new industrial policy - meaning , objectives , significance and challenges .

 New industrial policy

Meaning – govt. action to influence the ownership & structure of the industry and its performance. It includes procedures, principles, policies, rules and regulations, in­centives and punishments, the tariff policy, the labour policy, government’s attitude towards foreign capital, etc.

Objectives

§  to maintain a sustained growth in productivity;

§  to enhance gainful employment;

§  to achieve optimal utilisation of human resources;

§  to attain international competitiveness; and

§  to transform India into a major partner and player in the global arena.

 

Timeline of industrial policy reform

 

Industrial Policy Resolution, 1948

• It declared the Indian economy as Mixed Economy
• Strategic Industries (Public Sector): It included three industries in which Central Government had monopoly. These included Arms and ammunition, Atomic energy and Rail transport.
• Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal, iron & steel, aircraft manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and mineral oil were designated as “Key Industries” or “Basic Industries”.
  
  
• These industries were to be set-up by the Central Government.
• However, the existing private sector enterprises were allowed to continue.
• Important Industries (Controlled Private Sector): It included 18 industries including heavy chemicals, sugar, cotton textile & woollen industry, cement, paper, salt, machine tools, fertiliser, rubber, air and sea transport, motor, tractor, electricity etc.
  
  
• These industries continue to remain under private sector however, the central government, in consultation with the state government, had general control over them.
• Other Industries (Private and Cooperative Sector): All other industries which were not included in the above mentioned three categories were left open for the private sector.
• Small scale and cottage industries were given the importance
• The government restricted foreign investments

Industrial Policy Resolution, 1956 (IPR 1956)

• This policy laid down the basic framework of Industrial Policy
• This policy is also known as the Economic Constitution of India

It is classified into three sectors

• Schedule A – which covers Public Sector (17 Industries)
• Schedule B – covering Mixed Sector (i.e. Public & Private) (12 Industries)
• Schedule C – only Private Industries

This has provisions for Public Sector, Small Scale Industry, Foreign Investment. To meet new challenges, from time to time, it was modified through statements in 1973, 1977, and 1980.

·         The sector was kept under state control through a system of licenses.

Industrial Licenses §  In order to open new industry or to expand production, obtaining a license from the government was a prerequisite. §  Opening new industries in economically backward areas was incentivised through easy licensing and subsidization of critical inputs like electricity and water. This was done to counter regional disparities that existed in the country. §  Licenses to increase production were issued only if the government was convinced that the economy required more of the goods.

 

Criticism: The IPR 1956 came in for sharp criticism from the private sector since this Resolution reduced the scope for the expan­sion of the private sector significantly.

Industrial Policy Statement, 1977

• This policy majorly focused on Decentralisation
• It gave priority to small scale Industries
• It created a new unit called “Tiny Unit”
• This policy imposed restrictions on Multinational Companies (MNC).

 

Criticism: The industrial Policy 1977, was subjected to serious criticism as there was an absence of effective measures to curb the dominant position of large scale units and the policy did not envisage any socio­economic transformation of the economy for curbing the role of big business houses and multinationals.

Industrial Policy Statement, 1980

• The Industrial Policy Statement of 1980 addressed the need for promoting competition in the domestic market, modernization, selective Liberalization, and technological up-gradation.
• Due to this policy, the MRTP Act (Monopolies Restrictive Trade Practices) and FERA Act (Foreign Exchange Regulation Act, 1973) were introduced.
• The objective was to liberalize the industrial sector to increase industrial productivity and competitiveness of the industrial sector.
• The policy laid the foundation for an increasingly competitive export-based and for encouraging foreign investment in high-technology areas.

New Industrial Policy, 1991

The New Industrial Policy, 1991 had the main objective of providing facilities to market forces and to increase efficiency.

Larger roles were provided by

• L – Liberalization (Reduction of government control)
• P – Privatization (Increasing the role & scope of the private sector)
• G – Globalisation (Integration of the Indian economy with the world economy)

Because of LPG, old domestic firms have to compete with New Domestic firms, MNC’s and imported items

 

The government allowed Domestic firms to import better technology to improve efficiency and to have access to better technology. The Foreign Direct Investment ceiling was increased from 40% to 51% in selected sectors.

 

The maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion board was established. It is a single-window FDI clearance agency. The technology transfer agreement was allowed under the automatic route.

 

Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and use domestic inputs, it was abolished in 1991.

 

Under the Mandatory convertibility clause, while giving loans to firms, part of the loan will/can be converted to equity of the company if the banks want the loan in a specified time. This was also abolished.

 

Industrial licensing was abolished except for 18 industries.

Monopolies and Restrictive Trade Practices Act – Under his MRTP commission was established. MRTP Act was introduced to check monopolies. The MRTP Act was relaxed in 1991.

On the recommendation of the SVS Raghavan committee, Competition Act 2000 was passed. Its objectives were to promote competition by creating an enabling environment.

 

Review of the Public sector under this New Industrial Policy, 1991 are:

• Public sector investments (Disinvestment of Public sector)
• De-reservations –Industries reserved exclusively for the public sector were reduced
• Professionalization of Management of PSUs
• Sick PSUs to be referred to the Board for Industrial and financial restructuring (BIFR).
• The scope of MoUs was strengthened (MoU is an agreement between a PSU and concerned ministry).

 

Features of New Industrial Policy

§  De-reservation of Public sector: Sectors that were earlier exclusively reserved for public sector were reduced. However, pre-eminent place of public sec­tor in 5 core areas like arms and ammu­nition, atomic energy, mineral oils, rail transport and mining was continued.

o    Presently, only two sectors- Atomic Energy and Railway operations- are reserved exclusively for the public sector.

