With the gradual liberalisation of the 1956 Industrial policy in the mid-eighties the tempo of industrial development started picking up. But the industry was still feeling the burden of many controls and regulations For a faster growth of industry, it was necessary that even these impediments should be removed. The new government by Shri Narasimha Rao, which took office in June 1991, announced a package of liberalisation measures under its Industrial Policy on July 24, 1991.

The broad objectives of New Industrial Policy

The New Industrial Policy,1991 seeks to liberate the industry from the shackles of licensing system Drastically reduce the role of public sector and encourage foreign participation in India’s industrial development
(i) Liberalising the industry from the regulatory devices such as licenses and controls.
(ii) Enhancing support to the small scale sector.
(iii) Increasing competitiveness of industries for the benefit of the common man.
(iv) Ensuring running of public enterprises on business lines and thus cutting their losses.
(v) Providing more incentives for industrialisation of the backward areas, and
(vi) Ensuring rapid industrial development in a competitive environment.

significant changes in four main areas

Industrial licensing role of public sector,
foreign investment and
technology and
the MRTP (Monopolies and Restrictive Trade Practices) act

The major provisions of this policy

(1) Abolition of Industrial Licensing
(2) De-reservation of Industries for Public Sector
(3) Liberalised Policy Towards Foreign Capital and Technology
(4) Changes in the MRTP Act
(5) Greater Support to Small-Scale Industries
(6) Other Provisions

(1) Abolition of Industrial Licensing

In the earlier industrial policy, industries were subjected to tight regulation through the licensing system. Though some liberalisation measures were introduced during 1980’s that positively affected the growth of industry. Still industrial development remained constrained to a considerable extent.

The new industrial policy abolishes the system of industrial licensing for most of the industries under this policy no licenses are required for setting up new industrial units or for substantial expansion in the capacity of the existing units, except for a short list of industries relating to country’s security and strategic concerns, hazardous industries and industries causing environmental degradation.

To begin with, 18 industries were placed in this list of industries that require licenses. Through later amendment to the policy, this list was reduced. It now covers only five industries relating to health security and strategic concerns that require compulsory licensing. Thus the industry has been almost completely made free of the licensing provisions and the constraints attached with it.

(2) De-reservation of Industries for Public Sector

The public sector which was conceived as a vehicle for rapid industrial development, largely failed to do the job assigned to it. Most public sector enterprises became symbols of inefficiency and imposed heavy burden on the government through their perpetual losses.

Since a large field of industry was reserved exclusively for public sector where it remained a virtual non performer (except for a few units like the ONGC). The industrial development was thus the biggest casualty.

The new industrial policy seeks to limit the role of public sector and encourage private sector’s participation over a wider field of industry. With this view, the following changes were made in the policy regarding public sector industries

(i) Reduced reservation for public sector

Out of the 17 industries reserved for the public sector under the 1956 industrial policy, the new policy de-reserved 9 industries and thus limited the scope of public sector to only 8 industries.

Later, a few more industries were de-reserved and now the exclusive area of the public sector remains confined to only 4 industrial sectors which are: (i) defence production, (ii) atomic energy, (iii) railways and (iv) minerals used in generation of atomic energy.

However, if need be even some of these areas can be opened up for the private sector. The public sector can also be allowed to set up units in areas that have now been thrown open for private sector, if the national interest so demands.

(ii) Efforts to revive loss making enterprise

Those public enterprises which are chronically sick and making persistent losses would be returned to the Board of Industrial and Financial Reconstruction (BIFR) or similar other high level institutions created for this purpose. The BIFR or other such institutions will formulate schemes for rehabilitation and revival of such industrial units.

(iii) Disinvestment in selected public sector industrial units

As a measure to raise large resources and introduce wider private participation in public sector units, the government would sell a part of its share holding of these industries to Mutual Funds, financial institutions, general public and workers.

For this purposes, the Government of India set up a ‘Disinvestment Commission’ in August 1996 which works out the modalities of disinvestment. On the basis of recommendations of the ‘Disinvestment Commission’ the government sells the shares of public enterprise.

(iv) Greater autonomy to public enterprises

The New Industrial Policy seeks to give greater autonomy to the public enterprises in their day-to-day working. The trust would be on performance improvement of public enterprises through a mix of greater autonomy and more accountability

(3) Liberalised Policy Towards Foreign Capital and Technology

The inflow of foreign capital and import of technology was tightly regulated under the earlier Industrial policy. Each proposal of foreign investment was to be cleared by the Government in advance. Wherever foreign investment was allowed, the share of foreign equity was kept very low so that majority of ownership control remains with Indians.

