of the population through wider dispersal of small-scale and village industries and strengthening of the agricultural sector; (f) Expanding role for the public sector as a stabilizing force for maintaining essential supplies for the consumer; (g) Foreign Investment—The provisions of the FERA would be strictly enforced so far as the existing foreign companies were concerned; (h) Take over of sick units—The Industrial Policy suggested that in future, the take over of the management of sick units would be resorted to on a selective basis and this would be done only after a careful examination of the steps required to revive the units and (i) Restricting family control of industry.
  • Highlights of the 1980 Industrial Policy were: (i) The new policy has spelt out the main socio-economic objectives as under: (a) Optimum utilization of the installed capacity; (b) Maximizing production and achieving higher productivity; (c) Higher employment generation; (d) Correction of regional imbalances through a preferential development of industrially backward areas; (e) Strengthening of the agricultural base by according a preferential treatment to agro-based industries and promoting optimum inter-sectoral relationship; (f) Faster promotion of export-oriented and import substitution industries; (g) Promoting economic federalism with an equitable spread of investment and the dispersal of returns amongst widely spread small, but growing units in rural as well as urban areas; (ii) Revival of the economic infrastructure; (iii) Revamping of the public sector; (iv) Private sector role in the economy was assured; (v) Economic federalism was emphasized; (vi) Nucleus plants: A nucleus plant is one which would concentrate on assembling the products of the ancillary units falling within its orbit, on producing the inputs needed by a large number of small units and making adequate marketing arrangements; (vii) Policy changes and initiatives: (a) Redefining of small-scale units: In order to boost the’ development of small-scale industries and to ensure their rapid growth, Government had decided: (1) To increase the limit of investment in the case of tiny units from INR 100,000 to INR 2 million; (2) To increase the limit of investment in the case of small-scale units from INR 1 million to INR 2 million and (3) To increase the limit of investment in the case of ancillaries from INR 1.5 million to INR 2.5 million. (b) Financial support to small units; (c) Buffer stocks of critical inputs for small-scale industries; (d) Marketing support and reservation of items for small-scale industries; and (e) Greater attention to village industries; (viii) Correcting regional imbalances; (ix) Generation of employment and higher production; (x) Liberalization of existing/licensed capacities; (xi) Provision for automatic growth; (xii) Streamlining licensing procedures; (xiii) Encouraging export-oriented units; (xiv) Permitting larger capacities to reap economies of scale; (xv) Encouragement to research and development; (xvi) Transfer of technology; (xvii) Modernization packages and energy industry dovetailing; (xviii) Monitoring System and Data Bank; (xix) Evaluation of incentives; (xx) Devising an early-warning system to bring the industrial sickness to light; (xxi) Merger and amalgamations; (xxii) Take over in exceptional cases; (xxiii) Industrial relations also considered that the maintenance of constructive and cordial industrial relations in which both labour and management had to cooperate in a responsible manner, was essential for the sustained growth of the economy; (xxiv) Industrial Pricing Policy; and (xxv) Scrapping of District Industries Centres.
  • The New Industrial Policy of 1991 is historical and a watershed in the economic history of India that spelt far-reaching changes in every aspect and sector of the economy, the way people looked at development and even in the mindsets of people and Government. The major objectives of the new industrial policy package were: (i) to build on the gains already made, (ii) to correct the distortions or weaknesses that might have crept in, (iii) to maintain a sustained growth in productivity and gainful employment and (iv) to attain international competitiveness. The pursuit of these objectives would 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 the public, private or cooperative sector, would be encouraged to grow and improve on their past performances. In pursuit of these objectives, Government have decided to take a series of initiatives in respect of the policies relating to (i) Industrial Licensing; (ii) Foreign Investment; (iii) Foreign Technology Agreements; (iv) Public Sector Policy and (v) MRTP Act.
  • The Industrial Licensing Policy was abolished for all industries, except those specified, irrespective of the levels of investment; (ii) Foreign Investment: while freeing Indian industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited; (iii) Foreign Technology Agreements: With a view to injecting the desired level of technological dynamism in Indian industry, Government would provide automatic approval for technology agreements related to high priority industries within specified parameters; (iv) Public Sector Policy: The priority areas for growth of public enterprises in the future would be (a) Essential infrastructure for goods and services, (b) Exploration and exploitation of oil and mineral resources, (c) Technology development and building of manufacturing capabilities in areas which were crucial in the long-term development of the economy and where private sector investment was inadequate and (d) Manufacture of products where strategic considerations predominate such as defence equipment; (v) The MRTP Act would be restructured by eliminating the legal requirement for prior governmental approval for expansion of present undertakings and establishment of new undertakings. Simultaneously, provisions of the MRTP Act would be strengthened in order to enable the MRTP Commission to take appropriate action in respect of the monopolistic, restrictive and unfair trade practices. In a further liberalization drive, Government delicensed manufacture of motor cars, white goods such as refrigerators and air conditioners, raw hides and skins, leather and patent leather, excluding chamois leather.
