Open In App

New Industrial Policy : Features & Impact

Last Updated : 11 Jan, 2024
Like Article

In order to review a backward economy, it was necessary for the government to plan for new economic planning. The new economic planning focused on the role of the public sector. The main objective of the new economic planning was: to initiate rapid economic growth in order to raise the standard of living and reduce unemployment, become self-reliant, and set up a strong industrial base providing more emphasis to heavy industries and giving more importance to the socialistic pattern of the economy. So, the Indian economy adopted the system of mixed economy. 

Features of New Industrial Policy

The main feature of the new industrial policy was to create a more competitive environment in the economy and growth of the business. The main features of the policy are as follows:

  • De-licensing Policy: The new policy abolished compulsory licensing for all projects, except for six industries.
  • Decreased role of the Public Sector: The number of industries that were reserved for the public sector was reduced to four, and the remaining industries were open for the private sector.
  • Disinvestment: It means selling a part or whole of the share of the country. Disinvestment was carried out in many public sector and industrial enterprises.
  • Liberalization of foreign capital: The share of foreign equity participation was increased, and foreign direct investment was permitted.
  • Liberal policy for technical collaboration: Automatic permission was granted for technology agreements with foreign companies.
  • Setting up of Foreign Investment Promotion Board (FIBP): To promote and channel foreign investment in India, FIBP was set up.
  • De-reservation under small industries: De-reservation of many goods produced in small-scale industries was done.

As a part of economic reform, the government of India announced a new industrial policy in July 1991, which sought to liberate the industry from the shackles of the licensing system (liberalization). It drastically reduced the role of the public sector (privatization) and encouraged foreign private participation in industrial development (globalization).

1. Liberalization

Liberalization refers to the removal of entry and restriction on the private sector enterprise. It is any method of how a state raises its limitations on some private individual investors. For developing countries, liberalization has opened economic borders to foreign companies and investments. The main aim of liberalization was to lure MNCs and foreign investors to invest and expand in India. Earlier, investors have to face difficulties to enter countries with many barriers. These barriers included tax laws, foreign investment restrictions, legal issues, etc. The Indian business industries have been liberalized in the following ways:

  • Abolition of licensing requirements in most of the industries
  • No restriction on the expansion or contraction of business activities
  • Removal of restrictions on the movement of goods and services
  • Freedom in fixing the prices of goods and services
  • Reduction in tax rates and the unnecessary restrictions were uplifted 
  • Imports and Exports procedures were simplified
  • The process to attract MNCs, foreign capital and technology were also simplified and liberalized.

2. Privatization

Privatization means transfer of ownership, management and control of the public sector to the private sector. India went for privatization in the historic reforms budget of 1991, also known as the ‘New Economic Policy or LPG Policy’. The main aim of privatization was the removal of restrictions on the public sector and to enhance the role of the private sector. For privatization, the government of India initiated the following majors:

  • Disinvestment: Disinvestment means selling a part or the whole share of a public sector undertaking. If the private sector acquires more than 51 percent share of the public sector, then it would result in the transfer of ownership of the public sector to the private sector.
  • Revival of sick PSUs: The government of India set up the Board of Industrial and Financial Reconstruction(BIFR) to revive sick public sector units.

3. Globalization

Globalization means integrating the national economy with the world economy through removal of barriers on international trade and capital movement. Till 1991, the Indian government strictly regulated the import license through licensing of imports, tariff restrictions, and quantitative restrictions, but the new economic policy aimed to liberalize foreign trade through the policy of globalization. 

Various steps were taken by the Indian government in the direction of globalization:

  • Import liberalization through reduction in import tariffs and removal of quantitative restrictions on imports
  • Export promotions through wide range of incentives
  • Simplifications of export and import procedures 
  • Liberalization of norms for the entry of MNCs and foreign direct investment
  • Liberalization of foreign exchange management regime
  • Improvement of trade infrastructure, like port facility
  • More freedom to Foreign Institutional Investors to participate in the money and capital markets.

With Globalization, the interaction and interdependence amongst the various nations was increased. Whole global economy was integrated and it became easy to serve customers from different geographical locations, which increased the standard of living of people.

Impact of Industrial Policy on Business

The policy of LPG made a significant impact on the working of businesses and industries. The impact of changes in the government policies is as follows:

  • Increasing competition: Before economic reforms, the Indian firms were enjoying protection due to licensing system and other restrictions, but after reform, entry of foreign firms was liberalized which gave tough competition to the Indian firms. E.g. The entry of Coca-Cola ruined the market of the existing Indian brands.
  • More demanding customers: Increased competition in the market also increased the choice of customers. Today customers have become more demanding because they are well informed. Due to this, the manufacturer tries to satisfy customers’ expectations. This has created a buyers market in the country.
  • Rapidly changing technological environment: Increased competition made the Indian firm compulsory to adopt the latest technology providing a competitive market and helping in producing a better quality product at a lower cost. E.g. Handlooms industries shifted to power looms in order to adopt new technology.
  • Necessity for change: Before economic reform the business environment was stable and business policy use continued for a long period but after economic reform, LPG policy made the business environment unstable. Every enterprise has to continuously modify its operations and policies. E.g. Mobile phones these days come up with different features from time to time.
  • Need for developing human resources: Indian firms have suffered a lot due to a shortage of trained employees. In this dynamic environment, it is not possible to achieve success with unskilled employees. Therefore, the firms have realized the need to develop human resources. E.g. Organizations trained their employees to work from home and came up with various management tools in this Covid-19 era. Here, the human resource was developed.
  • Market Orientation: Earlier, the firms used to follow the selling concept. It means they produce first and then go to market for sale. However, with an increase in competition, the firm adopted the marketing concept. It means the study and analyzing the need of the market, and then producing goods to satisfy customers effectively. E.g. Organizations carry out various surveys in order to collect the data about likes and dislikes of customers and then use the data collected for production or service development. 

It can be concluded that New Industrial Policy( Economic Reforms)have positively affected the Indian economy. Indian firms have changed their strategy and have become customer-oriented. They focus more on customers’ needs and satisfaction. The entry of MNCs has provided employment and increased the foreign capital investments in India.

Like Article
Suggest improvement
Share your thoughts in the comments

Similar Reads