But such a policy kept the inflow of foreign capital very small and industrial development suffered for want of capital resources and technology. The July, 1991 Industrial policy made several concessions to encourage flow of foreign capital and technology into India, which are follows

(i) Relaxation in Upper Limit of Foreign Investment

The maximum limit of foreign equity participation was placed at 40 per cent in the total equity capital of industrial units which were open to foreign investments under the 1991 policy; this limit was raised to 51 per cent. 34 specified more industries were added to this list of 51 per cent foreign equity participation.

In some industries the ratio of foreign equity was raised to 74 percent. Foreign Direct Investments (FDI) was further liberalised and now 100 per cent foreign equity is permitted the case of mining, including coal and lignite, pollution control related equipment, projects for electricity generation, transmission and distribution, ports, harbours etc.

Recent decision taken to further liberalise FDI include permission for 100 per cent FDI in oil refining, all manufacturing activities in Special Economic Zones (SEZ’s), some activities in telecom see tor etc

(ii) Automatic Permission for Foreign Technology Agreement

The New Industrial Policy states that automatic permission will be granted to foreign technology agreements in the high priority industries. Previously technology agreement by an Indian company with foreign parties for import of technology required advance clearance from the government.

This delayed the import of technology and hampered modernisation of industries. Now the Indian companies could enter into technology agreements with foreign companies and import foreign technology for which permission would be automatically granted provided the agreements involved a lump sum payment of upto Rs. 1 crore and royalty upto 5 percent on domestic sales and 8 per cent on exports.

(4) Changes in the MRTP Act

According to the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, all big companies and large business houses (which had assets of Rs. 100 crores or more, according to the 1985 amendment to the Act) were required to obtain clearance from the MRTP Commission for setting up any new industrial unit, because such companies (called MRTP companies) were allowed to invest only in some selected industries.

Thus, besides obtaining a licence they were also required to get MRTP clearance. This was a big impediment for industrial development as the big business firms which had the resources for development could not grow and diversify their activities.

The Industrial Policy, 1991 has put these industries on par with others by abolishing those provisions of the MRTP Act which mediate mandatory for the large industrial houses to seek prior clearance from MRTP Commission for their new projects.

Under the amended Act, the MRTP Commission will concern itself only with the control of Monopolies and Restrictive Trade Practices that are unfair and restrict competition to the detriment of consumer s interests. No prior approval of or clearance from the MRTP Commission is now required for setting up industrial units by the large business houses.

(5) Greater Support to Small-Scale Industries

The New Industrial Policy seeks to provide greater government support to the small-scale industries so that they may grow rapidly under environment of economic efficiency and technological upgradation. A package of measures announced in this context provides for setting up of an agency to ensure that credit needs of these industries are fully met.

It also allows for equity participation by the large industries in the small scale sector not exceeding 24 per cent of their total shareholding. This has been done with a view to provide small scale sector an access to the capital market and to encourage their upgradation and modernisation the government would also encourage the production of parts and components required by the public sector industries in the small-scale sector

(6) Other Provisions

Besides above discussed measures, the Industrial Policy 1991 announced some more steps to promote rapid industrial development. It said that the government would set up a special board (which was established as Foreign Investments Promotion Board—FIPB) to negotiate with a number of international companies for direct investment in industries in India.

It also announced the setting up of a fund (called National Renewal Fund) to provide social security to retrenched workers and provide relief and rehabilitate those workers who have been rendered unemployed due to technological changes.

The New Policy also removed the mandatory convertibility clause under which the Public Sector Financial Institution were asked to convert the loans given by them to private industries in equity (shares) and thus become partners in their management.

This removed a big threat to the private sector industries as they were always under threat that their management and control could pass on into the hands of the Government owned financial institutions.

Evaluation of the New Industrial Policy

The New Industrial Policy 1991 aims to unshackle Indian’s industrial economy from the cobwebs of unnecessary bureaucratic control. According to this policy the rate of the government should change from that of only exercising control over industries to that of helping it to grow rapidly by cutting down delays.

Removal of entry barriers and bringing about transparency in procedures. This policy therefore also at virtually ending the ‘Licence-Permit Raj’ which has hampered private initiative and industrial development. The new policy therefore throws almost the entire field of industry wide upon for the private sector.

