INTRODUCTIONThe industrial policy was announced on July 24, 1991 bythe government, headed by prime minister P.V NarasimhaRao. The New Industrial Policy (NIP) was a big departurefrom the erstwhile industrial policy.The important objectives are:(a) The key objective of industrial policy was rapid industrialisation of the country.(b) to maintain sustained growth in the productivity and gainful employment, and(c) to attain international competitiveness. Therefore, the basic philosophy of the New IP, 1991 has been the continuity with change.
These changes pertain broadly to five areas viz.,(a) Industrial licensing.(b) Public sector policy.(c) MRTP Act, 1969.(d) Foreign investment.(e) Foreign technology agreements.The new government assumed office in June 1991. itmade a decision to organize sale of gold.The exchange rate of the rupee was adjusted, and massivedevaluation of the rupee was carried against majorcurrencies to improve the trade and payment situation. Inthis situation, India needed major economic overhauling.
DEFINATION OF L.P.G.Liberalisation Liberalisation refers to relaxation of previousgovernment restrictions usually in areas of social andeconomic policies.Thus, when government liberalizes trade it means it hasremoved the tariff, subsidies and other restrictions on theflow of goods and services between countries.
Privatisation It refers to the transfer of assets or service functions from public to private ownership or control and the opening of the hitherto closed areas to private sector entry. Privatisation can be achieved on many ways- franchising, leasing, contracting and divesture.
Globalisation Globalisation means integrating the domestic economy with the world economy. It is a process which draws countries out of their insulation and makes them join rest of the world in its march towards a new world economic order.
Reason for implementing LPG Various distortions like poor technological development shortage of foreign exchanges; and imprudent borrowings from abroad and mismanagement of foreign exchange reserves. Low foreign exchange reserves. Burden of national debt. Inflation.
Introduction of Liberalisation The economic liberalisation in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms. In 1991, after India faced a balance of payments crisis, it had to sell 67 tons of gold to the International Monetary Fund (IMF) as part of a bailout deal, and promise economic restructuring. The government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister) started breakthrough reforms.
The new neo-liberal policies included opening forinternational trade and investment, deregulation, initiationof privatization, tax reforms, and inflation-controllingmeasures.The main objective of the government was to transformthe economic system from socialism to capitalism so as toachieve high economic growth and industrialize the nationfor the well-being of Indian citizens. Today India ismainly characterized as a market economy.
Meaning Liberalisation of the economy means to free it from direct or physical controls imposed by the government. Economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control. Examples of one of other undeveloped countries like Korea, Thailand, Singapore, etc. That had achieved rapid economic development as a result of liberalization were kept in consideration.
What made India to liberalize A Balance of Payments crisis in 1991 which pushed thecountry to near bankruptcy. The Rupee devalued and economic reforms wereforced upon India. India central bank had refused new credit and foreignexchange reserves had reduced to the point that Indiacould barely finance three weeks’ worth of imports
Reforms taken during Liberalisation Abolition of industrial licensing and registration Liberalizing the MRTP act Freedom for expansion and production Increase in the investment limit of the small industries Freedom to import capital goods Freedom to import technology Free determination of interest rates
Impact of these reforms Average annual growth of services shifted to 8.1% during 1991-2001 from 6.9% during 1981-1991. A rate of growth that will double average income in a decade. Rapid Growth in communication services, financial services, business service & community services. Exports of information technology enabled services particularly strong.
Industrial licensing Industrial licensing is governed by industries(Development and Regulation) act 1951. it is a veryeffective tool used by the government to regulate theprivate sector.It abolished all industrial licensing, irrespective of thelevel of investment, except for 18 industries related tosecurity and strategic concern, social reasons, concernsrelated to safety and overriding environment issues,manufacture of products of hazardous nature and articlesof elitist consumption.
Later, this list was trimmed, and as of now license isrequired only for 6 items listed in Annexure II. These areas follows.1. Distillation and brewing of alcoholic drinks.2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes.3. Electronic Aerospace and defense equipment.4. Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches.5. Hazardous chemicals.6. Drugs and pharmaceuticals.
