The New Industrial Policy 1991

What the Statement expected from it. That the exemption "will be particularly helpful to the many dynamic small and medium entrepreneurs who have been unnecessarily hampered by the licensing system", and that the economy would become "more competitive, more efficient and modern".

What was preserved, and students forget this. "Industries reserved for the small scale sector will continue to be so reserved." And areas where security and strategic concerns predominate continue to be reserved for the public sector, listed in Annex I.

Automatic clearance for capital goods imports was provided where imported capital goods are required, in cases where foreign exchange availability is ensured through foreign equity, and otherwise within specified value limits.

Head B: foreign investment

Why the Statement wanted it. Foreign investment "would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports", and it says the Government "will therefore welcome foreign investment which is in the interest of the country's industrial development".

The provision, which is the most quoted number in the whole topic. "In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment upto 51% foreign equity in such industries. There shall be no bottlenecks of any kind in this process."

Two details worth stating. These are the industries "generally known as the Appendix I industries", in which companies under the Foreign Exchange Regulation Act had previously been allowed to invest on a discretionary basis. The change, in the Statement's own account, was to make Indian policy on foreign investment transparent: an investor could now read the rule instead of negotiating an exception.

Two supporting measures. Foreign trading companies were to be encouraged to assist Indian export activity, since marketing expertise of that kind was not well developed in India. And a special board was to be appointed to negotiate with the world's largest international manufacturing and marketing firms, so that large investments could be pursued purposefully.

A caution about the figure. Fifty one per cent was the limit for automatic approval in the specified high priority industries in 1991. It is not, and never was, a general cap on foreign investment in India, and the limits have been raised sector by sector many times since. An answer should give 51 per cent as the 1991 measure and say that it has since been liberalised further.

Head C: foreign technology agreements

The problem identified. That the relationship between suppliers and users of technology must be continuous, and becomes difficult where the approval process "includes unnecessary governmental interference on a case to case basis involving endemic delays and fostering uncertainty". The Statement adds that "the Indian entrepreneur has now come of age" and no longer needs bureaucratic clearance of his commercial technology relationships.

The provision. Automatic approval for technology agreements relating to high priority industries within specified parameters, and the same facility for other industries where the agreement does not require the expenditure of free foreign exchange. Indian companies were left "free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgement".

Also removed. Prior clearance for the hiring of foreign technicians and for foreign testing of indigenously developed technologies.

The expected effect, in the Statement's words, is that predictability and independence of action would induce Indian industry to develop indigenous competence to absorb foreign technology efficiently, and that greater competitive pressure would induce more investment in research and development.

Head D: public sector policy

This head is the most balanced part of the Statement, and reproducing that balance earns marks.

What it says in favour of the public sector. "The public sector has been central to our philosophy of development", and public ownership in critical sectors "has played an important role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development serves the common good". It records that key sectors are dominated by "mature public enterprises that have successfully expanded production, opened up new areas of technology and built up a reserve of technical competence".

The problems it identifies. "Insufficient growth in productivity, poor project management, over-manning, lack of continuous technological upgradation, and inadequate attention to R&D and human resource development", together with "a very low rate of return on the capital investment", which inhibited the enterprises' ability to regenerate themselves. It also notes that the original concept of the public sector had been diluted, "the most striking example" being the takeover of sick units from the private sector.

The four decisions.

1. Priority areas for future growth of public enterprises, listed in the Statement as: essential infrastructure goods and services; exploration and exploitation of oil and mineral resources; technology development and building manufacturing capabilities in areas crucial to long term development where private investment is inadequate; and manufacture of products where strategic considerations predominate, such as defence equipment. It adds that the public sector "will not be barred from entering areas not specifically reserved for it".
2. Review of the existing portfolio of public investments "with greater realism", directed at industries based on low technology, small scale and non strategic areas, inefficient and unproductive areas, areas with low or no social consideration or public purpose, and areas where the private sector has developed sufficient expertise and resources.
3. Strengthening those public enterprises which fall in reserved areas, are in high priority areas, or are generating good or reasonable profits.
4. Attending to chronically sick enterprises incurring heavy losses, operating in a competitive market and serving little or no public purpose.

And the direction of the change. The industries reserved for the public sector are listed in Annex I of the Statement, and that list is substantially shorter than Schedule A of the Resolution of 1956, which contained seventeen industries. The exact count in Annex I is not stated here, for the reason given under head A: the compilation held does not reproduce the annexes.

Head E: the MRTP Act

The reasoning. "With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity and competitive advantage in the international market, the interference of the Government through the MRTP Act in investment decisions of large companies has become deleterious in its effects on Indian industrial growth."

The provision. "The pre-entry scrutiny of investment decisions by so called MRTP companies will no longer be required." The Act was to be restructured by eliminating the legal requirement of prior governmental approval for expansion, establishment of new undertakings, merger, amalgamation and takeover, and the appointment of certain directors.