The public sector’s role has been confined largely to industries of defence, strategic and environmental concerns. Thus new policy is more market friendly and aims at making the best use of available entrepreneurial talent in a congenial industrial environment. The industry is thus expected to grow faster under the new industrial policy 1991

The shift from FERA to FEMA

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India". It was passed in the winter session of Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes offences related to foreign exchange civil offenses. It extends to the whole of India., replacing FERA, which had become incompatible with the pro-liberalisation policies of the Government of India. It enabled a new foreign exchange management regime consistent with the emerging framework of the World Trade Organisation (WTO). It also paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which came into effect from 1 July 2005.

FERA, in place since 1974, did not succeed in restricting activities such as the expansion of Multinational Corporations. The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant. After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of. FEMA served to make transactions for external trade and easier – transactions involving current account for external trade no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of for the capital.
Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered the company to turn over its secret formula for Coca-Cola and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA). In 1993, the company (along with PepsiCo) returned after the introduction of India's Liberalization policy.
FERA was repealed in 1998 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment.
The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India.It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market. Foreign Exchange Market Whether under FERA or FEMA’s control, the need for the management of foreign exchange is important. It is necessary to keep adequate amount of foreign exchange from Import Substitution to Export Promotion

Main Features

1> Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions.
2> Without general or specific permission of the MA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorised person.
3> Deals in foreign exchange under the current account by an authorised person can be restricted by the Central Government, based on public interest generally.
4> Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions.
5> Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited by him/her from someone living outside India.

Location of Industries

Related provisions were simplified by the policy which was highly cumbersome and had time­ consuming 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 abolished, 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 Abolished

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 development 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 loan amounts into equity shares and hand them over to the banks. The private companies which opted this route (this was a compulsory option) ultimately became a government-owned company as the banks were owned by the Gol­ 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

Disinvestment

Disinvestment is a process of selling government equities in public sector enterprises. Disinvestment in India is seen connected to three major inter­related areas, namely-
(i) A tool of public sector reforms
(ii) A part of the economic reforms started in mid-1991. It has to be done as a complementary part of the 'de­ reservation of industries"
(iii) Initially motivated by the need to raise resources for budgetary allocations

Types of Disinvestment

(i) Token Disinvestment
(ii) Strategic Disinvestment

(i) Token Disinvestment

Disinvestment started in India with a high political caution-in a symbolic way known as the 'token' disinvestment. The general policy was to sell the shares of the PSUs maximum upto the 49 per cent (i.e., maintaining government ownership of the companies). But in practice, shares were sold to the tune of 5-10 per cent only. This phase of disinvestment though brought some extra funds to the government (which were used to fill up the fiscal deficit considering the proceeds as the 'capital receipts') it could not initiate any new element to the PSUs, which could enhance their efficiency. It remained the major criticism of this type of disinvestment, and experts around the world started suggesting the government to go for it in the way that the ownership could be transferred from the government to the private sector. The other hot issue raised by the experts was related to the question of using the proceeds of disinvestment.

(ii) Strategic Disinvestment

In order to make disinvestment a process by which efficiency of the PSUs could be enhanced and the government could de-burden itself of the activities in which the private sector has developed better efficiency (so that the government could concentrate on the areas which have no attraction for the private sector such as social sector support for the poor masses), the government initiated the process of strategic disinvestment. The government classifying the PSUs into 'strategic' and 'non strategic' announced in March 1999 that it will generally reduce its stake (share holding) in the 'non-strategic' public sector enterprises (PSEs) to 26 per cent or below if necessary and in the 'strategic' PSEs (i.e., arms and ammunition; atomic energy and related activities; and railways) it will retain its majority holding

The essence of the strategic disinvestment was-
(i) The minimum shares to be divested will be 51 per cent, and
(ii) the wholesale sale of shares will be done to a 'strategic partner' having international class experience and expertise in the sector.