§  De-licensing: Abolition of Industrial Licensing for all projects except for a short list of indus­tries.

o    There are only 4 industries at present related to security, strategic and environmental concerns, where an industrial license is currently required-

·         Electronic aerospace and defence equipment

·         Specified hazardous chemicals

·         Industrial explosives

·         Cigars and cigarettes of tobacco and manufactured tobacco substitutes

§  Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were reduced to enhance their efficiency and competitiveness.

§  Liberalisation of Foreign Investment: This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed.

o    Today, there are numerous sectors in the economy where government allows 100% FDI.

§  Foreign Technology Agreement: Automatic approvals for technology related agreements.

§  MRTP Act was amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. MRTP Act was replaced by the Competition Act 2002

Why were Economic reforms introduced in India?

Economic reforms were introduced in India because of the following reasons:

Poor performance of the public sector

• Public sector was given a role important in development policies during 1951-1990.
• However the performance of the majority of public enterprises was disappointing.
• They were incurring huge losses because of inefficient management.

Adverse BoP Or Imports exceeded exports

• Imports grew at a very high rate without matching the growth of exports.
• Government could not restrict imports even after imposing heavy tariffs and fixing quotas.
• On the other hand, Exports was very less due to the low quality and high prices of our goods as compared to foreign goods.

Fall in foreign exchange reserves

• Foreign exchange (foreign currencies) reserves, which government generally maintains to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
• The government was not able to repay its borrowings from abroad.

Huge debts on government

• Government expenditure on various developmental works was more than its revenue from taxation etc.
• As a result, the government borrowed money from banks, public and international financial institutions like IMF etc.

Inflationary pressure

• There was a consistent rise in the general price level of essential goods in the economy.
• To control inflation, a new set of policies were required.

Terms and conditions of world bank and IMF

• India received financial help of $7 billion from the World Bank and IMF on an agreement to announce its New Economic Policy.

New industrial policy , 2018

The New Industrial Policy ( National Industrial Policy ) aims to create jobs over the next two decades, promote foreign technology transfer and attract $100 billion FDI annually.

Aim

•  It subsumes the National Manufacturing Policy.
• It primarily aims at making India a manufacturing hub.
• The Department of Industrial Policy and Promotion, the nodal body for the new Policy, has floated a discussion paper inviting feedback.
• Focus groups, with members from government departments, industry associations, academia, and think tanks have been set up to look into the challenges faced by the industry.
• Six thematic focus groups include manufacturing and MSME, technology and innovation, ease of doing business, infrastructure, investment, trade and fiscal policy, skills and employability.
• Besides, a Task Force on Artificial Intelligence for India’s economic transformation has also been constituted to provide inputs for the policy.

Objectives

·         It is time to shift from a policy of continuity to radical and accelerated reforms for greater strategic engagement with the world, i.e., it is time to Reform, Perform and Transform.

·         A comprehensive, actionable, outcome-oriented industrial policy will enable Industry to deliver a larger role in the economy; to fulfil its role as the engine of growth and to shoulder the responsibility of adding more value and jobs.

Major concerns

• Inadequate infrastructure: Rapid growth of the economy has put further stress on infrastructure. Lack of quality industrial infrastructure has resulted in high logistics cost and has in turn affected cost competitiveness of Indian goods in global markets.
• Restrictive labour laws: The labour laws have been overly protective of the labour force in the formal sector. Though labour protection and security are required, the flipside is that it discourages employers from hiring workers on a regular basis. It has probably also led to entrepreneurs choosing to stay away from labour-intensive sectors.
• Complicated business environment: Complex and time taking business processes and clearances have been a disincentive for businesses.
• Slow technology adoption: Indian industry has been a slow adopter of new and advanced technologies. Inefficient technologies led to low productivity and higher costs adding to the disadvantage of Indian products in international markets.
• Low productivity: Workers in India are overwhelmingly employed in low productivity and low wage activities. Productivity as measured by the value-added per worker and average wages in manufacturing in India is only one-third of that in China.
• Challenges for trade: Manufacturing sector especially exporters are facing challenges of stagnant/shrinking global demand and rising protectionist tendencies around the world. Indian MSME sector is particularly facing tough competition from cheap imports from China and FTA countries.
• Inadequate expenditure on R&D and Innovation: Investments in these areas is essential to ensure growth in the industry. Public investments have been constrained and private investment is not forthcoming as these involve long gestation periods and uncertain returns.

Policy proposals

It proposes to incorporate a range of measures for the following:

• Facilitating the use of smart technologies such as the internet of things (IoT), artificial intelligence (AI) and robotics for advanced manufacturing.
• Increasing the number of global Indian firms helping attract inward FDI and supporting outward FDI to assert Indian presence in world markets.
• Addressing the problem of low job creation in the formal sector.
• Enhancing industrial competitiveness
• Developing alternatives to banks and improving access to capital for MSMEs through options like the peer to peer lending and crowdfunding.
• Providing a credit rating mechanism for MSMEs.
• Addressing the problems with duty structure and also balancing it against obligations under multilateral or bilateral trade agreements.
• Studying the impact of automation on jobs and employment.
• Ensuring minimal/zero waste from industrial activities and targeting certain sectors to radically cut emissions.
• Reviewing the FDI policy to ensure that it facilitates greater technology transfer, leverages strategic linkages and innovation.