Public SectorThe statement of industry policy 1991 reduce the list ofindustries reserved for the public sector to eight from 70and further for more area where de resaved whichtrimmed the list of four.Public sector monopoly was limited only for 8 industriesof security and strategic relevance. This was also latertrimmed and only railways, arms and ammunition andallied items of defence equipments, defence aircraft andwarships, atomic energy, minerals specified in theschedule to the atomic energy, remained. Presently, only 2sector are under public sector monopoly: Atomic energy& Railway transport.
Various SectorA. Industry and servicesIndustry accounts for 28% of the GDP and employ 14%of the total workforce.The Indian industrial sector underwent significantchanges as a result of the economic reforms of1991, which removed import restrictions, brought inforeign competition, led to privatisation of certain publicsector industries.
India is 13th in services output. The services sectorprovides employment to 23% of the work force and isgrowing quickly, with a growth rate of 7.5% in 1991–2000, up from 4.5% in 1951–80.Even sectors like Insurance which were earlier reservedfor public sector were not only opened for private sector,when foreign investment was allowed up to 26%.Under the 1997, WTO financial servicers agreement,India is committed to permit 12 foreign bank branchesannually.
Fig. 1.A : Annual growth in number of companies 18.00% 16.00% 14.00% 12.00%Year to year growth 10.00% Government Companies 8.00% Non-Government 6.00% Companies 4.00% 2.00% 0.00% -2.00% 1993-94 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Year
100% foreign investment is permitted in informationtechnology Unit setup exclusively for exports.100% of FDI is allowed in E commerce. Automaticapproval is allowed for Foreign equity in software &almost all area of Electronics.
B. AgricultureIndia ranks second worldwide in farm output. Agricultureand allied sectors like forestry, logging and fishingaccounted for 15.7% of the GDP in 2009–10, employed52.1% of the total workforce,Yields per unit area of all crops have grown since 1950,due to the special emphasis placed on agriculture in thefive-year plans and steady improvements in irrigation,technology, application of modern agricultural practicesand provision of agricultural credit and subsidies since theGreen Revolution in India.
India is the largest producer in the world of milk, jute andpulses, and also has the worlds second largest cattlepopulation with 175 million animals in 2008.It is the second largest producer of rice, wheat, sugarcane,cotton and groundnuts, as well as the second largest fruitand vegetable producer, accounting for 10.9% and 8.6%of the world fruit and vegetable production respectively.
C. Banking and financePrime Minister Indira Gandhi nationalized 14 banks in1969, followed by six others in 1980, and made itmandatory for banks to provide 40% of their net credit topriority sectors like agriculture, small-scale industry, retailtrade, small businesses, etc.To ensure that the banks fulfill their social anddevelopmental goals. Since then, the number of bankbranches has increased from 8,260 in 1969 to 72,170 in2007 and the population covered by a branch decreasedfrom 63,800 to 15,000 during the same period.
Indias gross domestic saving in 2006–07 as a percentageof GDP stood at a high 32.7%. More than half of personalsavings are invested in physical assets such as land,houses, cattle, and gold.The public sector banks hold over 75% of total assets ofthe banking industry, with the private and foreign banksholding 18.2% and 6.5% respectively.Since liberalisation, the government has approvedsignificant banking reforms.
MRTP Act, 1969MRTP Act, 1969 The New Industrial Policy, 1991proposes to amend suitably the Monopolies andRestrictive Trade Practices Act, 1969.MRTP can be divine into four part :1. Monopolistic practices2. Restrictive trade practices3. Unfair tread practices4. Controlling the concentration of economic power.Principle objective of MRTP act are as under:1. Prevention of concentration of economic power & control of monopolies2. Prohibition of monopolistic, restrictive and unfair trade practices.