This form of disinvestment commenced with the Modern Food Industries Ltd. (MFIL). The second PSUs was the BALCO which invited every kind of criticism from the opposition political parties, the Government of Chattisgarh and experts, alike. The other PSUs were CMC Ltd, HTL, IBPL, VSNL, ITDC (13 hotels), Hotel Corporation of India Ltd. (3 hotels), Paradeep Phosphate Ltd (PPL), HZL, IPCL, MUL and Lagan Jute Manufacturing Company Ltd. (LJMC)-a total number of 13 public sector enterprises, were part of the 'strategic sale' or 'strategic disinvestment' of the PSEs.46 The new government at the Centre did put this policy of strategic disinvestment on the hold practically and came up with a new policy in place

Current Disinvestment Policy

The present disinvestment policy was articulated by the UPA-11 under its restructured Common Minimum Prgramme (CMP) in 2009 which is based on the main ideology that:
(i) Citizens have every right to own part of the shares of Public Sector Undertakings
(ii) Public Sector Undertakings are the wealth of the nation and this wealth should rest in the hands of the people, and
(iii) While pursuing disinvestment, the government has to retain majority shareholding, i.e., at least 51 per cent and management control of the PSUs.

action plan

(i) Already listed profitable PSUs (not meeting mandatory shareholding of 10 per cent) are to be made compliant by 'Offer for Sale' by government or by the PSUs through issue of fresh shares or a combination of both;
(ii) Unlisted PSUs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed;
(iii) Follow-on public offers would be considered taking into consideration the needs for capital investment of PSUs, on a case-by-case basis, and government could simultaneously or independently offer a portion of its equity shareholding;
(iv) In all cases of disinvestment, the government would retain at least 51 per cent equity and the management control;
(v) All cases of disinvestment are to be decided on a case-by-case basis; and
(vi) The Department of Disinvestment is to identify PSUs in consultation with respective administrative ministries and submit proposal to government in cases requiring Offer for Sale of Government equity.

DISINVESTMENT – Debate Concerning the Use

In the very next year of disinvestment, there started a debate in the country concerning the suitable use of the proceeds of disinvestment (i.e. the accruing to the government out of the sale of the shares in the PSUs). The debate has by now evolved to a certain stage coming off basically in three phases:

Phase I

This phase could be considered from 1991–2000 in which whatever money the Governments received out of disinvestment were used for fulfilling the budgetary requirements (better say bridging the gap of fiscal deficit).

Phase II

This phase which has a very short span (2000–03) saw two new developments. First, the government started a practice of using the proceeds not only for fulfilling the need of fiscal deficit but used the money for some other good purposes, such as—re-investment in the PSEs, pre-payment of the public debt and social sector. Second, by the early 2000–01 a broad concensus emerged on the issue of the proposal by the then Finance Minister. 49 The proposal regarding the use of proceeds of disinvestment was as given below:

Some portions of the disinvestment proceeds should be used
(i) in the divested PSU itself for upgrading purposes
(ii) in the turn-around of the other PSUs
(iii) in the public debt repayment/pre-payment
(iv) in the social infrastructure (education, healthcare, etc.)
(v) in the rehabilitation of the labour-force (of the divested PSUs) and
(vi) in fulfilling the budgetary requirements.

Phase III

The current policy regarding the use of the disinvestment proceeds are as given below:

1. National Investment Fund

In January 2005, the GoI decided to constitute a ‘National Investment Fund’ (NIF) which has the following salient features:
(i) The proceeds from disinvestment of will be channelised into the NIF which is to be maintained outside the Consolidated Fund of India.
(ii) The corpus of the National Investment Fund will be of a permanent nature.
(iii) The Fund will be professionally managed, to provide sustainable returns without depleting the corpus, by selected Public Sector Mutual Funds (they are – UTI Asset Management Company Ltd.; SBI Funds Management Company Pvt. Ltd.; LIC Mutual Fund Asset Management Company Ltd.).
(iv) 75% of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable PSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.

2. Using the Proceeds Itself

In view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan performance, the GoI, in November 2009, decided to give a one-time exemption to utilisation of proceeds from disinvestment for a period of three years from April 2009 to March 2012, i.e. disinvestment proceeds during this period would be available in full (the proceeds itself and not the income accruing from the NIF!) for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. Now as the Country is facing very difficult economic conditions due to continued financial/economic problems in Europe, impacting the economic growth in India, higher subsidy burden relating to petroleum, food and fertilizers, high interest rate impacting the manufacturing sector, affecting excise collection, falling revenue collection, the exemption cited above has been extended upto March 2013.

Accordingly, fromApril 2009, the disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes of the GoI, namely:
(i) Mahatma Gandhi National Rural Employment Guarantee Scheme
(ii) Indira Awas Yojana
(iii) Rajiv Gandhi Gramin Vidyutikaran Yojana
(iv) Jawaharlal Nehru National Urban Renewal Mission
(v) Accelerated Irrigation Benefits Programme
(vi) Accelerated Power Development Reform Programme