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MEC-105: Indian Economic Policy

MEC-105: Indian Economic Policy

IGNOU Solved Assignment Solution for 2021-22

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Assignment Code: MEC-105/AST/2021-22

Course Code: MEC-105

Assignment Name: Indian Economic Policy

Year: 2021-2022 (July 2021 and January 2022)

Verification Status: Verified by Professor

Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in about 700 words each) those in Section B carry 12 marks each (to be answered in about 500 words each).




1. “Indian economic environment has undergone dramatic changes with a shift in development strategy”- In the light of this statement evaluate the series of economic reforms introduced since 1991.

Ans) During the economic reform process, the New Economic Policy (NEP) represented neoliberalism. The Industrial Policy, introduced by the government in 1991, offered the foundation for economic reforms. 'Continuity with change' was the company's primary principle. The main goals can be summarised as follows:

  1. To liberate the Indian industrial economy from the burdens of excessive bureaucratic restrictions.

  2. To liberalise the Indian economy in order to integrate it with the global economy.

  3. to loosen limits on foreign direct investment (FDI) and the Monopolies and Restrictive Trade Practices (MRTP) Act's prohibitions on domestic entrepreneurs.

  4. to weaken the monopoly of public-sector enterprises and foster fresh private-sector competition.


The following steps were part of a liberal policy adopted on both the domestic and international fronts to combat the financial crisis in the early 1990s:

  1. Except for 18 industries related to security and strategic problems, social sectors, hazardous chemicals, environmental grounds, and products of elite consumption industries, all industrial licencing was eliminated. (At the moment, just five industries require licensure.)

  2. Since the 1990s, reservations of Small-scale industry (SSI) items have been increasingly lowered in order to foster local and worldwide competitiveness. Currently, there are only 21 goods that are subject to reserve, down from 836 in 1996.

  3. The MRTP Act was changed to account for the removal of pre-entry limitations, economic power concentration, and asset threshold limits for dominating undertakings and MRTP entities. (The MRTP Act was subsequently repealed, and the MRTP Commission was disbanded.)


Any procedure that diminishes the state's/public sector's involvement in a country's economic activity is referred to as privatisation. In contrast to the post-independence push for government expansion, the 1991 economic reforms recognised the private sector as the engine of growth. Policies were created to increase the private sector's role in the development process. In a mixed economy like India, privatisation can take numerous forms, including:

  1. Total denationalisation, which entails the transfer of all state-owned economic assets to private ownership. In India, Allwyn Nissan, Mangalore Chemical and Fertilisers, and Maharashtra Scooters were among the companies that were sold to private investors.

  2. Joint venture, which entails the partial induction of private ownership in a public sector firm from 25% to 50% or even more, depending on the nature of the enterprise and state policy in this regard. The primary goal is to increase a company's efficiency, productivity, and profitability.

  3. A worker's co-operative is a type of privatisation in which a losing public-sector enterprise is transferred to the workers. The Indian Coffee Houses, which are administered by a chain of worker cooperative societies and were retained from British administration after independence, are a typical illustration of the Indian instance. However, due to the need for capital for company expansion, it did not play a substantial part in economic reforms.

  4. Token privatisation, often known as deficit privatisation or disinvestment, refers to the sale of 5-10% of a profit-making public sector enterprise in the open market in order to raise funds to eliminate budget deficits.


Globalisation is the process of integrating the various economies of the world without creating any barriers in the flow of goods and services, technology, capital and labour/human capital. It involves four components:

  1. Reduction of trade barriers in the form of custom duties/quotas/quantitative restrictions so as to permit free flow of goods and services in different economies.

  2. Creation of an environment in which free flow of capital (or investment) can take place between nation states.

  3. Creation of an enabling environment for the free flow of technology; and

  4. From the viewpoint of developing countries, creation of an environment in which free flow of labour or human resources can take place among different countries of the world.

Essentially, globalisation is an extension of the process of liberalisation in the international domain. It therefore signifies internationalisation plus liberalisation. In India, the process of globalisation began with the adoption of LPG model during economic reforms since 1990s. Some of the key features in this context are:

  1. Its key impact was seen in India’s service sector particularly in fast-paced growth of industries like information technology (IT), information technology enabled services (ITES), outsourcing, telecommunications, tourism, real estate, transport, banking, insurance, entertainment, etc.

  2. Inducement to foreign investment flows (FDIs and FIIs) has brought about efficiency, competition, profitability and global standards in productivity and quality of economic goods. Mergers, joint-ventures, PPPs, and contracting to foreign players have accelerated the development process in the Indian economy.