  • Reforms in Industrial Sector are (i) Industrial licensing for almost all bulk drugs was abolished; (ii) Automatic approval of foreign investment upto 51 per cent and foreign technology; (iii) Basic telecommunication services opened to private participation; (iv) Minimum lending rates for amounts over INR 200,000 abolished; (v) SLR reduced to 31.5 per cent to make more credit available for the commercial sector; (vi) Import duties on capital goods reduced to 15 per cent on export-related capital goods; (vii) MODVAT extended to capital goods and petroleum products; (viii) Corporate tax reduced from 45 per cent for widely held companies and 50 per cent for closely held companies to 40 per cent for domestic companies and from 65 per cent to 55 per cent for foreign companies; (ix) The 5 year tax holiday to new industrial undertakings initially allowed for industrially backward state in the Budget for 1993–94, extended to all backward areas to be notified by the Department of Revenue; (x) Major overhaul of the excise tax structure, including rationalization of rates, elimination of most end use exemptions and a general shift from specific to ad valorem duties and (xi) Continued reforms in customs duties, including reduction of the peak tariff rate, elimination of most end-use exemptions and removal of exemptions from countervailing duties.
  • The Industries (Development and Regulation) Act 1951 was the central legislation which provided the basic framework for directing the flow of investment into various industries for achieving the planned targets. As a matter of general practice, initially a letter of intent was issued stipulating condition subject to which a licence would be issued. An industrial licence was issued on furnishing evidence that the prescribed conditions had been fulfilled. Under the Act, the entrepreneur was required to obtain prior permission from the technical authorities such as the Directorate General of Technical Development (DGTD) for setting up industries, to manufacture any of the items included in the first schedule of the Act.
  • The licence was issued for a specific product quantity and location. (i) taking up the manufacture of a new article in an existing undertaking; (ii) substantially expanding the capacity of an industrial undertaking in an existing line of manufacture; (iii) carrying on the business of an existing undertaking to which licensing provisions did not originally apply on account of an exemption order issued by the Government and became applicable thereafter and (iv) changing the location of an existing industrial undertaking.
  • The categories of industrial undertakings which were exempted from licensing were: (i) Small-scale industries with investments, in plant and machinery not exceeding INR 3.5 million; (ii) Ancillary units with investments in plant and machinery not exceeding INR 4.5 million; (iii) Undertakings other than small-scale and ancillary units with investments, in land, building, plant and machinery, not exceeding INR 30 million; (iv) Certain notified industries; (v) Industrial undertakings which took up the manufacture of any items based on the technology developed by any of the laboratories established by the Council of Scientific and Industrial Research.
KEY WORDS
EXIMSCRIPS FIPB IMF
immunity scheme India Development Bond Scheme LERMS
MRTP Act regional disparities SDR
Small-scale industries World Bank  
DISCUSSION QUESTIONS
  1. If liberalization does not mean discarding each and every type of control mechanism. What kind of regulatory framework do you recommend at this juncture to make India competitive in world markets?
  2. Give a critical appraisal of the new industrial policy with special reference to the aim of integrating Indian industry with the world economy.
  3. Explain the need for liberalization of industrial policy in India. Also evaluate the impact of this policy.
  4. What policy changes should be made in India's trade and industrial policies to ensure rapid growth of GDP, while maintaining adequate macroeconomic balance?
  5. What do you mean by liberalization? Assess its impact on the industrial economy of India.
  6. “Rapid industrialization and diversification of the industrial structure have been the twin objectives of industrial policy of India.” Enumerate.
  7. Assess the performance of the industrial sector in India since 1991. What are the reasons for the slowing down of the growth momentum after a four year boom in the early 1990s.
  8. Write note on New Industrial Policy, 1991. In the light of the growth rate achieved after its adoption, do you think the Policy can be justified in every way?
  9. State the features of New Industrial Policy 1991and give a critical evaluation of the Policy.
  10. Examine the changes introduced in the New Industrial Policy of 1991with respect to industrial licensing and foreign investment.
  11. Write note on New Industrial Policy of 1991 with respect to public sector and foreign investment
SUGGESTED READINGS

