NA

1. INDUSTRIAL & TRADE
POLICY REFORMS
Session 5: International & Indian Economy
Prof Prema Basargekar

2. Session Plan
 Industrial Policy Resolution, 1948
 Industrial Policy Resolution, 1956
 Industries (Development and Regulation) Act,
1951
 Review of industrial policy before liberalization
 The libralization trends
 New Industrial Policy, 1991
 Import & Export policy
 Trade reforms

3. Industrial Policy Resolution,
1948
 Division of industries into four categories:
 1. Industries where state had a monopoly – arms &
ammunition, atomic energy & rail transport
 2. Mixed sector – 6 industries such as coal, iron & steel,
aircraft mfg, ship building, mfg of telephone, telegraph &
wireless apparatus, mineral oils- new undertakings were to
be set up by public sector but existing pvt players were to
continue in the business for next 10 years
 3. The field of Government control – 18 industries of national
importance
 4. The field of private enterprise – all other industries not
included in the above categories
 Encouragement to small & cottage industries

4. Industrial Policy Resolution,
1956
 Objectives – to accelerate the rate of industrialization, to develop
heavy industries, to expand public sector, to reduce disparities, to
develop cooperative sector & to control monopolies
 Three categories:
 1. Monopoly of the state – Schedule A: 17 industries where either
public monopolies or existing pvt sector will operate
 2. Mixed sector – schedule B where state would play a major role
but would not deny the opportunities for pvt sector
 3. industries left for pvt sector – all industries not included in the
schedule ‘A’ or schedule ‘B’ which were left open to pvt sector
 Mutual dependence of public & pvt sector
 Recognition of small & cottage industries
 Enlarged the area of public sector from 6 to 17 sectors

5. Industries (Development And
Regulation) Act, 1951
 Objective – to control and regulate the process of
industrial development, to regulate the
investments and production according to plan
priorities & targets, protection of small
entrepreneurs, prevention of monopolies,
balanced regional development
 1. Restrictive Provisions – a) registration &
licensing of industrial units b) enquiry of industries
listed in the schedules – capacity utilization, cost
of production, prices c) cancellation of registration
& licenses

6. Industries (Development And
Regulation) Act, 1951
 2. Reformative provisions:
 A) Direct regulation or control by the
government – direction, take over of mgt, etc.
 B) control on price, distribution, supply, etc:
regulation of all units listed in the schedule of
Act
 C) constructive measures: establishments of
Central Advisory Council & other Development
Councils

7. MRTP & FERA
 Monopoly & Restrictive Trade Practices Act –
1969
 To safeguard the interests of the consumers
 To prevent economic power concentration
 To prevent unfair trade practices
 Foreign Exchange Regulation Act – 1973
 To regulate the transactions related to foreign
exchange
 Firms that came under the purview of these Acts
were allowed to invest only in a select set of
industries.

8. New Economic Policy - 1985
 This net of controls on the economy in the seventies caused several
firms to
 A) operate below the minimum efficiency scale
 B) under-utilize capacity and,
 C) use outdated technology resulted from the restrictions placed on
import of technology through the provisions of FERA.
 D) unnecessary diversification to get advantages of SSI
 E) the capacity mix being determined independent of the market
demand,
 F) the policy of distributing imports based on capacity, causing firms
to expand beyond levels determined by demand so as to be eligible
for more imports.
 New Economic Policy (NEP) in 1985.
 As part of these reforms, several groups of industries were
delicensed
 Foreign investment was allowed in select industries and norms
under the MRTP Act were relaxed.

9. Liberalization trend
 Liberalization trend started from 1970s. Major changes since
1980s
 Exemption from licensing limit was raised from 3 crore to 5
crore in 1983 & to 15 crore in non-backward areas & 50
crore to backward areas in 1988-89.
 Relaxation from MRTP (Monopolies & Restrictive Trade
Practices Act) & FERA (Foreign exchange regulation Act) in
raising of the limit of MRTP companies from Rs. 20 crore to
Rs. 100 crores, permission to increase capacities, mfg
products not reserved for SSI, etc
 Delicensing of 28 broad category of industries which are not
falling in MRTP & FERA Act and also not reserved for SSI.
 Broad banding of industries into generic categories such as
automobile, pharma, etc so as to enable them to change their
product mix rapidly with changes in demand patterns.