The mechanism, from the Statement's own summary of measures. "The MRTP Act will be amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings", which is what eliminates the requirement of prior approval for the establishment of new undertakings, expansion, merger, amalgamation, takeover and the appointment of directors in certain circumstances. Removing the threshold is the operative step: the restrictions had attached to a company because its assets exceeded a figure, so deleting the figure removes the class.

The change of emphasis. "Instead, emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices", and "the thrust of policy will be more on controlling unfair or restrictive business practices". The Statement adds that the newly empowered MRTP Commission would be authorised to initiate investigations suo motu or on complaints from individual consumers or classes of consumers, and that comprehensive amendments would enable the Commission to exercise punitive and compensatory powers.

This is the doctrinal turn of the whole Statement, and it should be stated as such: policy moved from regulating size to regulating conduct. The completion of that turn was the repeal of the MRTP Act by section 66 of the Competition Act 2002, treated in [Monopoly].

The five heads in one table

A worked example: the same scooter maker, after July 1991

Take the firm from [Industrial Policy Before 1991], which needed five separate approvals to make 60,000 scooters.

• The industrial licence is no longer required, because scooters are not in Annex II, and the abolition applies "irrespective of levels of investment". The firm decides its own capacity.
• MRTP approval is no longer required, because pre entry scrutiny of investment decisions by large houses has gone.
• The foreign technology agreement receives automatic approval within specified parameters, and the firm negotiates the terms on its own commercial judgement.
• Foreign equity up to 51 per cent is available without a bottleneck if the industry is on the high priority list.
• The capital goods import receives automatic clearance where foreign exchange is ensured through foreign equity.

What changes for the buyer. Capacity now follows demand rather than a licence, so the waiting list disappears within a few years. Several firms enter, so the manufacturer must compete on price, quality and service for the first time.

What changes for the firm. It gains freedom and loses protection at the same moment, which is the trade the whole Statement makes. A firm that had prospered because entry was closed now had to be good enough to keep customers who had somewhere else to go.

What beginners get wrong

"Licensing was abolished entirely." For all industries except those specified, on grounds of security and strategic concerns, social reasons, safety, overriding environmental issues, hazardous products and articles of elitist consumption. Annex II listed eighteen.

"Small scale reservation was abolished in 1991." The Statement expressly preserved it. It was dismantled gradually over later years.

"Foreign investment was capped at 51 per cent." Fifty one per cent was the ceiling for automatic approval in specified high priority industries. Higher stakes could be sought, and the limits have been raised many times since.

"The public sector was dismantled." The Statement is emphatic about the public sector's contribution and lists four priority areas for its future growth. What it cut was the reserved list, from seventeen to eight, and it directed a realistic review of the existing portfolio.

"The MRTP Act was repealed in 1991." It was restructured in 1991 by removing pre entry scrutiny. It was repealed by section 66 of the Competition Act 2002.

Quick revision

1. Five heads: A industrial licensing, B foreign investment, C foreign technology agreements, D public sector policy, E MRTP Act.
2. The governing principle: let entrepreneurs make investment decisions on their own commercial judgement, and change the Government's role "from that of only exercising control to one of providing help and guidance".
3. A: licensing abolished for all industries except those specified, irrespective of levels of investment; grounds are security and strategic concerns, social reasons, safety, environment, hazardous products and articles of elitist consumption; the list is Annex II. Small scale reservation preserved; public sector reservation in Annex I.
4. B: approval for direct foreign investment up to 51 per cent equity in high priority industries, with "no bottlenecks of any kind"; previously discretionary in the Appendix I industries; foreign trading companies encouraged for exports; a special board to negotiate with large international firms.
5. C: automatic approval of technology agreements in high priority industries, and elsewhere where no free foreign exchange is required; no prior clearance for foreign technicians or for foreign testing of Indian technology.
6. D: the public sector is praised, and the problems named are low productivity, poor project management, over manning, lack of technological upgradation, weak research and development and a very low rate of return. Four priority areas for its future; a realistic portfolio review; sound enterprises strengthened; chronically sick ones attended to. The reserved list in Annex I is much shorter than Schedule A's seventeen.
7. E: pre entry scrutiny abolished by removing the asset thresholds for MRTP companies and dominant undertakings, so prior approval for expansion, new undertakings, merger, amalgamation, takeover and certain director appointments went. Emphasis shifted to monopolistic, restrictive and unfair trade practices, the Commission to act suo motu or on complaint with punitive and compensatory powers. Repealed by section 66 of the Competition Act 2002.
8. The doctrinal turn: from regulating size to regulating conduct.

