Let us make an in-depth study of the features and comments of the Industrial Policy of 1991.
Salient Features of the NIP:
The NIP does away with licensing for all major industries, irrespective of the investment level, proposes liberal foreign investment, dispenses with MRTP clearances but curbs unfair trade practices and emphasises technological up-gradation.
While allowing a greater role for the private sector, it vests the Government with necessary control in key areas of industry as per the Industrial Policy Resolution of 1956.
(a) Abolition of licensing procedures:
The NIP has abolished the industrial licensing requirement irrespective of the level of investment in all industries except those 18 industries specified in Annexure II of the ID & R Act (1951). The industries where industrial licensing will be necessary include areas like coal, petroleum, sugar, cigarettes, motor cars, hazardous chemicals, drugs and pharmaceuticals and some luxury items.
(b) Broad branding facility and FMP:
Existing and new industrial units have been provided with the broad branding facility to produce any article so long as no additional investment in plant and machinery is undertaken. The Phased Manufacturing Programme (PMP) will no longer be applicable to new projects.
(c) Modifications in the MRTP Act:
The MRTP Act will be amended to remove the threshold limit of assets in respect of MRTP companies and dominant undertakings. This would eliminate the requirement of prior approval of the Central Government for establishment of new undertakings, merger, amalgamation, takeover and appointment of directors under certain circumstances.
(d) Foreign investment:
While welcoming foreign investment with its attendant advantage of technology transfer, marketing expertise, introduction of modern managerial techniques and export promotion, the NIP provides for automatic approval of foreign equity participation up to 51% in high priority industries which include 34 broad areas like metallurgy, electrical equipment, transformer, food processing, hotel and tourism.
There will be no bottlenecks of any kind in clearing proposals for foreign equity participation. Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. Furthermore, the foreign equity proposals need not necessarily be accompanied by foreign technology agreements. Companies with 51% foreign equity will be encouraged to act as trading houses primarily engaged in exporting activities in order to generate greater passage of Indian goods to export markets.
A specially empowered Board will be constituted to negotiate with large international firms called multinational corporations (MNCs) and encourage direct foreign investment in select areas.
This would be a special programme to attract substantial investment that would provide access to high technology and world markets.
Repatriation of dividends by companies with foreign equity will have to be met through export earnings over a period of time.
(e) Foreign collaboration:
On foreign technology agreements, the Government intends to combine the need for updating technology in high priority areas with incentives for domestic sales and export promotion.
The stress is on foreign technology agreements in high priority areas with incentives for domestic sales and export promotion.
Foreign technology agreements in high priority industries will be given automatic permission up to a lump-sum payment of Rs. 1 crore. In non-high priority areas, automatic permission would be given as per the same guidelines provided no free foreign exchange is required for the payments.
So far as hiring foreign technicians or foreign testing of indigenously developed products, no permission would be required. Payments may be made from blanket permits or free foreign exchange as per RBI guidelines.
(f) Import of capital goods:
The NIP envisages automatic clearances for import of capital goods provided the foreign exchange requirement for such imports is ensured through foreign equity. In addition, with effect from April 1992, such automatic approval would be given provided the cost, insurance and freight (c.i.f.) value of the capital goods to be imported was less than 25% of the total value of plant and machinery and subject to maximum limit of Rs. 2 crores.
(g) Public sector:
The pre-eminent place of public sector will be continued in 8 core areas. These are arms and ammunition, atomic energy, mineral oils, rail transport and mining of coal and minerals.
Though the role of the public sector has been emphasised, the Government has committed to ensure that it runs on sound commercial lines and continues to innovate and maintain its dominant role in strategic areas.
Furthermore, in order to raise resources and encourage wider public participation, a part of the Government’s shareholding in the public sector units would be offered to mutual funds, financial institutions, the public and workers.
Chronically sick PSUs, which are unlikely to turn around, will be referred to the BIFR or other such institutions to formulate a rehabilitation-cum- revival scheme for such units. Also, a social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.
(h) Non-applicability of convertible clause:
In a significant step, the NIP has dispensed with the applicability of the mandatory convertibility clause which enabled financial institutions to convert loans into equity for the term loans extended by financial institutions for new projects.
(i) Reservation for small-scale industries:
The reservation of items for small-scale sector will be continued to promote industrial and agro-industrial employment base. A package for tiny and small-scale sector will be announced by the Government separately.
(j) Locational policy:
In cities of less than 1 million population there will be no need for obtaining industrial approvals from the Central Government except for industries subject to compulsory licensing. In respect of cities with population greater than 1 million, industries (other than those of a non-polluting nature such as electronics, computer software and printing) will be located outside 25 kms. of the periphery, except in prior designated industrial areas.
The New Industrial Policy announced by the Government is a landmark policy in the history of industrial development of the country. It is in line with the current economic philosophy of the Government to liberalise the existing industrial and commercial policies with the objective of increasing efficiency, competitive advantage and modernisation in the economy.
The abolition of the system of licensing in most industrial areas as also the break from the ‘big is evil’ syndrome in terms of the withdrawal of the asset criterion from the MRTP Act are policy initiatives which are likely to boost industrial growth in the country.
Similarly, the raising of the automatic foreign equity participation to 51% in 34 high priority areas will lead to greater foreign portfolio investment and thereby reverse the phenomenon of capital flight from the economy. This—in conjunction with the liberalised foreign technology agreements and doing away with the Phased Manufacturing Programmes (PMP) provisions for new projects—will lead to technology up-gradation and modernisation of the industrial sector.
A novel feature of NIP has been the effort to encourage direct foreign investment. In particular, the constitution of a special empowered Board to negotiate with large international firms for this purpose is a step in the right direction. The Board should perform a promotional role so that domestic firms can derive the benefits of international markets.
By the removal of the convertibility clause on term loan of financial institutions, the new policy will give a fillip to the capital market as the profitability and the consequent rise in dividend payments is likely to promote equity culture in the country.
In view of the drain on the exchequer the large and public sector imposes, the new policy rightly emphasised the need to promote privatisation in the economy. The commitment to run the existing PSUs on commercial lines will, however, have to be watched. However, the revival package for the perpetually sick PSUs needs to be formulated without any delay so that the burden on the Centre’s financial resources can be removed at early as possible.