10. Review of Industrial Policy before
1991
 Licensing & underutilization of capacity – Licensing was used
to restrict the output & raise prices, underutilization of
capacities in many industries (such as cement, automobile,
paper, ceramic, etc)
 Concentration of economic power – licensing acted as an
entry barrier for other players
 Mis -utilization of power by licensing authorities – As
discretionary power was vested with govt authorities, it
tended to promote corruption, rent seeking activities. The
system favoured large business as they had more power &
resources to deal with bureaucracy.
 Regional imbalance – regional imbalance increased due to
several reasons such as private sector’s choices,
infrastructural development, etc (Maharashtra, Gujarat, West
Bengal & Tamil Nadu accounting for more than 60 % of
licenses approved)
 Delays in processing – due to higher coverage & degree of
details of regulations & scarcity of resources, lack of clarity

11. Roadmap to liberalization
 The two principal instruments of industrial policy
before the reform were a system of industrial licensing
and a system of import licensing designed to foster
import substituting industries.
 The main objectives of the policy were to dismantle
the regulatory systems, develop the capital market
and increase the competitiveness of industry for the
benefit of the common man.
 A major policy decision was regarding the public
sector. The role of public sectors would be confined
only to the strategic and basic infrastructure sectors.
An-other area where further changes were
contemplated was the exit policy.

12. Liberalization trend
 Introduction of Minimum Economic Scales of
Operation (MECs) to encourage realization of
minimum economic level of operation.
 Promotion of backward areas by allowing MRTP/FERA
cos to establish in backward regions, deciding to set
up 100 growth centres for creating infrastructure
facilities of high order..
 Incentives for export promotion – permitting MRTP &
FERA cos to expand for exports, setting up 100 %
export oriented businesses, setting up free trade
zones, etc.
 Enhancement of investment limit for SSI to Rs. 35 lakh
& ancillary unit to Rs. 45 lakh

13. New Industrial Policy, 1991
 Abolition of Industrial Licensing – licensing remained
compulsory for only 5 industries such as alcohol, cigarettes,
hazardous chemicals, electronics aeroscape, defence
equipments & industrial explosives.
 Dilution in the role of public sector – reduction in the
reservation from 17 to 8 & later to 3 industries – atomic
energy, mineral required for atomic energy & rail transport
 Relaxation in MRTP – MRTP cos (having more than Rs. 100
cr of assets) which were not allowed to enter in certain
sectors were permitted to enter on a case by case basis.
 Freer entry to foreign investment & technology – high
technology & high priority list was made to allow 51 % foreign
equity with automatic approval. The limit was raised from 51
% to 100 % over the years.

14. Liberalization trend
 Liberalization of industrial location policy – no
requirement of obtaining industrial approval
from centre below cities having population
more than 1 million.
 Abolition of Phased Manufacturing Programme
for new projects – no need for enforcing the
local content requirements
 Removal of mandatory convertibility clause:
conversion of loans into equity may not be
imposed by banks.

15. Appraisal of New Industrial
Policy
 Positive outcomes –
 Reduction in interventionist barriers on growth &
encouragement to more competitive environment
 Reduction in project costs, higher productive use
of resources, higher efficiency
 Encouragement to attract foreign investment,
technology & managerial expertise
 Higher allocative efficiency by rehabilitation,
restructuring, closure, liquidation, privatization of
public sector

16. Appraisal of New Industrial
Policy
 Negative outcomes:
 Erratic & fluctuating industrial growth – despite
liberalization, the growth in industrial production could
not take place. – 5.9 % per yr
 Fall in the production of capital goods – 4.7 % per yr
 Unequal competition from foreign MNCs
 Misplaced faith in foreign investment – development
of indigenous technology, exports could not take
place. Technology, managerial inputs used by MNCs
more suitable to western countries.
 Danger of business colonalisation – foreign investors
buying out brands in order to replace them later with
their own brands to penetrate in the market.

17. Trade Policy before
Liberalization
 Import policy:
 Due to heavy dependence of public sector on import of capital
goods, technical know how & increasing imports of food grains we
resorted to policy of import restriction & import substitution
 Import restriction – requirement of import license for a) specific
amount b) specified item c) specified user d) specified purpose e)
specified source of supply
 Selective Quantitative Restriction based on perceived importance of
in the development strategy
 Import divided into different categories such as capital, consumer,
intermediate- each category divided into sub groups such as non –
permissible, limited permissible, automatic permissible, open, etc.
 Licenses were categorized based on user types
 Some crucial imports were allowed only through state trading
corporations

18. Trade Policy before
Liberalization
 Import substitution: to save the scarce foreign
exchange for the import of more important goods & to
achieve self reliance in the production
 Encouraging domestic production of consumer goods
 Replacement of imported capital goods
 Reducing dependence on imported technology by
developing indigenous techniques.
 1977-78 – import liberalization – many capital goods &
raw material were put in open category
 Duty free imports against exports
 1980 – liberal import of technology to make out
country internationally completive

