INDIAN INDUSTRIAL ENVIRONMENT
MODULE
2
Industrial policy up to 1991, New industrial
policy, Liberalisation, Privatisation and
Globalization process in India,Disinvestment,
Industrial sickness, MRTP act 1969,
Competition law2002, Foreign Exchange
Regulation Act and Foreign Exchange
Management Act (FERA and FEMA).
India's industrial policy evolved over several decades following
independence, with the government playing a significant role
in shaping the country's industrial landscape. The policies
before 1991 were characterized by protectionism, government
control, and a focus on self-reliance, but they also created
inefficiencies that led to a shift towards liberalization and
reform in 1991.
INDUSTRIAL POLICY
RESOLUTION, 1948
The first significant industrial policy was announced in 1948, laying the foundation for
India's industrial development after independence. The government divided industries into
four categories:
1. Strategic Industries (Public Sector): Arms and ammunition, atomic energy, railways.
[Link] and Key Industries (Mixed Sector): Coal, iron, steel, shipbuilding, and other
heavy industries where both the public and private sectors could operate.
[Link] Private Sector: Industries where private enterprises were allowed but under
state control.
[Link] Industries (Private Sector): All other industries, where private firms
could operate freely.
INDUSTRIAL POLICY
RESOLUTION, 1956
•The 1956 policy was a turning point in India's industrial strategy, with a greater emphasis
on the public sector. This policy expanded the role of the public sector and aimed to
establish a socialist pattern of society. It classified industries into three categories:
[Link] A: Industries to be exclusively owned by the state (e.g., defense, railways,
atomic energy).
[Link] B: Industries where the state would play a dominant role but allow private
enterprises (e.g., machine tools, chemicals, and fertilizers).
[Link] C: All other industries where private enterprises were given the freedom to
operate, but the state could intervene if necessary.
•The policy led to the creation of Public Sector Enterprises (PSEs) in key sectors such as
steel, electricity, and heavy engineering.
INDUSTRIAL LICENSING (LICENSE
RAJ)
The government introduced a system of industrial licensing,
where industries had to obtain licenses from the state to start
new businesses or expand existing ones. This system aimed to
control the production capacity, location of industries, and
maintain regional balance.
The License Raj, however, became a major source of inefficiency
and corruption, as it restricted competition and led to delays in
industrial growth.
THE MONOPOLIES AND RESTRICTIVE TRADE
PRACTICES (MRTP) ACT, 1969
•The MRTP Act was introduced to prevent the concentration of economic power and
control monopolistic and restrictive trade practices. It regulated large industrial
houses and ensured that no single enterprise dominated the market.
Industrial Policy of the 1970s and 1980s
•The government continued to strengthen the public sector while tightening
control over the private sector. Key industries such as banking, insurance,
and coal mining were nationalized.
•Small-scale industries (SSI) were promoted to encourage decentralization
and employment generation. The government reserved certain products
exclusively for production by SSIs.
NEW INDUSTRIAL POLICY, 1991
The economic crisis of 1991, marked by a severe balance of payments crisis
and high inflation, led to a major shift in India's industrial policy. The
government, under Prime Minister P. V. Narasimha Rao and Finance Minister
Dr. Manmohan Singh, introduced economic reforms aimed at liberalizing the
economy.
Key Objectives of the 1991 Policy:
[Link]: Reduce government control over industries and encourage
private sector participation.
[Link]: Dismantle the public sector's monopoly and allow private
players to enter sectors previously reserved for the state.
[Link]: Integrate the Indian economy with the global market by
encouraging exports and attracting foreign investment.
FEATURES OF THE 1991
INDUSTRIAL
•Abolition POLICY
of Industrial Licensing:
•Industrial licensing was abolished for most industries, except for a few sectors like
defense, hazardous chemicals, and industries with environmental concerns.
•De-reservation of Public Sector:
•The public sector's role was redefined, and only a few industries remained under
exclusive state control (e.g., defense production, railways). Many industries were
opened to private and foreign players.
•Disinvestment and Privatization:
•Public sector enterprises were encouraged to improve efficiency, and the
government began a process of disinvestment, selling stakes in public enterprises
to private investors.
•Foreign Direct Investment (FDI):
•The policy allowed up to 51% foreign equity in many industries, with further
relaxations in subsequent years. Foreign investments were encouraged to bring in
capital, technology, and managerial expertise.
Foreign Trade Policy Reforms:
Import restrictions were relaxed, and the export-oriented industrialization
strategy was promoted. Tariffs and duties on imports were gradually
reduced to make Indian industries competitive globally.
