Indian Economy, 5th edition (42 page)

(v)
Serious attention was given on the level of production and the prices of the essential commodities of everyday use.

Industrial Policy Resolution,
1980

The year 1980 saw the return of the same political party at the centre. The new government revised the industrial policy of 1977 with few exceptions in the Industrial Policy Resolution, 1980. The major initiatives of the policy were as given below:

(i)
Foreign investment via the technology transfer route was allowed again (similar to the provisions of the IPS, 1973).

(ii)
The ‘MRTP Limit’ was revised upward to
`
50 crore to promote setting of bigger companies.

(iii)
The DICs were continued with.

(iv)
Industrial licencing was simplified.

(v)
Overall liberal attitude followed towards the expansion of private industries.

Industrial Policy Resolution,
1985 & 1986

The industrial policy resolutions announced by the governments in 1985 and 1986 were very much similar in nature and the latter tried to promote the initiative of the former. The main highlights of the policies are:

(i)
Foreign investment was further simplified with more industrial areas being open for their entries. The dominant method of foreign investment remained as in the past i.e.
technology transfer
but now the equity holding of the MNCs in the Indian subsidiaries could be upto 49 per cent with the Indian partner holding the rest of the 51 per cent shares.

(ii)
The
‘MRTP Limit’
was revised upward to
`
100 crore—promoting the idea of bigger companies.

(iii)
The provision of industrial licencing was simplified. Compulsory licencing now remained for 64 industries only
19
.

(iv)
High level attention on the sunrise industries such as telecommunication, computerisation and electronics.

(v)
Modernisation and the profitability aspects of the public sector undertakings were emphasised.

(vi)
Industries based on imported raw materials got a boost
20
.

(vii)
Under the overall regime of the FERA, some relaxations concerning the use of foreign exchange was permitted so that essential technology could be assimilated into Indian industries and international standard could be achieved.

(viii)
The agriculture sector was attended with a new scientific approach with many
Technology Missions
being launched by the Government.

These industrial policies were mooted out by the Government when the developed world was pushing for the formation of the WTO and a new world economic order looked like a reality. Once the world had become one market, only bigger industrial firms could have managed to cater to such a big market. Side by side sorting out the historical hurdles to industrial expansion perpetuated by the past industrial policies, these new industrial policy resolutions were basically a preparation for the
globalised
future world.

These industrial provisions were attempted at liberalising the economy without any slogan of ‘economic reforms’. The government of the time had the mood and willingness of going for the kind of economic reforms which India pursued post-1991 but it lacked the required political support
21
.

The industrial policies conjoined with the overall micro-economic policy followed by the Government had one major loophole that it was more dependent on foreign capital with a big part being costlier ones. Once the economy could not meet industrial performance, it became tough for India to service the external borrowings—the external events (the Gulf
w
ar, 1990–91) vitiated the situation, too. Finally, by the end of 1980s India was in the grip of a severe balance of payment crisis with higher rate of inflation (over 13 per cent) and higher fiscal deficit (over 8 per cent).
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The deep crisis put the economy in a financial crunch which made India opt for a new way of economic management in the coming times.

New Industrial Policy, 1991

India was faced with a severe balance of payment crisis in June 1991. Basically, in 1990 and 1991, there were several inter-connected events which were growing unfavourable for the Indian economy.

(i)
Due to the Gulf War (1990–91), the higher oil prices were fastly
23
depleting India’s foreign reserves.

(ii)
Sharp decline in the private remittances from the overseas Indian workers in the wake of the Gulf War
24
, specially from the Gulf region.

(iii)
Inflation peaking at nearly 17 per cent.
25

(iv)
The gross fiscal deficit of the central government reaching 8.4 per cent of the GDP.
26

(v)
By the month of June 1991, India’s foreign exchange had declined to just
two weeks
of import coverage.
27

India’s near miss with a serious balance of payments crisis was the proximate cause that started India’s market liberalisation measures in 1991 followed by a gradualist approach
28
. As the reforms were induced by the crisis of the BoP, the initial phase focussed on macroeconomic stabilisation while tfhe reforms of industrial policy, trade and exchange rate policies, foreign investment policy, financial and tax reforms as well as public sector reforms did also follow soon.

The financial support India recieved from the IMF to fight out the BoP crisis of 1990–91 were having a tag of conditions to be fulfilled by India. These IMF conditionalities required the Indian economy to go for a structural re-adjustment.
As the nature and scope of economy were moulded by the various industrial policies India did follow till date, any desired change in the economic structure had to be induced with the help of another industrial policy. The new industrial policy, announced by the Government on July 23, 1991 had initiated a bigger process of economic reforms in the country, seriously motivated towards the structural readjustment naturally obliged to ‘fulfill’ IMF conditionalities
29
. The major highlights of the policy are as follows:

1. De-reservation of the Industries

The industries which were reserved for the Central government by the IPR, 1956 were cut down to only eight. In coming years many other industries were also opened for private sector investment. At present there are only three industries which are fully or partially reserved for the central government:

(i)
Nuclear energy (at present the central government is seriously considering the proposal of allowing the private sector to enter into the management of the nuclear power plants in the country.).

(ii)
Nuclear research and related activities i.e. mining, use, management, fuel fabrication, export-import, waste management, etc. of radioactive minerals (none of the nuclear powers in the world have allowed the entry to private sector in these activities, thus no such attempts look logical in India, too).

