1991 Industrial Policy: Reforms, Privatization, Disinvestment, and IRDA

NEW INDUSTRIAL POLICY 1991 ლ The Congress government led by Sri Narashimha Rao announced the new economic policy and the new industrial policy in conformity on 24th July , 1991. ლ In line with the liberalization move introduced during the 1980s , the new policy radically liberalized the industrial policy itself and de regulated the industrial sector substantially . ლ Thus , the primary objective of this new industrial policy was to " unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic controls " . ლ The other objectives were : a) to build on the gains already experienced b) to correct the distortions involved in the system c) to introduce liberalization measures in order to integrate Indian economy with world economy d) to abolish restrictions on direct foreign investments e) to liberate the indigenous enterprises from the restrictions of MRTP Act f) to maintain a sustained growth in productivity and employment ; and also g) to achieve international competitiveness . ლ To fulfil these objectives , the government introduced a series of initiatives in the new industrial policy , as discussed below : 1. Abolition of Industrial Licensing : 𓆸 In order to liberalize the economy and to bring transparency in the policy , the new policy abolished the system of industrial licensing to all industrial undertakings , irrespective of the level of investment , except for a short list of industries related to security and strategic concerns , social reasons , hazardous chemicals and overriding environmental concerns and items of elitist consumption . 𓆸 There are only 18 industries for which licensing were compulsory . However , of these 18 industries , 13 categories have been removed from the list gradually . 𓆸 Currently only 5 categories ofindustries involving health , strategic and security considerations , needs license Examples include alcohol , cigarettes , hazardous chemicals , electronic , aerospace and all types of defence equipment . 2. Policy regarding Public sector : 𓅍 The 1956 Resolution had reserved 17 industries for the public sector . 𓅍 But , the 1991 industrial policy reduced this number to 8. As of now only 3 industries are reserved for government : a) Atomic Energy b) Mining of Atomic Minerals c) Railway Transport . ❈ The policy also suggested that those public enterprises which are chronically sick and which are unlikely to be turned around well , for the formation of revival / rehabilitation schemes , be referred to the Board for Industrial and Financial Reconstruction ( BIFR ) , or other similar high level institutions created for the purpose , in order to protect the interests of workers likely to be affected by such rehabilitation package. A social security mechanism was considered . 3. MRTP Act : ࿐ Under the Monopolistic and Restrictive Trade Practice Act , all firms with assets above a certain size ( Rs.100 crore since 1985 ) were classified as MRTP firms . ࿐ Such firms were permitted to enter selected industries only and this also on a case by case approval basis . ࿐ In addition to control through industrial licensing , separate approvals were required by such large firms for any investment proposals . ࿐ The New Industrial Policy removed the threshold limit in assets in respect of MRTP companies . 4. Foreign Technology and Investment : ⚘ The New Industrial Policy , prepared a specified list of high technology and high investment priority industries , wherein automatic permission was to be made available for direct foreign investment up to 51 percent foreign equity . ⚘ The industries in which automatic approval was granted included a wide range of industrial activities in the capital goods and metallurgical industries , entertainment electronic , food processing and the services sectors having significant export potential . List was expanded later . 5. Location Policy Liberalized : ☘ Regarding the location of industries , it was mentioned that other than cities of more than 1 million population , no industrial approval is required from the centre , except for industries subject to compulsory licensing . ☘ In cities , with more than 1 million population , industries other than those of non - polluting in nature , will be located outside 25 kms . of its periphery . 6 . Removal of Mandatory Convertible Clause : ✧ In pre liberalization era , there was a mandatory convertible clause in loan agreement with borrower ( industries in this case ) . ✧ As per this clause , banks had right to convert their loan amount into equity whenever they felt so . ✧ This will make them ' owner ' from ' lender ' in that enterprise . ✧ This clause was used by government as an instrument to nationalize private firms . ✧ This was removed under new economic policy . EVOLUATION OF THE NEW INDUSTRIAL POLICY 1991 ♨ The New Industrial Policy 1991 aimed that the role 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 . ♨ It also tried to remove entry barriers and bring about transparency in procedures . This policy virtually ended the ' Licence Permit Raj ' which 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 Indian industrial sector was thus expected to grow faster under the new industrial policy 1991 . PRIVATIZATION ☂ Privatization means the following : a ) The transfer of ownership of property or businesses from a government to a privately owned entity . b ) The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange . When a publicly traded company becomes private , investors canno longer purchase a stake in that company . ☂ One of the main arguments for the privatization of publicly owned operations is the envisaged increase in efficiency that can result from private ownership . ☂ The increased efficiency is thought to come from the greater importance private owners tend to place on profit maximization as compared to government , which tends to be less concerned about profits . Advantages of privatization : a ) It increases the overall efficiency and reduces the bureaucratic culture which is the main culprit because typically in government organizations work happens at its own leisurely pace which results in delay in decision making and therefore reduces the effectiveness and competence of public sector enterprise . b ) As far government is concerned it has also benefits from privatization because majority of governments all over the world has fiscal deficit and by privatization government can reduce fiscal