New Industrial Policy – 1991
(Turning Point in Indian Economic History)
🔹 Background:
India was facing a severe balance of payments crisis, economic stagnation, and pressure from international institutions like the IMF.
The government led by P.V. Narasimha Rao, with Dr. Manmohan Singh as Finance Minister, announced the New Industrial Policy in July 1991.
This policy liberalized the Indian economy.
🎯 Objective:
To enhance efficiency, attract investment, and accelerate growth by freeing the economy from excessive state control
🌟 Key Features of the 1991 Industrial Policy:
1. De-reservation of Public Sector:
Earlier, many industries were reserved only for public sector. This was now rolled back, except for 5 core areas:
- Arms & Ammunition,
- Atomic Energy,
- Mineral Oils,
- Railways,
- Mining
👉 As of 2025, only two sectors — Atomic Energy and Rail Transport — are reserved.
2. De-licensing:
The cumbersome process of getting a license was abolished for most industries.
👉 Only 4 industries now need licenses due to security or environmental concerns:
- Defence & aerospace electronics,
- Hazardous chemicals,
- Industrial explosives,
- Tobacco products.
🧠 This ended the “License, Permit, Quota Raj” that plagued Indian industry.
3. Disinvestment of Public Sector:
The government began reducing its stake in Public Sector Enterprises (PSEs) to:
- Improve their performance,
- Enhance competition.
4. Liberalisation of Foreign Investment:
For the first time, foreign companies could hold a majority stake in Indian firms:
- Up to 51% FDI in 47 high-priority industries,
- Up to 74% FDI in export trading houses,
- Now, even 100% FDI allowed in many sectors.
5. Foreign Technology Agreements:
Allowed automatic approval for foreign technology collaborations.
6. End of MRTP Restrictions:
The MRTP Act was amended to:
- Remove limits on asset size for big companies,
- Allow easier mergers and expansion.
👉 Replaced later by the Competition Act (2002) to regulate fair practices.
✅ Outcomes of 1991 Policy:
1. End of Licence Raj:
Removed bureaucratic hurdles; simplified procedures.
2. Boost to Private Sector:
The limited role of government opened up new space for private and foreign players.
3. Entry of MNCs:
Multinational companies entered Indian markets, bringing:
- Better tech,
- Cheaper products (like electronics),
- More jobs.
4. Export Promotion:
Special schemes emerged:
- Export-Oriented Units (EOUs)
- Export Processing Zones (EPZs)
- Agri Export Zones
- Special Economic Zones (SEZs)
- National Investment and Manufacturing Zones (NIMZs)
Result: 📈 Exports increased, particularly in IT, pharma, and textiles.
❌ Limitations of Industrial Policies in India:
Even though the policies were transformative, several structural challenges persisted:
1. Stagnation in Manufacturing:
The manufacturing sector’s share in GDP is stuck around 16% since 1991. No big boost, despite liberalisation.
2. Uneven Investment Pattern:
Investments flow into only a few profitable sectors (like IT or telecom), while basic sectors like machine tools, power, or engineering see little interest.
3. Jobless Growth:
Restructuring led to displacement of labour. Automation and outsourcing meant fewer new jobs were created.
4. Lack of Efficiency Incentives:
Focus remained on internal reforms; less on building exports or productivity. Growth became consumption-led, not investment-led.
5. Poor Industrial Location Policy:
Though environmental risks were acknowledged, there’s no clear policy for setting up industries in eco-sensitive or strategic zones.
🧠 Final Takeaway:
| Pre-1991 | Post-1991 |
|---|---|
| Licence Raj | Market Reforms |
| State-led Growth | Private + FDI-led Growth |
| Monopoly Control | Competition & Globalisation |
| Quotas & Permits | Liberalisation & Ease of Doing Business |