Bhattacharjea, Aditya and Sugata Marjit (Eds.). Globalisation and the Developing Economies: Theory and Evidence. New Delhi, India: Manohar, 2004.

Bhattacharya, B. B. and Sabyasachi Kar. Macroeconomic Reforms: Growth and Stability. New Delhi, India: Oxford University Press, 2006.

Cohen, Daniel. Globalisation and Its Enemies. Cambridge, Mass.: MIT Press, 2006.

Dasgupta, Biplab. Globalisation, India's Adjustment Experience. New Delhi, India: Sage Publications, 2005.

Dasgupta, Samir. The Changing Face of Globalisation. New Delhi, India: Sage Publications, 2004.

Debroy, Bibek. Indian Economy on a Fast Track. New Delhi, India: Konark, 2005.

Frankel, Francine R. India's Political Economy, The Gradual Revolution, 1947–2004. New Delhi, India: Oxford University Press, 2005.

Gokarn, Subir, Anindya Sen, and Rajendra Vaidya (Eds.). The Structure of Indian Industry. New Delhi: Oxford University Press, 2004.

IMF, China and India Learning from Each Other, Reforms and Policies for Sustained Growth. Washington, DC: IMF, 2006.

Jalan, Bimal. The Future of India: Politics, Economics and Governance. New Delhi: Viking/Penguin, 2005.

Jha, Raghbendra (Ed.). Indian Economic Reforms. Hampshire, UK: Palgrave MacMillan, 2003.

Jomo, K. S. Globalisation under Hegemony, The Changing World Economy. New Delhi, India: Oxford University Press, 2006.

Jomo, K. S. (Ed.). The Long Twentieth Century—Globalization under Hegemony. New Delhi: Oxford University Press, 2006.

Joshi, V, and I. Little (Eds.). India's Economic Reforms 1991–2001. New Delhi: Oxford University Press, 2002.

Jugale, V. B. Globalisation, Growth and Poverty. New Delhi: Serials, 2004.

Kalirajan, K. P. and U. Sankar (Eds.). Economic Reform and the Liberalization of the Indian Economy. Cheltenham, UK: Edward Elgar, 2002.

Landy, Fredric and Basudeb Chaudhari (Eds.). Globalisation and Local Development in India. New Delhi: Manohar, 2005.

Mooij, Jos. The Politics of Economic Reforms in India. New Delhi: Sage Publications, 2005.

Nagaraj, R. Aspects of India's Economic Growth and Reforms. New Delhi: Academic Foundation, 2006.

Naib, Sudhir. Disinvestment in India. New Delhi: Sage Publications, 2004.

Nayyar, Baldev Raj. India's Globalisation: Evaluating the Economic Consequences. New Delhi: Vistaar, 2007.

Purfield, Catriona and Jerald Schiff. India Goes Global: Its Expanding Role in the World Economy. Washington, DC: IMF, 2006.

Ram Mohan, T. T., Privatisation in India: Challenging Economic Orthodoxy. New York, N.Y.: Routledge Curzon, 2005.

Reddy, Y. V. Economic Policy in India. New Delhi: UBSPD, 2003.

Reddy, Y. V. Lectures on Economic and Financial Sector Reforms in India. New Delhi: Oxford University Press, 2004.

Reed, Darryl, and Sanjay Mukherjee (Eds.). Corporate Governance, Economic Reforms and Development: The Indian Experience. New Delhi: Oxford University Press, 2004.

Sikdar, Soumyen. Contemporary Issues in Globalisation. New Delhi: Oxford University Press, 2003.