There has been a revolutionary change in the Indian Economy since the espousal of the new economic strategy in 1991. This had great impacts on all areas of life in India. When a nation becomes liberalized, the economic effects can be intense for the country and for investors. Liberalization is defined as laws or rules being liberalized, or relaxed, by a government. Economic liberalization is generally described as the relaxing of government regulations in a country to allow private-sector companies to operate business transactions with fewer restrictions. Concerning developing countries, this term denotes the opening of their economic borders to multinationals and foreign investment. Many economists explained that economic liberalization is “opening up” to the rest of the world about trade, regulations, taxation and other areas that generally affect business in the country.
Investors face problems entering emerging markets countries when there are lots of barriers. These barriers can include tax laws, foreign investment restrictions, legal issues and accounting regulations that can make it difficult or impossible to gain access to the nation. The economic liberalization process begins by relaxing these obstacles and relinquishing some control over the direction of the economy to the private sector. This often involves some form of deregulation and privatization of corporations.
Major goals of economic liberalization are the free flow of capital between countries and the effectual allocation of resources and competitive advantages. This is generally done by decreasing protectionist strategies such as tariffs, trade laws and other trade barriers. One of the main effects of this improved flow of capital into the country is that it makes it inexpensive for companies to access capital from investors. A lower cost of capital enables companies to undertake lucrative projects that they may not have been able to with a higher cost of capital pre-liberalization, leading to higher growth rates.
Stock Market Performance: Another factor is stock market performance. Generally, when a country relaxes laws, and taxes, the stock market values also rise. Stock Markets are platforms on which Corporate Securities can be traded in real-time. It offers mechanisms for continuous price discovery and choices for investors to exit from or enter into an investment at any time. These are a strong base of free markets these days and there is vigorous trade going all over the world on stock exchanges. Their Importance can be assessed from the fact that the behaviour of the stock markets of a country is the strongest indicator of growth and future prospects of an economy. These markets have thrown open a range of associated services such as Investment Banking, Asset Management, Underwriting services, Hedging advice etc. These collectively employ lakhs of people all over India. Similarly, there is a commodities market which provides avenues for the investment and sale of various eligible commodities. Fund managers and investors are always on the lookout for new prospects for profit, and so a whole country that becomes available to be invested in will tend to cause a surge of capital to flow in. The situation is similar to the anticipation and flow of money into an initial public offering (IPO). A private company that was formerly unavailable to an investor that suddenly becomes available typically causes a similar valuation and cash flow pattern. However, like an initial public offering, the initial eagerness also eventually dies down and returns become more normal and more in line with basics.
Political Risks Reduced: Liberalization policies in the country lessens the political risks to investors. The government can attract more foreign investment through liberalization in economic policies. These are areas that support and foster a readiness to do business in the country such as a strong legal foundation to settle disputes, fair and enforceable contract laws, property laws, and others that allow businesses and investors to operate with confidence. Also, government administration is a common target area to be streamlined and improved in the liberalization process. All these modifications can reduce the political risks for depositors.
Diversification for Investors: In a liberalized economy, Investors get benefits by being able to invest a portion of their portfolio into a diversifying asset class. Commonly, the correlation between developed countries such as the United States and undeveloped or emergent countries is comparatively low. Although the general risk of the developing country by itself may be higher than average, adding a low-correlation asset to your portfolio can reduce your portfolio’s overall risk profile. However, a discrepancy should be made in that although the correlation may be low when a country becomes liberalized, the relationship may actually rise over time. This happens because the country becomes more incorporated with other parts of the world and has become more sensitive to events that happen outside the country. A high level of integration can also lead to increased contagion risk which is the risk that crunches that occur in different countries cause crises in the domestic country.
With the advent of Information Technology in the contemporary period, the globalization process increased and it made possible the transfer of real-time human labour across nations, without transferring humans themselves. Additionally, it removed all boundaries which hinder the free flow of information. It has many benefits to investors such as sharing, nurturing and development of knowledge in societies which earlier had access only to substandard or non-updated information. As always, the package is coupled with some grim realities too. All over the world, Governments have lost their capacity to control and ward off malevolent, false, sensitive information and content. The rise of the Islamic State establishes that the information technology revolution has helped global Terrorism. Furthermore, explicit content is freely available on the web, to which immature children have unhampered access.