Removal of MRTP Act Restrictions:
The MRTP Act was amended to remove restrictions on large business
houses. This allowed for greater freedom in expanding business
operations and encouraged mergers and acquisitions.
Technology Transfer and Foreign Collaboration:
The policy allowed greater freedom for Indian companies to enter into
technological collaboration with foreign companies. This led to a rapid
modernization of Indian industries.
1. LIBERALIZATION:
•Liberalization refers to the reduction of government
control and regulations over economic activities. The
1991 reforms significantly liberalized the Indian
economy by:
• Abolishing licensing requirements for most industries.
• Simplifying tax structures and reducing corporate taxes.
• Easing restrictions on the movement of goods and capital
across borders.
• Deregulating sectors like banking, insurance,
telecommunications, and aviation.
Privatization:
•Privatization involves transferring ownership or
management of public sector enterprises to private
entities. The Indian government initiated
privatization through:
• Disinvestment: Selling government stakes in public
enterprises to private investors.
• Outsourcing and Private Participation: Allowing
private companies to enter industries previously
reserved for public sector control, such as
telecommunications and power generation.
• Privatization aimed to improve efficiency, reduce the
fiscal burden, and enhance the competitiveness of
Indian industries.
Globalization:
•Globalization refers to the integration of the Indian
economy with the global market. India's approach to
globalization after 1991 involved:
• Trade Liberalization: Reducing import duties and
restrictions on exports to encourage international trade.
• Foreign Direct Investment (FDI): Attracting foreign
investors through relaxed regulations and offering
incentives for investing in key sectors like
infrastructure, manufacturing, and services.
• Outsourcing: India emerged as a global hub for IT
services and business process outsourcing, attracting
multinational companies to set up operations.
POSITIVE IMPACTS OF NEW
INDUSTRIAL POLICY
•Economic Growth: Post-1991 reforms led to higher GDP growth rates, with India
emerging as one of the fastest-growing economies in the world.
•Increased Foreign Investment: FDI inflows into India surged, helping to build
infrastructure, create jobs, and modernize industries.
•Global Competitiveness: Indian industries became more competitive globally due to
increased access to technology, managerial expertise, and international markets.
•Entrepreneurial Growth: The removal of licensing restrictions allowed for the rise of
new enterprises, startups, and a thriving private sector.
•Export Growth: India's exports increased significantly, particularly in IT,
pharmaceuticals, textiles, and automobile sectors.
CHALLENGES AND CRITICISMS OF
NEW INDUSTRIAL POLICY
Social Inequality: While economic reforms led to growth, they also widened
income disparities and wealth gaps between urban and rural areas.
Jobless Growth: The industrial and economic growth did not always translate
into enough employment opportunities, leading to concerns about
underemployment.
Environmental Concerns: Rapid industrialization and globalization led to
increased environmental degradation, with pollution and depletion of natural
resources becoming major issues.
Dependence on Global Economy: Greater integration into the global
economy made India more vulnerable to global economic fluctuations.
MRTP ACT 1969
The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, was
enacted by the Indian government to prevent the concentration of
economic power, control monopolies, and prohibit restrictive trade
practices. Its main objective was to ensure that the operation of the
economic system did not result in the concentration of wealth and
economic power to the common detriment. The Act sought to promote
fair competition in the market and protect consumer rights by preventing
monopolistic and restrictive trade practices.
FEATURES OF THE MRTP ACT
Prevention of Monopolistic Practices: The Act aimed to prevent
the dominance of a few companies in the market that could hinder
competition.
Prohibition of Restrictive Trade Practices: It targeted practices
such as price-fixing, supply limitations, or creating market barriers
that were detrimental to the consumer.
Consumer Protection: The Act provided mechanisms to protect
consumer interests from unfair trade practices.
COMPETITION ACT, 2002
The Competition Act, 2002 is an important piece of legislation in India aimed at
promoting competition and preventing anti-competitive practices in the market.
This law replaced the Monopolies and Restrictive Trade Practices (MRTP) Act of
1969, marking a shift from curbing monopolies to fostering a competitive market
economy. Below are some key points regarding the Competition Act, 2002:
Key Objectives:
[Link] Competition: The primary objective is to promote and sustain
competition in markets.
[Link] Consumer Interests: It aims to protect the interests of consumers by
preventing practices that have an adverse effect on competition.
