THE INDUSTRIAL POLICY RESOLUTION OF 1991.
The Congress Government led by Mr Narasimha Rao announced the new Industrial Policy Resolution in July 1991.
Aims of the Industrial Policy Resolution 1991.
a] To unshackle the industrial economy from the cobwebs of unnecessary bureaucratic control.
b] To introduce liberalization with a view to integrate the Indian economy with the world economy.
c] To remove restrictions on direct foreign investment as also to free the domestic entrepreneur from the restrictions of MRTP Act.
d] The policy aimed to shed the load of the public enterprises which have shown a very low rate of return or were incurring losses over the years.
To achieve these aims the Government brought about changes in:
a] Industrial licensing policy.
b] Foreign investment.
c] Foreign technology policy.
d] Public sector policy.
e] MRTP Act.
A] Industrial licensing policy
1] Industrial licensing to be abolished for all projects except for a short list of industries relating to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental issues and items of elitist consumption. Industries reserved for the small scale sector would continue to be so reserved and compulsory licensing provision would not apply to them.
2] Areas where security and strategic concerns predominate will continue to be reserved for the public sector and will be given automatic clearance.
3] Projects where imported capital goods are required will be given automatic clearance.
4] In locations other than cities of more than 1 million population, there will be no requirement of obtaining industrials approvals from the central government except for industries subject to compulsory licensing. (The industrial location policy was liberalised).
In respect of cities with a population of more than 1 million, industries other than those of a non-polluting nature such as electronics, computer software and printing will be located outside 25 kms of the periphery except in prior designated industrial areas.
5] The units that are already in existence will be provided a new broad banding facility so that they can expand into the production of any other article without additional investment.
6] No licensing is required for substantial expansion of existing units.
7] The mandatory convertibility clause will apply to term loans from financial institutions for new projects.
8] All existing registration schemes (Delicensed Registration, Exempted industries Registration, DGTD registration) will be abolished except for 18 industries related to defence needs, social reasons (health or environmental hazards like cigarette, asbestos etc) and manufacture of luxury items.
B] Foreign investment / import of capital goods.
In order to invite foreign investment in high priority industries requiring large investments and advanced technology it was decided
1] Approval would be given for direct foreign investment upto 51 % foreign equity in 34 priority industries. This includes foreign exchange requirement for import of capital goods.
2] To ensure that outflows on account of dividend payments are balanced by export earnings over a period of time, the payment of dividend would be monitored by the RBI.
3] To provide access to international markets, majority foreign equity holding upto 51% equity will be allowed for trading companies primarily engaged in export activities.
4] Approvals for foreign investments and foreign technology agreements had earlier prohibited the use of foreign brand name or trade mark in goods in the domestic market. This restriction has been withdrawn.
5] Foreign Exchange Regulation Act (FERA) 1973 was liberalized in January 1993. All restrictions on FERA companies, both borrowing funds or raising deposits in India as well as taking over or creating any interest in business in Indian companies have been removed. Indian companies and Indian nationals are now allowed to start joint ventures abroad.
6] Non Resident Indians (NRI) and Over Seas Corporate Bodies (OCB) predominantly owned by them are allowed to invest upto 100% foreign equity in high priority and other industries with full benefits of repatriation of capital invested and income accruing thereon. Investment by NRIs upto 100% on full repatriation basis is also allowed in export houses, trading houses, hotels and tourism-related industries.
[In simple words Repatriation is the transfer of funds from India to accounts held overseas of NRI’s, PIO’s and OCI’s. ]
7] A special board would be set up by the government to negotiate with a number of large international firms and approve direct foreign investment in selected areas.
8] Foreign investment would be allowed in the form of components, raw materials and intermediate goods.
9] For promotion of exports of Indian products in world markets, the Government would encourage foreign trading companies to assist Indian exporters in export activities.
C] Foreign technology policy.
The new industrial policy recognized that Indian industry would not become competitive unless technological upgradation takes place. With a view to injecting the desired level of technological dynamism in Indian industry, the government would provide:
1] Automatic permission will be given for foreign technology agreements in 34 high priority industries upto a lumpsum payment of Rs 1 crore, 5% royalty for domestic sales and 8% for exports subject to total payment of 8 % of sales over a 10 years period from the date of agreement or 7 years from commencement of production, the prescribed royalty rates are not of taxes and will be calculated according to standard procedures.
2] Automatic approval for technology agreements in industries other than those in Annexure III.
3] No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies.
D]Public sector policy.
This policy diluted the role of the public sector. The number of industries reserved for the public sector has been reduced from 17 in 1956 to 6 in 1991. It includes
i] Essential infrastructure goods and services.
ii] Exploration and exploitation of oil and mineral resources.
iii] Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate.
iv] Manufacture of products where strategic considerations predominate such as defense equipment.
1] With emphasis on privatization the public sector investment was restricted to strategic, high tech and essential infra-structural units. The private sector would be allowed to enter fields which were earlier reserved for the public sector on a selective basis. Public sector could also enter fields which were not earlier reserved for it.
2] Sick public enterprises in which a turnaround was not possible would be referred to the Board for Industrial and Financial Reconstruction (BIFR). However, the workers in such units would be protected.
3] In order to increase the financial resources and encourage the people to participate in running a public sector, it was decided to make 20% of the government share holding in the public sector, would now be offered to mutual funds, financial institutions (UTI, LIC, Banks), general public and workers.
4] Competition will also be induced in these areas by inviting private sector participation. In such a case Governments holding in the equity share capital of these enterprises will be disinvested in order to provide further market discipline to the performance of public enterprises.
5] Public sector enterprises in high priority areas or which are generating good profits will be provided a much greater degree of management autonomy.
6] There will be greater emphasis on good performance through the Memoranda Of Understanding (MOU) system which would grant greater autonomy and make these units more accountable.
E] MRTP Act.
According to the resolution, 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 MRTP Act and licensing policy had an adverse effect on the growth of industry. Therefore the industrial policy resolution of 1991 amended the MRTP Act by removing the threshold limits of assets in case of MRTP companies and dominant enterprises.
When MRTP Act was in operation, all firms that had assets over Rs 100 crores (1985) would be classed as MRTP firms. Such firms required the permission of the government for expansion and development. However this permission was not given under MRTP Act because government wanted to control the concentration of economic power in the hands of a few big entrepreneurs. In addition to this the firms had to apply for Industrial license for any form of investment. Seeking permission resulted in slow growth in the industrial sector.
1] The definition of a monopoly company changed from one based on the value of assets of the company to a more realistic definition using the share of the company in the market.Thus delicensing of bulk industries would increase the competition between industries and enable them to enjoy monopoly profits.
2] The threshold limit of assets in respect of MRTP companies and dominant undertakings was abolished.
3] Restrictions on acquisition of transfer of shares was also abolished.
4] The pre-entry scrutiny of investment decisions by so called MRTP companies will no longer be required. Instead emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices rather than making it necessary for monopoly houses to obtain prior approval of central government for expansion, establishment of new undertakings, merger, amalgamation and takeover and appointment of certain directors.
5] The thrust of policy will be more on controlling and regulating monopolistic restrictive and unfair trade practices. The idea was to protect the consumers, therefore the MRTP Commission would be authorized to investigate in case of complaints..