Industrial Growth Rate: Liberalization is imperative for the growth of the Indian economy. Barring a few years, the industrial growth rate has not been so inspiring. Share of Industry still remains stagnantly low at 25%. It is discouraging that India has transitioned to a service-led economy, directly from an agrarian one. One compensation for this is the end of the policy of import substitution which derived industrial growth up to 1990. Foreign companies got free access to Indian markets and made domestic products uncompetitive. They perceptibly had better access to technology and superior economies of scale.
India’s status also trailed in the arena of Research and innovation. Import substitution required a certain degree of investment and effort in domestic production. It was done even when imports were inexpensive. This resulted in good and better capacity building up to that time. This was combined with constant technology denial by the west, which further pushed the government to spend on R&D. Technology Denial ended with liberalization and globalization. Till that time Indian Industry was better and more modern than that of China. Currently, China has exceeded India by a huge margin in the case of both Industry and novelty.
Impact on Small Scale in India: The impact of the small scale is evaluated from the beginning of colonization in the 18th century. Colonization can be considered the 1st movement of globalization. In the pre-pre-colonial period, India’s textiles and handicraft was popular across the globe and was a mainstay of the Indian economy. With the initiation of the industrial revolution along with foreign rule in India, the Indian economy underwa ent major setbacks and much of its home-small-scale scale cottage Industry was ruined. After independence, the Indian government made many efforts to recuperate the small-scale sector by reserving items exclusively for it to manufacture. With liberalization, the list of reserved items was substantially curtailed and many new sectors were thrown open to big companies.
The small-scale industry exists and still remains the strength of the Indian Economy. It contributes to a major portion of exports and private-sector employment. Results are mixed, many former Small scale industries got bigger and better. But overall value addition, product innovation and technology adoption remain miserable and they exist only on the back of government support. Their products are challenged by cheaper imports from China.
Impact on Agriculture: In the area of agriculture cropping patterns have undergone a huge modification, but theffectct of liberalization cannot be adequately measured. It is observed that there are still all pervasive government controls and interventions starting from production to distribution.
The global agricultural economy is highly biased. It is due to an imbalance in economic and political power in the hands of farmers of developed and developing countries. In developed countries, commercial and capitalistic agriculture is in place which is owned by influential Agri corporations. They easily influence WTO policies and extract a better deal for themselves at the cost of farmers of the developing world. Farming in the developing world is subsistence and supports the majority of poor people. With the process of globalization, there has been a high fluctuation in commodity prices which put them at massive risk. This is a fact for cash crops like Cotton and Sugarcane. Recent crunches in both crops indicate this decisively.
Impact on Services Sector: In the service sector, globalization has changed the scene of developing countries and misery for developed ones. Due to historic economic inequality between the two groups, human resources have been much cheaper in developing economies. This was further aided by the information technology revolution and this all culminated in the migration of numerous jobs from developed countries to developing countries.
Information technology industry: Currently, the Software, BPO, KPO, and LPO industry is prospering in India and it has helped India to absorb a big mass of demographic dividend, which otherwise would have been wasted. The best part is that export of services results in the export of high value. There is almost no material exported which consumes some natural resources. The only thing exported is the labour of Professionals, which does not reduce, but instead grows with time. Now India is better positioned to become a Knowledge Economy. Exports of these services generate huge revenue for India’s fForeignExchange.
Banking: In the banking sector, liberal policies have a great impact on the Indian economy. Since improvements, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised the standards of the Indian Banking Industry. Now there is tough competition in the banking industry, and public sector banks are more responsive to customers. It is well understood that information technology is bringing about a banking revolution. New government schemes like Pradhan Mantri Jan Dhan yojana aims to achieve their targets by using Aadhaar Card. Public Sector Banks still remain major lenders in the country. Similarly, the Insurance Industry provides an array of products such as Unit Linked Insurance plans, Travel Insurance etc. But, in India, the life Insurance business is still decisively in hands of the Life Insurance Corporation of India.