[Link] Fair Trade: The act aims to ensure freedom of trade in the market,
removing anti-competitive practices.
IMPORTANT PROVISIONS
•Anti-competitive Agreements (Section 3): This section prohibits agreements that
restrict free competition. For instance, agreements between enterprises that directly or
indirectly fix prices, limit production, or allocate markets are deemed anti-competitive.
•Abuse of Dominant Position (Section 4): Dominant enterprises or entities are not
allowed to abuse their dominant market position to suppress competition. Practices
such as predatory pricing or restricting market entry are prohibited.
•Regulation of Combinations (Section 5 & 6): Mergers, acquisitions, or
amalgamations that result in combinations which have the potential to reduce or limit
competition are regulated. Such combinations are subject to review by the Competition
Commission of India (CCI).
•Competition Commission of India (CCI): The Act established the CCI as the
regulatory authority to enforce the provisions of the law. The CCI can investigate anti-
competitive practices, review mergers and acquisitions, and take necessary action to
maintain competition in the market.
FOREIGN EXCHANGE
REGULATION ACT (FERA)
The Foreign Exchange Regulation Act (FERA) was an Indian law enacted in 1973 to
regulate payments and dealings in foreign exchange and securities. It aimed to
control foreign exchange transactions to maintain a balance of payments and
conserve foreign exchange resources in the country. FERA was part of the broader
economic policy that sought to restrict the flow of foreign capital and prevent the
excessive outflow of Indian currency.
FERA was replaced by the Foreign Exchange Management Act (FEMA) in 1999,
which marked a shift in focus from strict regulation to management and facilitation
of foreign exchange transactions in alignment with the liberalization policies of the
Indian economy.
KEY FEATURES OF FERA
•Stringent Regulations: FERA imposed strict controls on foreign exchange transactions,
including buying, selling, and holding foreign currencies. It aimed to conserve foreign
exchange and prevent its misuse.
•Control Over Foreign Business: The law heavily regulated operations of foreign
companies and individuals in India. It restricted investments by foreign entities and
imposed strict conditions on their operations.
•Stringent Penalties: Violations under FERA were considered criminal offenses, with
severe penalties, including imprisonment. There was little room for leniency, and even
minor violations could lead to stringent punishment.
•Restrictions on Export and Import: The act placed controls on the export and import of
goods and services, to manage the inflow and outflow of foreign currency.
•Capital Transactions: Under FERA, capital account transactions (e.g., investments,
borrowing, and lending) involving foreign exchange were highly regulated and required
permission from the Reserve Bank of India (RBI).
•Centralized Authority (RBI): The Reserve Bank of India (RBI) was given the primary
role in overseeing foreign exchange management, and all foreign exchange dealings
required RBI approval.
DRAWBACKS OF FERA
•Over-regulation: FERA was criticized for being overly stringent, creating an
environment that was seen as hostile to foreign investors. This led to a slow inflow
of foreign investment and hampered India's global trade relations.
•Criminalization of Violations: The strict penal provisions discouraged legitimate
business transactions, as any violation was treated as a criminal offense, leading to
fear and reluctance among foreign companies to invest in India.
•Lack of Flexibility: The rigid control mechanisms of FERA made it difficult for
businesses to operate efficiently, as even minor transactions required approval from
authorities, leading to delays and inefficiency.
FOREIGN EXCHANGE
MANAGEMENT ACT (FEMA)
In 1999, India adopted a more liberal and progressive approach to foreign exchange
regulation with the enactment of the Foreign Exchange Management Act (FEMA). FEMA
replaced FERA and was more in tune with India’s economic liberalization and
globalization goals. FEMA's key distinctions from FERA include:
Civil Offenses: Unlike FERA, where violations were criminal offenses, offenses under
FEMA are treated as civil offenses, with financial penalties instead of imprisonment.
Liberalized Regime: FEMA focuses on facilitating external trade and payments and
promoting the orderly development of the foreign exchange market.
Simplification of Procedures: FEMA simplified foreign exchange procedures, allowing
businesses and individuals to conduct foreign transactions with more flexibility.
FEATURES OF FEMA (1999)
Objective: FEMA aimed to simplify foreign exchange regulations and facilitate
external trade, making India more accessible to global investment.
Foreign Investment: It allowed for easier foreign direct investment (FDI) and
promoted globalization by providing a friendlier business environment for foreign
investors.
Capital Transactions: FEMA differentiates between capital account transactions
(investment in businesses or property) and current account transactions (trade
and services), with more liberalized regulations on the latter.