Jamia hamdard institute of legal

Studies and research (hilsr)

ACADEMIC SESSION: 2018-19

ECONOMICS-II

TOPIC: ‘INDUSTRIAL POLICY RESOLUTION-1956 AND 1991’

Submitted To: Submitted By:

Dr. Sadaf Fatima Shahnawaz

B.A. LL.B.
2nd Semester
Roll No: 12
Section: B

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 ACKNOWLEDGEMENT

It feels great pleasure in submitting this research project to Dr. Sadaf Fatima
without whose guidance this project would not have been completed successfully.
I would like to express my heartfelt gratitude towards my parents and friends
who guided me and helped me at every possible step.

SHAHNAWAZ
Roll. No. 12

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 INDEX

 Industrial Policy (Introduction)

 Objectives
 Major Industrial Policy Statements

 Industrial Policy Resolution 1956

 Objectives of 1956 Policy
 Features
 Schedule A
 Schedule B

 Industrial Policy Resolution 1991

Industrial Licensing Policy
Foreign Investment
Foreign Technology Agreements
Public Sector Policy
Monopolistic and Restrictive Trade Practices Act [MRTP Act]

 Conclusion

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 INDUSTRIAL POLICY

Industrial policy means rules, regulations, principles policies and procedures laid down by
the government for regulating, developing and controlling industrial undertaking in the
country. It prescribes the respective roles of the public, private, joint and cooperative
sectors for the development of industries. Naturally, the industrial development of a
country will be shaped, guided, fostered, regulated and controlled by its industrial policy.
Industrial policy is an important document. It lays down a wide canvas and sets the tone
for implementation of government’s regulatory and promotional roles. It is probably the
most important document which indicates the relationship between the government and
business.
The industrial policy does not have a legal sanction and as such its violation cannot be
challenged in the court. But it has justification for existence. There is a moral commitment
on the part of the government to implement the policy in word and spirit.

OBJECTIVES
 Achieving a socialistic pattern of society

 Achieving industrial development

 Achieving a self sustained economy

 Alleviating poverty

 Updating technology and modernization of industry

 Liberalization and globalization of economy

 Preventing wasteful uses of scarce resources

 Giving guidelines for importing foreign capital

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INDUSTRIAL POLICIES
 Industrial Policy Resolution Of 1948

 Industrial Policy Resolution Of 1956

 Industrial Policy Resolution Of 1973

 Industrial Policy Resolution Of 1977

 Industrial Policy Resolution Of 1980

 Industrial Policy Resolution Of 1991

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 INDUSTRIAL POLICY RESOLUTION 1956

The setting was favourable for the Industrial Policy 1956. The country gave itself a
Constitution which set out certain directive principles. Planning began to be implemented
on an organised basis and the First Five Year Plan was already completed. Parliament
accepted the socialist pattern of society as the objective of social and economic policy. The
country’s resources also increased and the government’s drive in expanding the public
sector as a means for rapid economic development to countervail economic concentration
and removal of regional economic disparities gained momentum. These changes and
developments necessitated a policy and then it was announced on 30th April, 1956.

OBJECTIVES OF 1956 POLICY:

 To accelerate the rate of economic growth and to speed up industrialization

 To develop heavy industries and machine making industries

 To expand the public sector

 To build up a large and growing private sector

 To provide opportunities for gainful employment and improving living standards

and working conditions of the people

 To reduce disparities in income and wealth

 To prevent private monopolies and the concentration of economic power in different

fields in the hands of small numbers of individuals

 To expand the cottage, village and small-scale industries

 To achieve balanced industrial development and other socio-economic objectives

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FEATURES:
In the 1956 policy, industries were classified into three categories. These categories will
inevitably overlap to some extent and too great a rigidity might defeat the purpose in view.
But the basic principles and objectives have always to be kept in view as the general
directions hereafter referred to be followed. It should also be remembered that it is always
open to the State to undertake any type of industrial production.

The first category included the industries the future development of which was the
exclusive responsibility of the State. The second category consisted of industries, which
would be progressively State-owned and in which the State would, therefore, generally
take the initiative in establishing new undertakings, but in which private enterprise would
also be expected to supplement the effort of the State. The third category included all the
remaining industries, and their future development was, in general, left to the initiative and
enterprise of the private sector.

Industries in the first category have been listed in Schedule A of this Resolution. All new
units in these industries, save where their establishment in the private sector has already
been approved, were set up only by the State. This did not preclude the expansion of the
existing privately owned units, or the possibility of the State securing the co-operation of
private enterprise in the establishment of new units when the national interests so required.
Railways and air transport, arms and ammunition and atomic energy were, however, be
developed as Central Government monopolies. Whenever co-operation with private
enterprise was necessary, the State ensured, either through majority participation in the
capital or otherwise, that it had the requisite powers to guide the policy and control the
operations of the undertakings.