Test yourself

1. State the main features of the New Industrial Policy 1991. Under industrial licensing, the licence requirement was abolished for all industries except those specified in Annex II, irrespective of levels of investment, the exceptions resting on security and strategic concerns, social reasons, safety, overriding environmental issues, hazardous products and articles of elitist consumption; reservation for the small scale sector and for the public sector was preserved. Under foreign investment, approval was given for direct foreign investment up to fifty one per cent of equity in high priority industries with no bottlenecks, foreign trading companies were to be encouraged to assist exports, and a special board was to be appointed to negotiate with large international firms. Under foreign technology agreements, automatic approval was given in high priority industries and elsewhere where no free foreign exchange was required, and prior clearance for hiring foreign technicians was removed. Under public sector policy, the reserved list was cut from seventeen industries to eight, four priority areas were identified for future public enterprise, the existing portfolio was to be reviewed with greater realism, sound enterprises strengthened and chronically sick ones attended to. Under the MRTP Act, pre entry scrutiny of the investment decisions of large companies was abolished and the emphasis shifted to controlling monopolistic, restrictive and unfair trade practices.

2. What did the Statement say about industrial licensing, and what exceptions did it preserve? It provided that industrial licensing would henceforth be abolished for all industries except those specified, irrespective of levels of investment, so that abolition became the rule and licensing the exception, and the removal of the reference to investment levels also removed the asset thresholds that had previously governed exemption. The specified industries, listed in Annex II, remained subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues, the manufacture of products of a hazardous nature and articles of elitist consumption. Two reservations were expressly preserved: industries reserved for the small scale sector continued to be so reserved, and areas where security and strategic concerns predominate continued to be reserved for the public sector under Annex I.

3. What did the 1991 Statement provide about foreign investment, and why? It decided to provide approval for direct foreign investment up to fifty one per cent of equity in high priority industries requiring large investments and advanced technology, stating that there would be no bottlenecks of any kind in the process. Its reasons were that foreign investment brings technology transfer, marketing expertise, modern managerial techniques and new possibilities for the promotion of exports, and that in a world marked by the mobility of capital the relationship between domestic and foreign industry needed to be more dynamic. The Statement also emphasised transparency: the same industries had previously been open to investment by companies under the Foreign Exchange Regulation Act on a discretionary case by case basis, and the change substituted a published rule for a negotiated exception. It further provided for encouragement of foreign trading companies to assist Indian exports and for a special board to negotiate with the largest international firms.

4. Summarise the public sector policy of the 1991 Statement. It began by affirming the public sector's contribution, recording that public ownership in critical sectors had prevented the concentration of economic power, reduced regional disparities and ensured that planned development served the common good, and that key sectors were dominated by mature public enterprises that had expanded production and built technical competence. It then identified the problems: insufficient growth in productivity, poor project management, over manning, lack of continuous technological upgradation, inadequate attention to research and development and to human resource development, and a very low rate of return on capital, which prevented the enterprises from regenerating themselves; it noted also the dilution of the original concept, most strikingly by the takeover of sick private units.

It made four decisions: to confine future growth of public enterprise to essential infrastructure, exploration and exploitation of oil and minerals, technology development where private investment is inadequate, and products where strategic considerations predominate; to review the existing portfolio with greater realism, particularly low technology, small scale, non strategic, inefficient and unproductive areas and areas where private expertise had developed; to strengthen enterprises in reserved or high priority areas or generating reasonable profits; and to attend to chronically sick enterprises serving little or no public purpose. The list of industries reserved for the public sector, set out in Annex I, was substantially shorter than the seventeen industries of Schedule A of the Resolution of 1956.

5. What did the Statement do to the MRTP Act, and why is that change described as doctrinal? It provided that the pre entry scrutiny of investment decisions by so called MRTP companies would no longer be required, and that the Act would be restructured by eliminating the legal requirement of prior governmental approval for the expansion of undertakings, the establishment of new undertakings, mergers, amalgamations and takeovers, and the appointment of certain directors. Instead, the emphasis was to be on controlling and regulating monopolistic, restrictive and unfair trade practices. The change is doctrinal because it moves the object of regulation from size to conduct: a firm was no longer to be restrained because it was large, but only because of what it did. That turn was completed eleven years later, when section 66 of the Competition Act 2002 repealed the MRTP Act and replaced it with a law directed at anti competitive agreements, abuse of a dominant position and combinations.

6. "The 1991 Statement was an abandonment of the 1956 Resolution." Comment. It was a substantial departure but not an abandonment. It preserved a reserved list for the public sector, though substantially shorter than the seventeen industries of Schedule A of 1956; it preserved reservation for the small scale sector expressly; it retained compulsory licensing for a specified list of industries on grounds of security, safety, environment and social concern; and it affirmed in terms the public sector's past contribution in preventing the concentration of economic power, reducing regional disparities and serving planned development, identifying four areas for its future growth. What it abandoned was the mechanism: the requirement that an entrepreneur obtain permission to invest, expand or acquire technology. The Statement itself presents the change as a continuation, recording that the winds of change had been present for some time and that licensing had already been moving away from capacity licensing, which is consistent with the direction taken in the Statements of 1980 and the reforms of 1985 and 1986.