(iii)
Railways (many of the functions related to the railways have been allowed private entry, but still the private sector cannot enter the sector as a full-fledged railway service provider).

2. De-licencing of the Industries

The number of industries put under the compulsory provision of licencing (belonging to schedules B and C as per the IPR, 1956) were cut down to only 18. Reforms regarding the area were further followed and presently there are only
six industries
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which carry the burden of compulsory licencing:

(i)
Aero-space and defence related electronics

(ii)
Gun powder, industrial explosives and detonating fuse

(iii)
Dangerous chemicals

(iv)
Tobacco, cigarette and related products

(v)
Alcoholic drinks

(vi)
Drugs and Pharmaceuticals.

3. Abolition of the MRTP Limit

The MRTP limit was Rs. 100 crore so that the mergers, acquisitions and takeovers
of the industries could become possible. In 2002, a
c
ompetition Act was passed which has replaced the MRTP Act. In place of the MRTP
c
ommission, the
c
ompetition Commission has started functioning (though there are still some hitches regarding the compositional form of the latter and its real functions and jurisdictions).

4. Promotion to Foreign Investment

Functioning as a typical closed economy, the Indian economy had never shown any good faith towards foreign capital. The new industrial policy was a pathbreaking step in this regard. Not only the draconian FERA was committed to be diluted but the government went to encourage foreign investment (FI) in its both forms—direct and indirect. The direct form of FI was called as the foreign direct investment (FDI) under which the MNCs were allowed to set up their firms in India in the different sectors varying from 26 per cent to 100 per cent ownership with them—
Enron
and
Coke
being the flag-bearers. The FDI started in the year 1991 itself. The indirect form of foreign investment (i.e in the assets owned by the Indian firms in equity capital) was called the
portfolio investment scheme
(PIS) in the country which formally commenced in 1994.
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Under the PIS the
foreign institutional investors
(FIIs) having good track record are allowed to invest in the Indian security/stock market. The FIIs need to register themselves as a stock broker with the SEBI. It means India has not allowed
individual foreign investment
in the security market still, only
institutional investment
has been allowed till now.
32

5. FERA Replaced by FEMA

The government committed in 1991 to itself to replace the draconian FERA with a highly liberal FEMA which cause into effected in the year 2000–01 with a sun-set clause of two years.
33

6. Location of Industries

Related provisions were simplified by the policy which was highly cumbersome and a time-consuming process. Now, the industries were classified into ‘polluting’ and ‘non-polluting’ categories and a highly simple provision deciding their location was announced:

(i)
Non-polluting industries might be set up anywhere.

(ii)
Polluting industries to be set up at least 25 kms away from the million cities.

7. Compulsion of Phased -production Abolished

With the compulsion of phased-production abolished, now the private firms could go for producing as many goods and models simultaneously
34
. Now the capacity and capital of industries could be utilised to their optimum level.

8. Compulsion to Convert Loans into Shares Abolished

The policy of nationalisation started by the Government of India in the late 1960s was based on the sound logic of
greater public benefit
and had its origin in the idea of
welfare state
—it was criticised by the victims and the experts alike. In the early 1970s, the GoI came with a new idea of it. The major banks of the country were now fully nationalised (14 in number by that time) which had to mobilise resources for the purpose of planned development of India. The private companies who had borrowed capital from these banks (when the banks were privately owned) now wanted their loans to be paid back. The government came with a novel provision for the companies who were unable to repay their loans (most of them were like it)—they could opt to convert their loan amounts into equity shares and hand them over to the banks. The private companies which opted this route (this was a compulsory option) ultimately became a government-owned company as the banks were owned by the GoI—this was an
indirect
route to nationalise private firms. Such a compulsion which hampered the growth and development of the Indian industries was withdrawn by the government in 1991.
35

The picture presented by the New Industrial policy of 1991 was taken by many experts, the opposition in the parliament and even the public figures as well as the business and industry of the country as a
‘rolling back’
of the state. The glorious role given to the state by the Nehruvian economy seemed completely toppled down. Any one idea the new policy challenged was an emphatic good bye to the ‘control regime’ perpetuated till now by the government. There was a coalition of interests of politicians, bureaucrats, multinationals as well as the domestic industrial and business houses whose interests the control regime sheltered and served.
36
t
hus, a memorandum to the Government requesting not to dismantle the control regime by the major industrial houses of India as well as arrival of the ‘
Swadeshi Jagaran Manch
’ were not illogical. But the governments continued with the reform programme with politically permissible pace and a time came when the same industrial houses requested the Government (2002) to expedite the process of reform! Now the Indian industry and business class has been able to understand the economics of ‘openness’ and a different kind of the mixed economy. But the process of reforms have still to go miles before its real benefits start reaching the masses and development together with reform could be made a mass movement.

This is why the experts have suggested that only assuming that reforms will benefit the masses will not be enough to make it politically happen, but the governments, the administrative agencies and the economists all need to link it positively to
mass welfare—
it might require to create a popular climate and form the political coalitions in favour of the argument that privatisation and accordingly restructured labour laws are basically aimed at creating jobs, better job prospects, alleviating poverty, enriching education and providing healthcare to the masses
37
. In the coming times, the Government went from one to another generations of the reforms setting new targets and every time trying to make reforms sociopolitically possible.