Telecom Sector: Usually, the Telecom sector was a government-owned domination and therefore service was not very efficient. But after reforming policies, the private telecom sector reached its zenith of success. Indian telecom companies are progressing at a global scale. However, corruption and rent-seeking disfigured the growth and outlook of this sector. Entry of modern Direct to Home services saw enhancements in the quality of Television services on one hand and loss of livelihood for numerous local cable operators. Education and Health Sector: It is a fact that food (Agriculture), Health and education (and to lesser extent banking) are among the basic requirements, which every human being deserves and cannot do without. Unfortunately, in developing countries, there is market failure in all these sectors and the majority of people cannot afford beyond a certain limit. The concept of free markets, globalization, and liberalization fail despondently. Free markets provide goods and services to people who can afford to pay for them, not to those who deserve and need these.
If experts evaluate these sectors from the perspective of free markets, some progress is visible. There has been a high-level of education available in India and deregulation has resulted in the growth of private engineering and medical colleges. But in reality, this had a far-reaching upsetting effect on society. These new colleges accommodate only a small proportion of candidates at very high costs. In recent times, an Independent organization ‘Transparency International’ came out with a report claiming that India’s medical system is the most corrupt in the world. High fees for education force many aspirants to take educational loans from banks. After qualifying, the job market is unable to absorb the majority of them. Practice turns out to be an option of last resort. Now to make a decent living and to pay back the loans, people are attracted to dishonesty. Subsequently, when many similar cases are put together, a corrupt system is developed.
It is observed that after deregulation and liberalization, the government along with other sectors, pulled its hand from social sectors too. In the Public Sector, less than mediocre options are available. This leaves a huge proportion of hopeful students and expecting parents.
It is well recognized that liberalization has a major impact on the Indian economy and made it a huge consumer market. Currently, most of the economic changes in the country are based on the demand-supply cycle and other economic factors. Today, India has made good status in the economy in terms of market exchange rate and 4th largest in terms of purchasing power parity. Economic liberalization is generally thought of as a useful and necessary process for developing nations. The fundamental goal is to have clear capital flowing into and out of the country to increase growth and efficiency within the domestic country. The effects following liberalization are what should interest investors as it can provide new opportunities for diversification and profit.
Changes in Industrial Policies and their effect on Industrial Growth:
Industrial policy is described as a statement which explains the role of government in industrial development. The place of the public and private sectors in the industrialisation of the country. The relative role of large and small industries. The role of foreign capital etc. Concisely, it is a statement of objectives to be realized in the area of industrial development and the measures to be adopted towards achieving these objectives. Industrial policy formally designates the spheres of activity of the public and the private sectors. It lays down rules and procedures that would govern the growth and pattern of industrial activity.
The major objectives of industrial policy are as under:
Rapid Industrial Development: The objective of the industrial policy of the Government of India is to augment industrial development. It seeks to create a positive investment climate for the private sector as well as mobilize resources for investment in the public sector. In this way, the government seeks to promote rapid industrial development in the country.
Balanced industrial Structure: The industrial policy is intended to correct the predominant lopsided industrial structure. The industrial policy had to be framed in such a manner that these imbalances in the industrial structure are corrected. Thus by laying emphasis on heavy industries and the development of the capital goods sector, the industrial policy seeks to bring a balance to the industrial structure.
Prevention of Concentration of Economic Power: The industrial policy offers a framework of rules, regulations and reservation of spheres of activity for the public and the private sectors. This is aimed at reducing monopolistic tendencies and preventing the concentration of economic power in the hands of a few big industrial houses.
Balanced Regional Growth: Industrial policy has an objective to check regional imbalances in industrial development. It is well recognized that some regions in the country are industrially advanced such as Maharashtra and Gujarat while others are industrially backward, like Bihar, and Orissa. Industrial policy must work out programmes and policies which lead to industrial development or industrial growth.