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 SCHEDULE A
1. Arms and ammunition and allied items of defence equipments.
2. Atomic energy.
3. Iron and Steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining,
for machinery tool manufacture and for such other basic industries as may be
specified by the Central Government.
6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Mineral oils.
9. Mining of iron ore, manganese ore, chrome-ore, gypsum, sulphur, gold and
diamond.
10. Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram.
11. Minerals specified in the Schedule to the Atomic Energy (Control of
production and Use) Order, 1953.
12. Aircraft.
13. Air transport.
14. Railway transport.
15. Shipbuilding.
16. Telephones and telephones cables, telegraph and wireless apparatus
(excluding radio receiving sets).
17. Generation and distribution of electricity.

Industries in the second category were those listed in Schedule B. With a view to
accelerating their future development, the State increasingly established new undertakings
in these industries. At the same time, private enterprise also had the opportunity to develop
in this field, either on its own or with State participation.

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 SCHEDULE B
1. All other minerals except ‘minor minerals’ as defined in Section 3 of the
Minerals Concession Rules 1949.
2. Aluminium and other non-ferrous metals not included in Schedule A.
3. Machine tools.
4. Ferro-alloys and tool steels.
5. Basic and intermediate products required by chemical industries such as the
manufacture of drugs, dye-stuffs and plastics.
6. Antibiotics and other essential drugs.
7. Fertilizers
8. Synthetic rubber.
9. Carbonisation of coal.
10. Chemical pulp.
11. Road transport.
12. Sea transport.

All the remaining industries fell in the third category, and it was expected that their
development would be undertaken ordinarily through the initiative and enterprise of the
private sector, though it was open to the State to start any industry even in this category. It
was the policy of the State of facilitate and encourage the development of these industries
in the private sector, in accordance with the programmes formulated in successive Five
Year Plans, by ensuring the development of transport, power and other services, and by
appropriate fiscal and other measures. The State continued to foster institutions to provide
financial aid to these industries, and special assistance was given to enterprises organised
on co-operative lines for industrial and agricultural purposes. In suitable cases, the State
also granted financial assistance to the private sector. Such assistance, especially when the
amount involved was substantial, was preferably be in the form of participation in equity
capital, though it might also be in part, in the form of debenture capital.

The division of industries into separate categories did not imply that they were being
placed in watertight compartments. Inevitably, there was not only an area of overlapping
but also a great deal of dovetailing between industries in the private and the public sectors.
It was open to the State to start any industry not included in Schedule A and Schedule B
when the needs of planning so required or there were other important reasons for it. In

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appropriate cases, privately owned units might be permitted to produce an item falling
within Schedule A for meeting their own requirements or as by-products.

There was ordinarily no bar to small privately owned units undertaking production, such
as the making of launches and other light craft, generation for power for local needs and
small scale mining. Further, heavy industries in the public sector might obtain some of
their requirements of lighter components from the private sector, while the private sector
in turn would rely for many of its needs on the public sector. The same principle would
apply with even greater force to the relationship between large scale and small scale
industries.

Merits and demerits apart, the 1956 policy continued to constitute the basic economic
policy for a long time. This fact has been confirmed in all the Five Year Plans.

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 INDUSTRIAL POLICY RESOLUTION 1991

Policy measures initiated in the first three decades since Independence facilitated the
establishment of basic industries and establishing up of a broad based infrastructure in the
country. The Seventh Five Year Plan (1985-1900), recognized the need for consolidation of
these strengths and initiating policy measures to prepare the Indian industry to respond
effectively to emerging challenges. A number of measures were initiated towards
technological and managerial modernization to improve productivity, quality and to reduce
cost of production. The public sector was freed from a number of constraints and was
provided with greater autonomy. There was some progress in the process of deregulation
during the 1980s. In 1988, all industries, excepting 26 industries specified in the negative
list, were exempted from licensing. The automotive industry, cement, cotton spinning, food
processing and polyester filament yarn industries witnessed modernization and expanded
scales of production during the 1980s.
With a view to promote industrialization of backward areas in the country, the Government
of India announced in June, 1988 the Growth Centre Scheme under which 71 Growth
Centers were proposed to be set up throughout the country. Growth centers were to be
endowed with basic infrastructure facilities such as power, water, telecommunications and
banking to enable them to attract industries.