19. Export policy
 The pre reform period-
 Phase I – export pessimism (up to 1973) : exports
from developing countries like India face a
stagnant world demand & terms of trade are
destined to deteriorate - passive export policy
 Phase II – 1973 to 1083-84 – export priority due to
understanding the limitations of import substitution
policy – devaluation of Rs to boost exports
 Phase III – (1984- 1990)- export promotion –
exports being considered as integrated to
economic development process

20. Problems in Export – Import
 Import restrictive policies led to delays, administrative
expenses, inflexibility, absence of competition,
underutilization of capacity, lack of coordination between
multiplicity of agencies dispensing imports & creation of
bottlenecks & corruption
 Policy of import substitution helped India to achieve
diversification, but at a higher cost.
 Import substitution also led to lower quality of goods,
underutilization of capacity, monopolistic or oligopolistic
industrial structures
 In absence of any long term export strategy, India adopted an
ad-hoc policy which failed to integrate exports to overall
planning.
 Heavy dependence of exports of primary goods led to
unfavorable terms of trade & heavy fluctuations in export
earnings
 Overvalued exchange rate made imports cheaper & exports
unprofitable.

21. New Trade Policy
 Freer imports & exports: reduction in tariff
 Quantitative restrictions on all import items withdrawn.
 Rationalization of tariff structures – to bring parity
between domestic & international market
 Decanlization – excepting few essential product (oil,
fertilizers, etc) all the imports were decanlised
 Convertibility of Rs on current account
 Exchange rate made market driven
 51 % foreign equity allowed in trading houses
 Establishments of Special Economic Zones for
promoting exports
 Focus on exports of services

22. Impact of reforms: positive
results
 Higher and resilient growth: East Asian crisis – 1999,
sanctions in post Pokharan tests, border conflict in
1999, rising global prices – robust macro economic
performance
 Consistent rise in GDP- annual average growth rate
of 3.5 % during 1950 to 80 ; 6 % in 80 to 90 & 8 to 9
% in last 5 years
 Increasing resilience to external shocks such as
South Asian crisis, global economic slowdown in
2002, etc
 Widespread growth drawing from industry, services
& exports

23. Impact of reforms: positive
results
 Accelerated growth of service sector
 Increase in growth accompanied by fall in the avg
inflation rate from 8 % to 5.8% per year
 Domestic savings increasing at high rate: from 10 % of
GDP in 1950 to 32.4 % in 2005-06
 95 % of investment financed by domestic savings
 Gross investment rate rising from 22.9% of GDP in 1990
to 33.8 % 2005-06.

24. Impact of reforms: positive
results
 Higher growth in PCI by 4 % accompanied by
fall in population growth rate from 2.14 % to
1.96 % - resulting in significant reduction in
poverty ratio from 38.9% to 26.1%.
 Adequate foreign exchange reserves
 Trade liberalization has helped in globalization
of production processes in India
 Tax- revenue position improving
 Gross capital formation rate rising steadily

25. Impact of reforms: Negative
results
 Inability to generate employment
opportunities- no change in unemployment
ratios
 Lack of job oriented investment such as in
agriculture, construction, etc.
 No proper steps taken on the front of labour
reforms- without proper safety net we cannot
adopt labour reforms
 Dismal human development indicators –
challenge of human capital development

26. Impact of reforms: Negative
results
 Fall in development expenditure from 17.4 % to
15.9% in total expenditure
 Fall in education expenditure from 10.4 % to
9.9%
 Marginal decline in fiscal deficit: from 8 % to 5 %
& combined fiscal deficit almost remaining same
around 9.4%.
 No significant change in revenue deficit
 Neglect on agricultural reforms

27. Appraisal of reforms
 Absence of broader development strategy: reforms were
concentrated in few sectors and few pockets
 Wrong sequencing of reforms: fiscal correction resulted in
cut in development expenditure and capital expenditure;
liberalizing imports of capital goods before adopting a
strategy for technology advancement
 Hasty pace of reforms: reduction in the growth of capital
goods industry, industrial employment, etc
 Prerequisites of reforms ignored: development of
egalitarian structure very imp before reforms to spread
benefits universally- land reforms, education spread,
access to health & training, etc.
 Absence of human development goals as an integral part
of the strategy

28. Appraisal of reforms
 Inadequate framework: The new policy did not
pay enough attention to agricultural reforms,
reforms in labour sector and reforms in SSI &
cottage industries.
 New policy emphasized on agg supply &
improving productivity. It did not pay so much
attention on reviving agg demand by using
distributive measures.
 Gains of liberalization shd be spread more
evenly across different strata & specifically in
disadvantaged section of society