Before independence, India was not an industrially developed country. It was an agrarian country where handicrafts achieved sovereignty unmatched in the world. There are very few types of economic activity which became traditional in nature and could be included under the products produced under the factory system of the 19th and 20th centuries. Strategies are modified to achieve an end. Indian industrial policies developed to obtain speedy economic progress through rapid industrialization and making the economy self-reliant as an end. The industrial sector of the nation was in stagnation at the time of independence as it was not encouraged but ignored during the two centuries under the British government. Their manipulative policies framed to serve the interests of their homeland were the major cause of the lack of industrialization in India. India was the supplier of raw materials and consumer of British goods. The desire of Indians to industrialize can be observed from the standpoint of the creation of the Bombay Plan which was an initial effort by prominent industrialists of the country to form the industrial policy of the country through importance on heavy businesses
Industrial policies and economic policies were formed by the British Government for their interests. The tariff policy followed by the British in India was based on the principle of one-way free trade while the Indian interest industrialization in India remained deliberately neglected. While British producers had unhampered access to Indian markets, Indian products were kept at bay by British industrial strategy. The only access was allowed to raw materials. Though the British Government established the Department of Commerce and Industry in 1905, the activities followed by this department favoured industrial activity in England. Afterwards, the dominant Government established a board of Scientific and Industrial Research in 1940 but not much could come out of it. By this time, there were several plans such as one by the congress working committee, the Bombay plan, the Vishvesariya plan etc. Almost all of them proliferated heavy industries with the dominant role of the state.
After India got independence, various resolutions were passed in Parliament from time to time. A landmark shift happened in 1991 when India was forced to open up its economy to global competition and the government had to liberalize sectors to leave space for private industry. There are some revolutionary shifts in the Industrial policy of India.
Industrial Policy Resolution, 1948: After independence, it was compulsory to have a new policy for the industry of the country, to decide priority areas and clear doubts in the minds of private entrepreneurs regarding the nationalization of existing industries. In the Industrial Policy Resolution of 1948, both public and private sectors were involved towards industrial development. Consequently, the industries were divided into four far-reaching categories:
Exclusive government Monopoly: This includes the manufacture of arms and ammunition, the production and control of atomic energy and the ownership and management of railway transport. These industries were the exclusive monopoly of the Central Government.
Government Monopoly for New Units: This group included coal, iron and steel, aircraft manufacture, sshipbuilding manufacture of telephone, telegraphs and wireless apparatus (excluding radio receiving sets) and mineral oils. New undertakings in this category could henceforth be undertaken only by the State.
Regulation: This category encompassed industries of such basic importance as machine tools, chemicals, fertilizers, non-ferrous metals, rubber manufacturers, cement, paper, newsprint, automobiles, electric engineering etc. which the Central Government would feel necessary to plan and regulate.
Unregulated private enterprise: In this category, industries were left open to the private sector, individual as well as cooperative.
The main thrust of the 1948 Industrial Policy was to develop a mixed economy where both the private and public enterprises were to be given prominence and work together to develop the economy to quicken the pace of industrial expansion.
Industrial Policy Resolution, 1956: Industrial Policy Resolution 1956 was formed by Mahalanobis model of growth which highlighted the role of heavy industries in the long-term development of the country. The resolutions broadened the scope of the public sector with the elementary objective of accelerating economic development and enhancing the process of industrialization. The policy also has a major goal to decrease regional discrepancies through the development of a low industrial base and by giving impetus to small-scale industries and cottage industries as they have a huge potential to provide mass employment. The policy stuck in line with the prevalent beliefs of the times i.e. accomplishing self-sufficiency. But the policy faced many implementation catastrophes and as a result ffailedof its objectives such as regional disparities and concentration of economic power.
The Industrial Policy Resolution of 1956 grouped the whole industrial sector into three Schedules:
Schedule A: In the first category, those industries were included whose future development was the exclusive responsibility of the State. Seventeen industries were included in this category. This included heavy and strategic industries such as defence equipment; Atomic energy; Iron and Steel; Heavy castings and forging of iron and steel; Heavy plant and machinery required for iron and steel production for mining.
Schedule B: In this group those industries were included that were progressively State-owned and in which the private enterprises would be expected only to supplement the efforts of the State. In this category, twelve industries were included.