This restricted the growth of Indian industry and units likeTISCO,TELCO,HINDALCO and Ranbaxy, whichthrough having the capacity to become global players,remained confined to India, producing substandard goods.In 1991, the MRTP Act was restructured and pre-entryrestrictions removed with respect to new undertaking,expansion ,amalgamation, merger, takeover, registration,etc.
Foreign investmentThe 1956 Industrial policy accepted the role of foreignequity, since independence we have always looked atforeign equity as some sort of economic slavery.But in last 50 years, the enormous underutilization ofresources, unemployment, poor infrastructure andpervasive poverty compelled the government to open thedoors for foreign equity.
Today, India welcomes foreign equity in almost everysector. In 1991, it allowed:1) Automatic approval for foreign equity participation up to 51% granted to high priority industries listed every in Annexure IV.2) Foreign trading companies are allowed to invest up to 51% in Indian trading house engaged in export activity.3) In hotel and tourism related industry, up to 51% foreign equity is allowed.4) Even in the mining sector foreign investment up to 50% was allowed.
Fig. 1.C : Contribution to GDP 1800000 1600000 1400000 1200000Rupees crores 1000000 Government Companies 800000 Non-Government Companies 600000 400000 200000 0 1993 1994 1995 1996 1997 1998 1999 2000* 2001* 2002* Year
Foreign Technology AgreementsForeign Technology Agreements The New IndustrialPolicy proposes to give automatic permission for foreigntechnology agreements in identified high priorityindustries. Further, it also proposes to allow otherindustries to import foreign technology subject to thefulfillment of certain conditions.•The RBI grants automatic approval by the means of theregional offices to Indian industries for foreigntechnology collaboration•The royalty period should not exceed 7 years from thedate of starting of the business or 10 years from the datementioned in the agreement
Balance of paymentsSince independence, Indias balance of payments on itscurrent account has been negative. Since economicliberalisation in the 1990s, precipitated by a balance ofpayment crisis.Indias exports rose consistently, covering 80.3% of itsimports in 2002–03, up from 66.2% in 1990–91.However,the global economic slump followed by a generaldeceleration in world trade saw the exports as apercentage of imports drop to 61.4% in 2008–09.
Indias growing oil import bill is seen as the main driverbehind the large current account deficit, which rose to$118.7 billion, or 9.7% of GDP, in 2008–09. BetweenJanuary and October 2010, India imported $82.1 billionworth of crude oil.Indias reliance on external assistance and concessionaldebt has decreased since liberalisation of the economy,and the debt service ratio decreased from 35.3% in 1990–91 to 4.4% in 2008–09.In India, External Commercial Borrowings (ECBs), orcommercial loans from non-resident lenders, are beingpermitted by the Government for providing an additionalsource of funds to Indian corporate. Indias foreignexchange reserves have steadily risen from $5.8 billion inMarch 1991 to $283.5 billion in December 2009.
Challenges Ahead1) Governance Need for elimination of large number of Rules & Regulations in the books Sharply reducing the number of implementing agencies Moving towards single window clearance2) Infrastructure: A Challenge and an opportunity
CONCLUSIONThe New Industrial Policy, 1991 certainly differssignificantly from the earlier philosophies, approaches,etc. of the government. For instance, prior to 1991, scopeof public sector was expanded by reserving more numberof industries for the public sector.But now, its scope has been reduced drastically byreducing the number of industries reserved for the publicsector. Like this, a large number of changes can be noticedin the new policy.
This process has been continuing even in postliberalization era. Adding to this, the government hastaken a number of steps to give effect to its policydecisions included in the New Industrial Policy, 1991.Though the economy has been benefited significantlyfrom these measures, the economy has not been able toreap the full benefits of the Economic Reform Packageowing to the political instability, etc.
Arguments in the favor of Liberalization Increase in rate of economic growth Increase in competitiveness of industrial sector Reduction in poverty and inequality Fall in fiscal deficit Control on prices Decline in deficit of BOP Increase in Efficiency
Arguments in the Against of Liberalization Less importance to agriculture. Pressure by IMF and World Bank. More depending on Foreign Debt. Dependence on Foreign technology. Problem of Unemployment.