deficit to an extent , however full control is possible only when government controls its unnecessary expenditures . c ) Another advantage of privatization is that once a privatization is done completely there is no interference from political leaders and also one does not need to do undue favour to them which in itself is a big boost when it comes to doing business and increasing profitability . Disadvantages of privatization : a ) Private companies do not care about the society much and their main motive is to earn profits , which is in contrast to goverment companies . The government companies are more into social work . In case of privatizationsociety will not benefit muchas private companies do not have much obligation to do social work . b ) Privatization also affects the employees because in private sector enterprises there is emphasis on performance which indirectly results in work pressure and meeting deadlines or targets and individuals who have been doing work for years without much pressure find it difficult to adjust to new setting and many end up resigning from their service . c ) In privatization there is a risk that it may take decisions of starting a project which results in short term benefits but may not be good from long term perspectives . DISINVESTMENT Disinvestment is defined in the following way : a ) The action of an organization or government selling or liquidating an asset or subsidiary . Also known as " divestiture " . b ) A reduction in capital expenditure , or the decision of a company not to replenish depleted capital goods . Disinvestment takes place because : a ) A company or government organization will divest an asset or subsidiary as a strategic move for the company , planning to put the proceeds from the divestiture to better use that garners a higher return on investment . b ) A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment . If there is a better place to invest , they may deplete certain capital goods and invest in other more profitable assets . Alternatively a company may have to divest unwillingly if it needs cash to sustain operations . Objectives of disinvestment in India ✾ The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed . ✾ In fact , many PSUs traditionally established as pillars of growth had become a burden on the economy . ✾ The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs . ✾ About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs . ✾ Hence , the need for the Government to get rid of these units and to concentrate on care activities was identified . ✾ The Government also took a view that it should move out of non - core businesses , especially the ones where the private sector had now entered in a significant way . ✾ Finally , disinvestment was also seen by the Government to raise funds for meeting general / specific needs . ✾ In this direction , the Government adopted the ' Disinvestment Policy ' , as an active tool to reduce the burden of financing the PSUS . ✾ The following were identified as the main objectives of disinvestment : a) To reduce the financial burden on the Government b) To improve public finances c) To introduce competition and market discipline d) To fund growth e) To encourage wider share of ownership f) To depoliticise non - essential service ✾ Thus , disinvestment is aimed to reduce or mitigate fiscal deficit , bring about a measure of economic stabilisation or to improve efficiency in public enterprises through structural adjustments initiated to improve their efficiency and productivity . ✾ The new Industrial Policy provides that , " In order to raise resources and encourage wide public participation , a part of the government share holding in the public sector would be offered to mutual funds , financial institutions , general public and employees " . ✾ This is a process for disinvestment in the public enterprises . INSURANCE REGULARITY AND DEVELOPMENT AUTHORITY ( IRDA ) ⚜ Insurance Regulatory and Development Authority of India ( IRDAI ) is an autonomous apex statutory body which regulates and develops the insurance industry in India . ⚜ It was constituted by an Act of Government of India , called Insurance Regulatory and Development Authority Act , 1999 . ⚜ The agency operates from its headquarters at Hyderabad , Telangana where it shifted from Delhi in 2001. ⚜ Thus , IRDA regulates the Indian insurance industry to protect the interests of the policyholders and work for the orderly growth of the industry . ⚜ IRDA's Mission - Insurance Regulatory and Development Authority ( IRDA ) Act , 1999 spells out its Mission as : " ... to protect the interests of the policyholders , to regulate , promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto ....... " ⚜ Functions and Duties of IRDA : 𓅛 Section 14 of the IRDA Act , 1999 lays down the duties , powers and functions of IRDA . 𓅛 Some of them are as follows : ☽ Registering and regulating insurance companies ☽ Protecting policyholders ' interests ☽ Licensing and establishing norms for insurance intermediaries ☽ Promoting professional organisations in insurance sector ☽ Specifying financial reporting norms of insurance companies ☽ Regulating investment of policyholders ' funds by insurance companies ☽ Ensuring insurance coverage in rural areas and of vulnerable sections of society . 𓅛 IRDA also batted for a hike in the foreign direct investment ( FDI ) limit to 49 per cent in the insurance sector from the erstwhile 26 per cent . 𓅛 As such , the FDI limit in insurance sector was raised to 49 % in July 2014 . LET US SUM UP ༊˚ The Industrial Policy Resolutions were adopted in Indiafor accelerating the industrial development of the country . ༊˚ The focus was on having a balanced development with the contribution of the private and public sector as well . ༊˚ However , with the adoption of measures for economic reforms in 1991 , the LPG scenario emerged . ༊˚ Privatization was initiated . ༊˚ Privatization means the transfer of ownership of property or businesses from a government to a privately owned entity . ༊˚ Disinvestments were also made . ༊˚ Disinvestment means the action of an organization or government selling or liquidating an asset or subsidiary . ༊˚ In the new scenario , the regulatory organizations had to play an important role . ༊˚ Insurance Regulatory and Development Authority of India ( IRDAI ) is an autonomous apex statutory body which came into being in 1999. ༊˚ IRDAI regulates and develops the insurance industry in India.