The government announced a New Industrial Policy on July 24, 1991. This new policy deregulates the industrial economy in a substantial manner.
The major objectives of the new policy are to build on the gains already made, correct the distortions or weaknesses that might have crept in, maintain a sustained growth in productivity and gainful employment, and attain international competitiveness. In pursuit of these objectives, the government announced a series of initiatives in the new industrial policy as outlined below:
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1. Abolition of Industrial Licensing:
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In a major move to liberalise the economy, the new industrial policy abolished all industrial licensing irrespective of the level of in vestment except for certain industries related to security and strategic concerns, and social reasons.
Now there are only 6 industries for which licensing is compulsory as amended in February 1999. These are alcohol, cigarettes, hazardous chemicals, drugs and pharmaceuticals, electronics, aerospace and defense equipments, and industrial explosives.
2. Public Sector’s Role Diluted:
The number of industries reserved for the public sector since 1956 was seventeen. This number has now been reduced to three. They are arms and ammunition and allied items of defense equipment, atomic energy and rail transport.
The main elements of Government Policy towards Public Sector Undertakings (PSUs) are:
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(i) Bring down government equity in all non-strategic PSUs to 26 per cent or lower, if necessary;
(ii) Restructure and revive potentially viable PSUs;
(iii) Close down PSUs which cannot be revived; and
(iv) Fully protect the interests of workers.
3. Abolition of Phased Manufacturing Programmes:
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Devaluation of currency and increasing FDI led government to liberalise local content requirement for indigenous firms.
4. MRTP Act:
MRTP Act has been amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings.
The new industrial policy also states that the government will undertake review of the existing public enterprises in low technology, small-scale and non-strategic areas. Sick units will be referred to the Board for Industrial and Financial Reconstruction for advice about rehabilitation and reconstruction.
For enterprises remaining in the public sector it is stated that they will be provided a much greater degree of management autonomy through the system of Memorandum of Understanding (MOU).
5. Free Entry to Foreign Investment and Technology:
The Government is committed to promote increased flow of Foreign Direct Investment (FDI) for better technology, modernisation, exports and for providing products and services of international standards.
Therefore, the policy of the Government has been aimed at encouraging foreign investment particularly in core infrastructure sectors so as to supplement national efforts. The salient features of the FDI policy are:
(i) There are two modalities for FDI approval: a) automatic approval by the Reserve Bank, and b) approval by Foreign Investment Promotion Board (FIPB)/Government.
(ii) 34 categories/groups of high priority industries identified on the basis of National Industrial Classification qualify for automatic approval up to 50/51/74/100 per cent FDI depending on the nature of activity.
(iii) Projects for electricity generation, transmission and distribution, and construction and maintenance of roads, highways, vehicular tunnels, vehicular bridges, ports and harbours have permitted foreign equity participation up to 100 per cent under the automatic route.
(iv) FIPB is required to dispose of applications for FDI within a time frame of six weeks.
(v) FDI is not permissible in agriculture, real estate and insurance activities.
(vi) Full repatriation of original investment and returns except for dividend balancing and foreign exchange neutrality conditions in certain sectors.
(vii) Liberal access to foreign technology. Automatic approval to lump sum payment of up to US $2 million and royalty at the rate of 5 per cent for domestic sales and 8 per cent for exports subject to a total payment of 8 per cent on sales for a period not exceeding 7 years from the date of commercial production.
(viii) Easy access to domestic debt. Foreign companies that invest in India can leverage in India by way of domestic debt from domestic financial institutions.
(ix) Liberal external commercial borrowings and debt servicing norms.
(x) No ceiling on raising Global Depository Receipts (GDRs), American Depository Receipts (ADRs), and Foreign Currency Convertible Bonds (FCCBs).
6. Industrial Location Policy Liberalised:
The new industrial policy provides that in locations other than cities of more than 1 million populations, there will be no requirement of obtaining industrial approvals from the centre, except for industries subject to compulsory licensing.
In cities with a population of more than 1 million, industries other than those of a non-polluting nature will be located outside 25 kms of the periphery. Since there is 23 cities in India with a population of more than 1 million each, the new industrial policy has dispensed with government clearance for the location of projects except in the case of these 23 cities.
7. Removal of Mandatory Convertibility Clause:
A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions have followed a mandatory practice of including a convertibility clause in their lending operations for new projects.
This has provided them an option of converting part of their loans into equity if felt necessary by their management. The new industrial policy has provided that henceforth financial institutions will not impose this mandatory convertibility clause.