The Industrial Policy Resolution of 1991 stated that “the Government will continue to
pursue a sound policy framework encompassing encouragement of entrepreneurship,
development of indigenous technology through investment in research and development,
bringing in new technology, dismantling of the regulatory system, development of the
capital markets and increased competitiveness for the benefit of common man". It further
added that "the spread of industrialization to backward areas of the country will be actively
promoted through appropriate incentives, institutions and infrastructure investments”.

The objective of the Industrial Policy Resolution - 1991 was to maintain sustained growth
in productivity, enhance gainful employment and achieve optimal utilization of human
resources, to attain international competitiveness, and to transform India into a major
partner and player in the global arena. Quite clearly, the focus of the policy was to
unshackle the Indian industry from bureaucratic controls.

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This called for a number of far-reaching reforms. In pursuit of the above objectives,
Government had decided to take a series of initiatives in respect of the policies relating to
the following areas.

A. Industrial Licensing.
B. Foreign Investment.
C. Foreign Technology Agreements.
D. Public Sector Policy.
E. MRTP Act.

A. Industrial Licensing Policy

Industrial Licensing is governed by the Industries (Development & Regulation) Act, 1951.
The Industrial Policy Resolution of 1956 identified the following three categories of
industries:

 Those that would be reserved for development in the public sector,

 Those that would be permitted for development through private enterprise with or
without State participation, and
 Those in which investment initiatives would ordinarily emanate from private
entrepreneurs.

In order to achieve the objectives of the strategy for the industrial sector for the 1991s and
beyond it was necessary to make a number of changes in the system of industrial
approvals.

Industrial Licensing was abolished for all projects except for a short list of industries
related to security and strategic concerns, social reasons, hazardous chemicals and over-
riding environmental reasons, and items of etilist consumption (list attached as Annexure
II). Industries reserved for the small scale sector continued to be so reserved. Areas where
security and strategic concerns predominated, continued to be reserved for the public
sector. (List attached as Annexure I).The exemption from licensing was particularly
helpful to the many dynamic small and medium entrepreneurs who have been
unnecessarily hampered by the licensing system.

B. Foreign Investment
While freeing Indian industry from official controls, opportunities for promoting foreign
investment in India should have been fully exploited. In order to invite foreign investment
in high priority industries, requiring large investments and advanced technology, it had

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been decided to provide approval for direct foreign investment upto 51% foreign equity in
such industries. There were no bottlenecks of any kind in this process. This group of
industries had generally been known as the "Appendix-I Industries" and there were areas
in which FERA companies had already been allowed to invest on a discretionary basis.
This change would go a long way in making Indian policy on foreign investment
transparent in India.

C. Foreign Technology Agreements

With a view to injecting the desired level of technological dynamism in Indian industry,
Government provided automatic approval for technology agreements related to high
priority industries within specified parameters. Similar facilities were available for other
industries as well if such agreements did not require the expenditure of free foreign
exchange. Indian companies were free to negotiate the terms of technology transfer with
their foreign counterparts according to their own commercial judgement.

i. Automatic permission was given for foreign technology agreements in high

priority industries (Annexure III) up to a lump sum payment of Rs. 1 crore 5%
royalty for modestic sales and 8% for exports subject to total payments of 8% of
sales over a 10 year period from date of agreement or 7 years from commencement
of production. The prescribed royalty rates are net of taxes and will be calculated
according to standard procedures.
ii. In respect of industries other than those in Annexure III, automatic permission was
given subject to the same guidelines as above if no free foreign exchange is required
for any payments.
iii. All other proposals needed specific approval under the general procedures in
force.

D. Public Sector Policy

It was time that the Government adopted a new approach to public enterprises. A greater
commitment was needed to the support public enterprises which are essential for the
operation of the industrial economy. Measures were needed to make these enterprises
more growth oriented and technically dynamic. Units which may be faltering at present
but were potentially viable were to be structured and given a new lease of life. The priority
areas for growth of public were;

 Essential infrastructure goods and services.

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  Exploration and exploitation of oil and mineral resources.
 Technology development and building of manufacturing capabilities in areas which
are crucial in the long term development of the economy and where private sector
investment is inadequate
 Manufacture of products where strategic considerations predominate such as
defence equipment

At the same time the public sector was not to be barred from entering areas not specifically
reserved for it.

Government was to strengthen those public enterprises which fell in the reserved areas of
operation or were in high priority areas or were generating good or reasonable profits.
Such enterprises were provided a much greater degree of management autonomy through
the system of memoranda of understanding. Competition was also induced in these areas
by inviting private sector participation.

E. Monopolies and Restrictive Trade Practices Act (MRTP Act)

The principal objectives sought to be achieved through the MRTP Act are as follows:-

i. Prevention of concentration of economic power to the common detriment,

control of monopolies.
ii. Prohibition of monopolies and restrictive and unfair trade practices.

