New Industrial Policy 1991
🟠 Topic 72: New Industrial Policy 1991
📌 Introduction
The New Industrial Policy (NIP) of 1991 was a landmark shift in India’s economic and industrial strategy, marking a decisive departure from state control and ushering in an era of liberalisation, privatisation, and globalisation. Triggered by the 1991 Balance of Payments (BoP) crisis, the policy dismantled the license-permit raj, opened doors for private and foreign investment, and aimed at integrating India with the global economy.
The NIP is often considered the backbone of the 1991 economic reforms, laying the foundation for market-driven industrial growth in India.
🔹 Background – Why the New Industrial Policy?
Economic Situation in 1991
| Factor | Condition |
|---|---|
| High Fiscal Deficit | ~8.5% of GDP |
| Balance of Payments Crisis | Forex reserves < 3 weeks of imports |
| Low FDI & FPI Inflows | Highly restrictive investment climate |
| High Inflation | ~13% |
| Over-regulation | License Raj stifling growth |
🔔 The old policy framework, based on import substitution, protectionism, and state control, failed to generate sustainable growth.
Objectives of New Industrial Policy 1991
✔️ Promote industrial growth through liberalisation.
✔️ Encourage private sector participation, including foreign investment.
✔️ Improve competitiveness and productivity.
✔️ Remove entry barriers (licenses, permits).
✔️ Facilitate technological upgradation through global partnerships.
✔️ Enhance efficiency of public sector enterprises.
🔹 Key Components of New Industrial Policy 1991
1️⃣ Liberalisation – Dismantling License Raj
- Industrial licensing abolished for all industries except: ✔️ Strategic sectors (defence, atomic energy).
✔️ Hazardous industries. - Private players allowed in all sectors (except reserved list).
- Removed capacity restrictions, allowing businesses to scale freely.
2️⃣ Industrial Delicensing
| Status | Number of Industries |
|---|---|
| Pre-1991 (Compulsory Licensing) | ~800 |
| Post-1991 (Compulsory Licensing) | 18 (now reduced to 4) |
✅ Current licensing required only for:
- Alcohol.
- Cigarettes.
- Hazardous chemicals.
- Defence equipment.
3️⃣ Foreign Direct Investment (FDI) Liberalisation
- FDI allowed up to 51% in key sectors, later raised to 100% in many sectors.
- Simplified approval process through automatic route.
- Encouraged foreign technology collaborations.
| Sector | FDI Cap (1991) | FDI Cap (2023) |
|---|---|---|
| Manufacturing | 51% | 100% |
| Telecom | 49% | 100% |
| Defence | Restricted | 74% (automatic), 100% (govt route) |
4️⃣ Public Sector Reforms – Redefining Role of PSUs
- Disinvestment of PSUs initiated to improve efficiency and reduce fiscal burden.
- Role of PSUs limited to strategic sectors.
| Sector | Status |
|---|---|
| Atomic Energy | Reserved for PSUs |
| Defence Production | Opened to private & foreign players |
| Banking & Insurance | Gradual privatisation and liberalisation |
5️⃣ Encouragement for Small-Scale Industries (SSI)
- Reserved product list for SSI reduced gradually.
- Technology upgradation support provided.
- Credit facilities enhanced through SIDBI and commercial banks.
6️⃣ Trade Policy Reforms – Integration with Global Economy
- Reduction in import tariffs (from over 100% to ~10% over time).
- Abolition of import licensing for most goods.
- Promotion of exports through duty exemptions, SEZs, and EOUs.
- Full convertibility of rupee on current account (1994).
7️⃣ Technology and R&D Promotion
- Liberalised technology imports.
- Allowed automatic technology collaborations with foreign partners.
- Encouraged R&D investments with tax incentives.
🔹 Impact of New Industrial Policy 1991
1️⃣ Industrial Growth Acceleration
| Parameter | Pre-1991 | Post-1991 |
|---|---|---|
| Industrial Growth Rate | 4-5% | 8-10% (early 2000s) |
| FDI Inflows | Negligible | $70+ billion annually (2023) |
| Industrial Licensing | Required for most sectors | Abolished for >90% sectors |
2️⃣ Increased Private Investment
- Private investment drove growth in telecom, automobiles, IT, pharma, etc.
- Corporate sector became globally competitive.
3️⃣ Boost to Exports
- Indian products gained global market access.
- Textiles, gems & jewellery, engineering goods, IT services became export powerhouses.
4️⃣ Rise in Foreign Investment
- India became an attractive FDI destination, especially in manufacturing, IT, retail, and services.
- Enabled integration into global value chains.
5️⃣ Technological Upgradation
- Collaboration with global MNCs brought modern technologies.
- Sectors like automobiles, telecom, pharmaceuticals saw rapid technology transfer.
Case Study – Automobile Sector Transformation
- Pre-1991: Ambassador and Premier Padmini dominated with outdated technology.
- Post-1991: Entry of Maruti-Suzuki, Hyundai, Honda, etc.
- Result: India became a global automobile manufacturing hub.
🔹 Challenges & Criticisms
1️⃣ Uneven Growth
- Services sector outpaced manufacturing, leading to jobless growth.
- Agriculture stagnated, widening rural-urban divide.
2️⃣ Loss of Policy Space
- WTO and FDI rules limited India’s ability to protect domestic industries.
- Small industries faced stiff competition from imports.
3️⃣ Environmental Concerns
- Rapid industrialisation led to: ✔️ Pollution. ✔️ Resource depletion. ✔️ Poor compliance with environmental norms.
4️⃣ Rise of Crony Capitalism
- Privatisation and FDI inflows benefited a select few corporate houses.
- Corporate-political nexus raised governance concerns.
🔹 Comparison – Pre and Post-1991 Industrial Policy
| Parameter | Pre-1991 | Post-1991 |
|---|---|---|
| Private Sector Role | Restricted | Expanded |
| Foreign Investment | Highly restricted | Liberalised |
| Licensing | Mandatory for most | Limited to 4 sectors |
| Global Integration | Minimal | Strongly linked |
| Technology Transfer | Controlled | Freely allowed |
📚 Practice MCQ
1️⃣ The New Industrial Policy 1991 abolished industrial licensing for all sectors except:
- Alcohol
- Hazardous chemicals
- Banking
- Defence production
✅ Options:
(a) 1 and 2 only
(b) 1, 2, and 4 only
(c) 2, 3, and 4 only
(d) 1, 2, 3, and 4
2️⃣ Which of the following is NOT a feature of Privatisation under New Industrial Policy 1991?
✅ Options:
(a) Sale of PSU shares to private sector
(b) Complete withdrawal of government from strategic sectors
(c) Improvement in PSU efficiency through competition
(d) Increased private sector participation in non-core sectors
3️⃣ Which sector received maximum FDI after New Industrial Policy 1991?
✅ Options:
(a) Agriculture
(b) IT & Software
(c) Defence Production
(d) Education