Schedule C: Industries that are not listed in sScheduleA or B were included in the third category. These industries were left open to the private sector. Hence, the responsibility for establishment, function and development was of the private sector, though even here the state could start any industry in which it was interested.
Small Scale Sector: Several proposals were made to boost the small sector such as
The direct subsidy was provided to the small-scale sector.
Suitable taxation relief was given to this sector.
The main objective of the State was to protect the small-scale sector by advancing technical assistance. Nonetheless, the government was unsuccessful in incorporating these industries and their programs with the production program of the large-scale sector.
Foreign Investment: Another area of industrial growth is foreign capital participation in Indian economic development but the major share should belong to India. In the case of already existing foreign establishments, these will be replaced by Indian technicians progressively.
One of the major objectives of the resolution was a decrease regional inequalities and imbalances. But opposing this, the actual operation of this policy resulted in increased regional disparities. This becomes obvious from various reports which are prominent that the four industrially advanced States of Maharashtra, Gujrat, West Bengal and Tamil Nadu benefited the most from the operation of this policy. Most important sectors were reserved for the government, but the government failed to develop these reserved sectors. Sometimes, the private sector was permitted to operate in these areas. This was due to a system of rent-seeking and kickbacks which developed during this period.
The monopolies Inquiry commission(MIC) was formed in 1964 to appraise various aspects of the concentration of economic power and operation of industrial licensing under the Industrial (Development and Regulation) Act 1951. The report, while emphasizing that planned economy contributed to the progress of industry, accused the licensing system which permitted the big business companies to obtain disproportionately large shares of licenses which had led to pre-emptive and foreclosure of capacity. Consequently, the Dutt committee or Industrial licensing inquiry committee 1956 recommended that big industrial houses must be given licenses only for setting up industries in core and heavy investment sectors. Further, to control the concentration of economic power, the Monopolistic and Restrictive Trade Practices Act (MRTP) was presented. Large industries were designated as MRTP companies and were qualified to participate in industries that were not reserved for government or small-scale industries.
The Monopolistic and Restrictive Trade Practices Act, 1969: This act was a trademark of the infamous ‘license quota permit’ system. Companies having more than the specified value of assets are required to take permission/license before any development and commencement of operations. Major objectives were as under:
To prohibit monopolistic and restrictive trade practices (except by the government).
To prevent the concentration of economic power in a few hands.
To control the monopolies.
To protect consumer interest.
The Monopolistic and Restrictive Trade Practices Act became operative in June 1970. There was more emphasis on increasing the efficiency of the industry. There were major modifications in the 1980s and The Monopolistic and Restrictive Trade Practices commission was also set up. This act was mismatched with new economic policy after 1991 and subsequently, it was repealed in 2009. Now Competition Act and Competition Commission of India are in place instead.
Industrial licensing policy as well as Industrial policy 1973 both highlighted the necessity for controlling the concentration of capital and gave importance to small and medium-scale industries. Continuing the favouritism to small-scale industries the Industrial policy 1977 went a step ahead by introducing District industrial centres to provide support to SSI. It also introduced a new category called TINY SECTOR and considerably expanded the reserve list of small-scale industries. But due to exogenic shocks (wars) as well as internal disturbances (emergency) and implementation problems the policy failed to have a substantial effect.
Industrial Policy Resolution 1977: This resolution was made due to a change in government at the centre. Subsequently, this policy stressed more on the small-scale industry, cottage and village industries. This was moved away from Nehruvian- Mahalanobis ideology to Gandhian ideology of economic development. This categorized the small sector into three categories:
Cottage and household industries provide self-employment on a wide scale.
Tiny sector incorporating investment in industrial units in machinery and equipment up to Rs.1 lakh and situated in towns with a population of less than 50000.
Small-scale industries comprising industrial units with an investment of Rs.10 lakh and in the case of ancillaries with an investment in fixed capital up to Rs.15 lakh.
Small Scale sector-specific policies were formulated. The number of items reserved for this sector was increased (105 to 807). ‘District Industries Centres’ were established in every district, which is instrumental for support small-scale industry. This agency would provide many services in one place and support required by small and rural entrepreneurs. The Khadi and Village Industries Commission was revamped.
