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Chapter: 11th Economics : Chapter 9 : Development Experiences in India

Industrial Sector Reforms

Important Initiatives by the Government towards Industrial Policy

Industrial Sector Reforms


The Prime Minister of India announced the new industrial policy on July 24, 1991. The new policy radically liberalized the industrial policy itself and de-regulated the industrial sector substantially. The primary objectives of the industrial policy were to promote major industries from the clutches of bureaucrats, to abolish restrictions on foreign direct investment, to liberate the indigenous enterprise from the restrictions of MRTP Act, to maintain a sustained growth in productivity and employment and also to achieve international competitiveness.


Important Initiatives by the Government towards Industrial Policy


The policy has brought changes in the following aspects of industrial regulation:


1.        Industrial delicensing


2.        Dereservation of the industrial sector


3.        Public sector policy (dereservation and reform of PSEs)


4.        Abolition of MRTP Act


5.        Foreign investment policy and foreign technology policy.


Industrial delicensing policy: the most important objective of the new industrial policy of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the industrial licensing policies, private sector firms had to secure licenses to start an industry.


Dereservation of the industrial sector Previously, the public sector was given reservation especially in the capital goods and key industries. Under industrial deregulation, most of the industrial sectors were opened to the private sector as well. Under the new industrial policy, only three sectors viz., atomic energy, mining and railways will continue as reserved for public sector. All other sectors have been opened for private sector participation.


Reforms related to the Public sector enterprises: Reforms in the public sector were aimed at enhancing efficiency and competitiveness of the sector. The government identified strategic and priority areas for the public sector to concentrate. Loss making PSUs were sold to the private sector.


Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the Monopoly and Restrictive Trade Practices Act 1969. In 2010, the Competition Commission has emerged as the watchdog in monitoring competitive practices in the economy.


The policy caused big changes including emergence of a strong and competitive private sector and a sizable number of foreign companies in India.


Foreign investment policy: Another major feature of the economic reform was red carpet welcome to foreign investment and foreign technology. This measure has enhanced the industrial competition and improved business environment in the country. Foreign investment including FDI and FPI were allowed. In 1991, the government announced a specified list of high-technology and high-investment priority industries wherein automatic permission was granted for foreign direct investment (FDI) upto 51 percent foreign equity. The limit was raised to 74 percent and subsequently to 100 percent for many of these industries. Moreover, many new industries have been added to the list over the years.


Foreign Investment Promotion Board (FIPB) has been set up to negotiate with international firms and approve foreign direct investment in select areas.


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