Rapid growth and diversification has been twin objectives of growth in Indian industries. These two objectives are complementary at times and become conflicting as well. If we concentrate on those industries where we have a comparative advantage, we shall be able to attain rapid industrialization but not diversification. If we pay attention on all industries, we shall diversify at the cost of efficiency. Therefore, we need to make a judicious choice so that we can get dual advantage.
The keynote of the new industrial policy includes liberalization and globalization of the economy. Liberalization means de-regularisation of the industrial sector by cutting down to the minimum administrative interference in its operation so as to allow free competition between market forces. Similarly globalization means making the Indian economy an integral part of the world economy by breaking down to the maximum feasible the barriers to movement of goods, services, capital and technology between India and the rest of the world. The new Industrial Policy fulfils a long-felt demand of the industry to remove licensing for all industries except 18 industries (coal, petroleum, sugar, motor cars, cigarettes, hazardous chemicals, pharmaceuticals and luxury items). It proposes to remove the limit of assets fixed for MRTP Companies and dominant undertakings. Hence business houses intending to float new companies or undertake expansion will not be required to seek clearance from the MRTP Commission. This step will enable MRTP Companies to establish new undertakings, and effect plans of expansions, mergers, amalgamations and takeovers without prior government approval. They shall have the right to appointment of directors. The new Industrial Policy goes all out to woo foreign capital. It provides 51% foreign equity in high priority industries and may raise the limit to 100% in case the entire output is exported. This runs counter to the Nehruvian Model. By opening the gates of the Indian economy wide to the multinationals, the self reliance aspect has been completely ignored. These multinationals with slightest of inconvenience may shift their operations elsewhere leaving the economy in the lurch. Since multinational and private entrepreneurs would prefer most favourable locations for their industries it would further intensify spatial disparity in economic development. This fact has been well collaborated by the letters of intent so far approved. While selling out public sector shares and companies to private investors the Government is not only ignoring the interests of the employees but is transferring the assets at throw away prices. These public sector companies could have been handed over to the working class or autonomous organisations to manage their affairs independently. In the absence of MRTP safeguard private companies may develop monopolistic outlook and may indulge in unfair trade practices. There is also a risk of growing consumerism rather than strengthening the sinews of the economy. Foreign investors may prefer to invest in low priority consumer sector instead of going for high priority sector.
With the state yielding to the private enterprise the social objectives of equity with growth and protecting the interests of the down trodden and semi-skilled labourers would be thrown to the winds. This will be against the cherished goals of our Constitution and may create socio-economic disparity and tension.
The combination of protectionist, import-substitution and Fabian social democratic-inspired policies governed India for sometime after the end of British occupation. The economy was then characterized by extensive regulation, protectionism, and public ownership of large monopolies, pervasive corruption and slow growth. Since 1991, continuing economic liberalization has moved the country towards a market-based economy. By 2008, India had established itself as one of the world’s fastest growing economies. Growth significantly slowed to 6.8% in 2008-09, but subsequently recovered to 7.4% in 2009-10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period. India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2010-11, according to the state Labour Bureau, was 9.8% nationwide. As of 2011, India’s public debt stood at 68.05% of GDP which is highest among the emerging economies. However, inflation remains stubbornly high with 7.55% in August 2012, the highest trade (counting exports and imports) stands at $606.7 billion and is currently the 9th largest in the world. During 2011-12, India’s foreign trade grew by an impressive 30.6% to reach $792.3 billion (Exports-38.33% and Imports-61.67%).
Liberalization collectively a set of sweeping reforms covering industry, trade, investment and the financial sector, alongside rationalization of the tax structure, was principally responsible for transforming India from an economy in a low-growth equilibrium trap as late as the late 1980s to the second fastest growing large economy in the world two decades later. It was extreme crisis that drove change. India, in May 1991, faced a balance of payments crisis and was on the verge of defaulting on its external debt repayment obligations. Any bailout by multilateral institutions was contingent upon liberalizing the economy, internally and externally.
The most conspicuous contribution of industrial liberalization was in promoting domestic entrepreneurship. The change was twofold - existing firms rapidly scaled up, while several new first generation enterprises were started. Trade policy reform was slower compared to industrial reform. As a first step, the lifting of the ban on intermediates and capital goods helped make Indian industry more competitive. This reform was also easier to push through, because the number of existing domestic producers was small to begin with. However, the situation with final products was different because of the large number of domestic producers, mostly belonging to the small-scale sector. Tariff reduction was slower and often unsteady. While peak customs duties have come down from 150% in 1991-92 to about 30% today, they are still very high compared to China and Southeast Asia, where corresponding rates are around 10%. Nevertheless, due to a combination of factors, India's trade profile has changed significantly. In 2010-11 exports were $247 billion and imports $359 billion. They collectively amount to about 30% of GDP, a significant increase from the pre-liberalization era. While India still does not rank among the world’s great trading nations like China, it is undeniably a more open economy today than two decades ago.
The change in investment regime and its impact is equally striking. Foreign Direct Investment (FDI) in India increased from virtually nothing in 1990 to $25 billion in 2010 (it reached a peak of $36 billion in 2009). FDI has made domestic firms more competitive by forcing them to upgrade their technology, which in turn has enabled them to expand to more efficient scales of production. The economic reforms of 1991 have changed India unrecognizably. However, there is still a large unfinished agenda.
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