This resolution considered large industries along the lines of the Basic/core industry, Capital Goods industry, High Technology industry and other Industries. It was also visualized that the government made extreme efforts in the development of indigenous technology, which should guarantee efficient production and continued inflow of technology in sophisticated and high-priority areas where Indian skills and technology are yet not sufficiently developed.
Additionally, foreign investment would be exhilarated only for some industries in the national interest as decided by the Government. This indicated that in areas where foreign collaboration was not required, such cases would not be reviewed. For this, there was a draconian Foreign Exchange Regulation Act in place.
Industrial Policy resolution, 1980: In this period, Congress made a government and soon restored its own industrial policy. Major Changes were as under:
Some of the items reserved for small-scale industries were de-reserved.
Many units/companies were operating on excess capacities, then allowed by law. These excess capacities were regularized.
Foreign Investment was allowed with technology transfer.
Regulations, Licensing, and restrictions were eased a bit signalling an inclination towards the private sector.
The mounting economic situation led to the formulation of the Industrial Policy 1980 which sowed the seeds of liberalization.
The Industrial Policy of 1980 put more emphasis on competitiveness in the domestic market, technical advancement and modernization of industries along with the focus on optimum utilization of installed capacity for ensuring higher productivity, higher employment levels, and removal of regional disparities. Policy measures were proclaimed to recuperate the efficiency of public sector undertakings along with provisions of automatic development. The public sector undertakings were freed from several restrictions and were provided with greater sovereignty. The government took major initiatives to deregulate all industries except for those specified in the negative list. The limited liberalization initiated in the 1980s reached its summit with a landmark policy change in 1991.
Industrial Policy 1991
This policy slated a paradigm shift in the appraisal of industrial policy and development. The increase in Fiscal shortfall and monetized deficit along with the global financial crises (Gulf war, oil crises) played a major role at the beginning of the new episode in the history of industrial policy and economic progress. The objective of the policy was to maintain sustained growth in productivity, enhance gainful employment and realize optimal utilization of human resources, to accomplish international competitiveness and change India into a global player. The main emphasis of the policy was to liberate the industry from bureaucratic control. Important modifications brought about by the policy were as under:
Abolition of industrial licensing for most industries barring a few which was important because of strategic and security concerns and social and environmental issues.
Significant role accorded to FDI. 51% FDI allowed in heavy industries and technologically important industries.
Automatic approval of technological agreements for the promotion of technology and hiring foreign technology expertise.
Restructuring of PSUs to increase productivity, prevent overstaffing, technology upgradation and increase the rate of return.
Disinvestment of PSUs to increase resources and increase private participation.
The policy realized that governmental intervention in the investment decisions of large companies through the MRTP act has proved to be a deterrent for industrial growth. Hence the thrust of the policy was more on controlling unfair and restrictive trade practices. Provisions restricting mergers, amalgamations and takeovers were replaced. Since then the LPG reforms initiated in 1991 have been considerably expanded. Some of the measures are mentioned below.
The competition commission of India was established in 2003 to prevent practices from hurting competition in markets.
A new North East Industrial Policy was introduced in 1997 for mitigating regional imbalances due to economic growth.
Focus on the disinvestment of PSUs shifted from the sale of minority stakes to strategic stakes.
Focus on PP with the government playing a facilitative role rather than a regulatory role.
FDI limits increased in almost all sectors including defence and telecommunications.
New Industrial Policy 1991
The year 1991 observed a radical change in the industrial policy governing industrial development in the country since independence. This major transformation opened a new era which was to implement a completely open economic system as compared to the previous mixed system. The country decided to follow the lines of capitalism. It is also believed that there was a change from ‘imperative’ to ‘indicative’ planning under the new system. Features of New Industrial Policy.
Industrial Licensing Policy
New industrial policy eradicated all industrial licensing, regardless of the level of investment, except for a short list of 18 industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons and items of elitist consumption. Nevertheless, of these 18 industries, 13 categories have been removed from the list gradually and currently only 5 categories of health, strategic and security considerations industries need license viz. Alcohol, cigarettes, hazardous chemicals, electronics, aerospace and all types of defence equipment.
