Economic Reforms (NEP 1991)


Industrial Policy, 1991


It were the industrial policies of past which had shaped the nature and structure of the Indian economy. The need of the hour was to change the nature and structure of the economy by early 1990s. The GoI decided to change the very nature of the industrial policy which will automatically lead to change in the nature and scope of the economy. And here came the New Industrial Policy of 1991.

With this policy the government kickstarted the very process of reform in the economy, that is why the policy is taken more as a process than a policy.


Background: India was faced with severe balance of payment crisis by June 1991. Basically, in early 1990, there were inter-connected set of events, which were growing unfavourable for the Indian economy:


(i). Due to the Gulf War (1990-91), the higher oil prices were fastly depleting India's Foreign reserves.


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


(iii). Inflation peaking at nearly 17 percent. 


(iv). The gross fiscal deficit of the Central Government reaching 8.4 percent of the GDP.


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


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. As the reforms were induced by the crisis of the BoP. The initial phase focused on macroeconomic stabilisation while the 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 Indja received 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 the economy were moulded by the various industrial policies India did not 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 'fulfil' IMF conditionalities. The major highlights of the policy are as follows:


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 two industries which are fully or partially reserved for the Central Government:

(i). Atomic energy and nuclear research and related activities, i.e., mining, use, management, fuel fabrucation, export-import, waste management, etc., of radioactive minerals.

(ii). 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).


De-Licensing Of The Industries



The number of industries put under the compulsory provision of licensing (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 five industries which carry the burden of compulsory licensing:

(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.


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 competiton Act was passed which had replaced the MRTP Act. In place of the MRTP commission, the Competition Commission has started functioning (though there are still some hitches regarding the compositional form of the latter and its real functions and jurisdictions).


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 both its 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% to 100% ownership with them -- Enron and Coke being the flag-bearers. The FDI started in 1991 itself. The indirect form of foreign investment (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. Under the PIS the foreign institutional investors (FII) having good track record are allowed to invest in the Indian security/stock market. The FIIs need to register themselves as a stock brocker with SEBI. It means India has not allowed individual foreign investment in the security market still, only institutionao investment has been allowed till now.


FERA Replaced By FEMA


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


Location Of Industries


Related provisions were simplified by the policy which was highly cumbersome and had time comsuming 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.


Compulsion of Phased Production Abolished


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


Compulsion To Convert Loans Into Shares Abolised








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 Gol 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 developement 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 loans amounts into equity shares and hand them over to the banks. The private companies which opted this route (this 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.


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 bank. The glorious role given to the state by the Nehruvian economy seemed completely toppled down. Any one idea the new policy challenged was a 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 were sheltered and by the control regime. 


Thus, 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 governmentts continued with the reform programme with polutically 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 econimics 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 reforms could be made a mass movement.


This is why experts have suggested that only assuming that reforms will benefit the masses will not be enough to make it happen politically, 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 jobs prospects, alleviating poverty, enriching education and providing healthcare to the masses. In the coming times, the government went from one to anothet generations of the reforms, setting new targets and every time trying to make reforms socio-politically possible 


Reforms with the human face was one such attempt of the United Progressive Alliance in 2003 when it formed the government at the Centre. It was believed that the 'India Shining' slogan of the outgoing government (The NDA) was correct, but remained localised in the effects to the urban middle class only. The new government seemed taking lessons from the past and tried to make India shine for the rural masses, too. Its one programme, the Bharat Nirman (a rural infrastructure focused programme), could be seen as a political attempt attempt to make it happen.


Only the coming times will tell as to what extent the government has been able to educate the masses (better say the voters who vote) thr needful logic of the reforms.

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