The MRTP Act became effective in June 1970. With the emphasis placed on productivity
in the Sixth Plan, major amendments to the MRTP Act were carried out in 1982 and 1984
in order to remove impediments to industrial growth and expansion. This process of
change was given a new momentum in 1985 by an increase of the threshold limit of
assets. 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 decision of large companies had become deleterious in its effects on Indian
industrial growth. The pre-entry scrutiny of investment decisions by so called MRTP
companies as no longer required. Instead, emphasis was on controlling and regulating
monopolistic, restrictive and unfair trade practices rather than making it expansion,
establishment of new undertakings, merger, amalgamation and takeover and appointment
of certain directors. Simultaneously, provisions of the MRTP Act were strengthened in
order to enable the MRTP Commission to take appropriate action in respect of the
monopolistic, restrictive and unfair trade practices.

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 CONCLUSION

The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution
of 1956 which had as its objective the acceleration of the rate of economic growth and the
speeding up of industrialization as a means of achieving a socialist pattern of society. In
1956, capital was scarce and the base of entrepreneurship not strong enough. Hence,
the 1956 Industrial policy Resolution gave primacy to the role of the State to assume a
predominant and direct responsibility for industrial development.

The Industrial Policy Statement of 1973, inter alia, identified high priority industries
where investment from large industrial houses and foreign companies would be permitted.
The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on the role
of small scale, tiny and cottage industries. The Industrial Policy Statement of 1980 focused
attention on the need for promoting competition in the domestic market, technological
upgradation and modernisation. The policy laid the foundation for an increasingly
competitive export base and for encouraging foreign investment in high technology areas.
This found expression in the Sixth Five-Year Plan which bore the distinct stamp of Smt.
Indira Gandhi. It was Smt. Indira Gandhi who emphasised the need for productivity to be
the central concern in all economic and production activities.

These policies created a climate for rapid industrial growth in the country. Thus on the eve
of the Seventh Five Year Plan, a board-based infrastructure had been built up. Basic
industries had been established. A high degree of self-reliance in a large number of items-
raw materials, intermediates, and finished goods had been achieved. New growth centers
of industrial activity had emerged, as had a new generation of entrepreneurs.

The accent was on opening the domestic market to increased competition and readying our
industry to stand on its own in the face of international competition. The public sector was
freed from a number of constraints and given a larger measure of autonomy. The
technological and managerial modernisation of industry was pursued as the key instrument
for increasing productivity and improving our competitiveness in the world. The net result
of all these changes was that Indian industry grew by an impressive average annual growth
rate of 8.5% in the Seventh Plan Period.

The ever feeling need for globalization was recognized. Government was pledged to
launching a reinvigorated struggle for social and economic justice, to end poverty and

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unemployment and to build a modern, democratic, socialist, prosperous and forward-
looking India. Such a society could be built if India grows as part of the world economy
and not in isolation. This called for opening up of the economy in every sense of the word,
which later proved to be a step taken in right direction. The 1991 Policy Statement was
indeed a historic one with far reaching consequences. Increased FDI limit through the
policy of liberalization acted in the favor of the nation with many other economies
recognizing India’s worth and potential. This facilitated easy transfer of technology across
borders. On the other hand, Sick Units were given attention and transfer of sick units to
BIFR helped improve the performance of the government undertakings. The post
liberalization era witnessed major policy changes as envisaged in the Statement on
Industrial Policy, 1991 - heralding the process of non-discrimination between the public
and private sectors with those reserved for PSUs and SSIs steadily reduced in number and
opening up the sector almost whole-scale for direct/joint venture foreign investment.

It is important to note that the earlier system of phased manufacturing, run on an

administrative case-by-case basis, was made non-applicable for new projects. On
’technological self-reliance,’ the Statement mentioned the need for the priority area PSUs
to undertake ’technology development and building of manufacturing capabilities in areas
which are crucial in the long term economic development and where private sector
investment is inadequate.

But the most important change was change in mindset. The new policy was a welcome
change. There was a sense of trust in the market and economy, and it was because of this
trust that such radical measures of liberalization and privatization could be taken. There
was a greater reliance in the market and a need to modernize, which eventually bore the
fruits of success. Our economy which stands today is the testimony of the vision of then
leaders.

Industrial development is indeed a complex process in itself which involves the effective
interaction and co-operation of all sections of society. If the objectives of the Industrial
Policy of accelerating the pace of industrial growth, rapid increase in levels of
employment, productivity and income of industrial workers and a wide dispersal of small
and village industries are to be achieved, the willing co-operation of industrial worker,
trade unions, managers, entrepreneurs, financial institutions and various governmental
authorities responsible for implementing schemes of assistance is essential.

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