Policy on Public Sector
The 1956 Resolution reserved 17 industries for the public sector. The 1991 industrial policy reduced this number to 8. Currently, only 3 industries are reserved for the government which include
Atomic Energy
Mining of Atomic Minerals
Railway Transport.
The policy also advocated that those public enterprises which are constantly sick and are suspected to be turned around will, for the formation of revival/ rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high-level institutions created for the purpose, to protect the interests of workers likely to be affected by such rehabilitation package, a social security mechanism will be created.
Privatization/disinvestment: The government declared its plan to offer a part of government shareholding in the public sector enterprises to mutual funds, financial institutions, the general public and the personnel. A beginning in this direction was made in 1991-92 by diverting part of the equities of selected public sector enterprises.
Monopolistic and Restrictive Trade Practice limit: Under the Monopolistic and Restrictive Trade Practice Act, all companies with assets above a certain size (Rs.100 crore since 1985) were grouped as MRTP firms. Such firms were allowed to enter selected industries only and this also on a case-by-case approval basis. In addition, to controlling through industrial licensing, separate approvals were required by such huge firms for any investment applications. The New Industrial Policy removed the threshold limit in assets in respect of MRTP companies.
Policy on Foreign investment and Technology agreements: In transforming industrial policies in India, The New Industrial Policy developed a specified list of high technology and high investment priority industries, wherein automatic permission was to be made available for direct foreign investment up to 51 per cent foreign equity. The industries in which automatic approval was approved included an array of industrial activities in the capital goods and metallurgical industries, entertainment electronics, food processing and the services sectors having significant export potential. The list of such industries has been expanded since then. Abolition of Phased Manufacturing Programs for New Projects: The main objective of these programs was the indigenization of technology. These were in force in several engineering and electronic industries. The new policy abolished such a program for the future.
Removal of Mandatory Convertible Clause: In the pre-liberalization period, there was a mandatory convertible clause in the loan agreements with borrowers. According to this clause, banks had the authority to convert their loan amount into equity whenever they felt so. This used to make them “owner’ from ‘lender’ in that enterprise. This clause was used by the government as a tool to nationalize private firms. This was removed under the new economic policy.
New economic policy was the result of a long period of incompetent supremacy of the public sector. However, the public sector by this time had built a strong industrial base on which other industries can succeed in future. This was one of the objectives of the Nehruvian model. Naturally, Industrial and economic growth remained gloomy during this period. The process of liberalization began in the 1980s and demonstrated better performance in the economy. Recent high growth cannot be attributed to initiatives of New industrial and economic policy as statistical evidence propose better performance from the early 1980s.
In the post-liberalization era, the government has the effective role of facilitator and controller. Some decisive indications toward this are replacing Foreign Exchange – Regulation Act with the Management Act, the latter one being more liberal and less harsh. Correspondingly, the MRTP act was swapped by the Competition Act. Presently, foreign direct investment is allowed in many sectors, many of them through automatic routes. However, post-1991 growth is accused of uneven growth with upsetting social impact as the government had taken back expenditure from social sectors too.
To summarize, economic liberalization started in 1991 in India by reviving economic policies, creating an economy more market-oriented and increasing the role of private and foreign investment. Regarding industrial policies, it is apparent from the development of industrial policy that the governmental role in development has been widespread. The path to be followed towards industrial development has evolved over time. In the early stages, the government adopted an inward-looking development policy which forced the Indian industry to have low and inferior technology and throttled the growth of the private sector. It disallowed the domestic industries from severe competition and therefore resulted in low productivity and limited its ability to expand employment prospects.
The focus on self-reliance and lack of investment in R&D acted as obstacles to technological development and hence led to the production of inferior-quality goods. There is a strong belief that foreign merchandise is superior to Indian goods and is still predominant in Indian society. It is well established that the condition of the nation after two centuries of exploitation and a shocking separation must be kept in mind before evaluating the progress of the continual industrial policy. Many factors like lack of tactical skills, low literacy levels, unskilled labour, and absence of technology were significant aspects of the Indian economy before independence. It is said that Industrial plans and policies and their revival has a vital role in the economic growth of any country.
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