  3. The two decades of economic-reforms have seen an increase in the rate of exports, migration (domestic and international), etc.


2. State the various dimensions of deterioration in the quality of employment in India. Also examine the policy implications of declining rate of women’s participation in the workforce.

Ans) As per the latest data available for 2004-05, the employment in organised sector constituted only 6 per cent of the total employment. The growth in organised sector employment has taken place at a slow rate and this has led to informalisation of the vast labour force of India. This is evident if we see the data in the above table.

These estimates explain the wide disparity in the employment of workers in the formal and informal sectors of the economy, which is a serious matter concerning the quality of employment. While the trends in informal sector employment have remained more or less the same during both the periods, however the formal sector has been increasingly employing informal workers from 20.5 millions in 1999-2000 to 29.1 millions in 2004-05. Thus there has been informalisation of employment not only in the informal sectors of Indian economy but also in the formal sectors as well.

Female employment constitutes about 96 per cent in the informal sector itself as against 91 per cent for males. In urban areas, the per centage of organised sector employees is around 65-70 per cent.

Impact of Economic Reforms on Labour

In a poor country like India, being employed itself does not ensure a decent standard of living. So in the efforts to raise the level of employment vis-à-vis the growth of labour force, the quality of employment very often gets compromised.

In recent years, some serious questions have been raised regarding the nature and quality of employment in India. The quality of employment can be judged by evaluating a variety of indicators such as :- productivity of employment, trends in self-employment and casual workers, earnings/wage-rates of self-employed and casual workers, proportion of workers in organised and unorganised workers, etc.

Self-employed registered a large increase in their numbers and casual labour a decline during the period 1999-00 to 2004-05. During this period a total of 83.7 per cent of additional workers numbering 49.75 million were added to the ranks of self-employed. From this, 27.10 million were self-employed in agriculture and 25.06 million in rural areas. The latest data also proves this fact.

Impact on Productivity and Real Wage Earnings

Productivity of employment

In 1999-2000, the per centage of people below poverty line was high at 26.1 per cent whereas the unemployment rate was 2.23 per cent. This shows that of the total employed persons, about 23.87 per cent fall under the category of working poor. The low productivity of employment was mainly a result of low educational and skill levels of the workers which could not be matched with the requisite jobs which emphasises the need to bring about professionalisation in education sector. A planned link between education and employment has to be created.

Productivity of Employment

In a developing country like India being employed does not necessarily ensure a decent level of living. The number of working poor increased from 98 million in 1999-2000 to 94 million in 2004-05. The self-employed worker account for nearly 48 per cent of the working poor followed by casual labour (44 per cent) in 2004-05. However, among the casual labourers, nearly 32 per cent were poor as compared to 17.47 per cent in the category of self-employed. The proportion of poor, among all the three categories of working poor was least in the case of regularly employed workers.

It is significant to note that the incidence of poverty was higher among urban workers across the three categories. Similar was the case of females with a smaller difference.

Obviously, the major problem relates to that of the working poor as the productivity of employment is very low. The low productivity of employment is mainly because of low educational and skill levels of the workers. About 44 per cent of all workers were illiterate and another 22.7 per cent workers have schooling upto primary level.

Proportion of Workers Engaged in Regular and Casual Labour

Another dimension of deterioration in the quality of employment can be examined in terms of low earning, irregularity and uncertainty of work availability, poor condition of work and lack of social protection and vulnerability to the risks and hazards is seen in the increase in the casualisation of the work force.

In 2004-05 self-employment grew significantly with a fall in casual employment and marginal rise in regular employment. In 2009-10, the proportion of self-employed declined and it was lowest proportion for all workers since 1993-94. The decline of self-employment is the highest for female workers. The proportion The Indian employment market is moving from regular too casual employment. The proportion of casual workers in total workers increased from 24.03 per cent in 1983 to 27-29 in 1999-2000, 23 per cent in 2004-05 and 33.5 per cent in 2009- 10. The proportion of casual labour in rural and urban areas was 38.6 per cent and 17.5 per cent in 2009-10 respectively.

During 1983-2000, the proportion of self-employed declined from 58.84 per cent to 55.19 per cent and further increased to 58.83 per cent.

As regards, the share of regular workers, it declined from 17.14 per cent in 1983 to 16.35 in 1993-94 and 15.16 per cent in 2009-10.

The proportion of casual workers have increased significantly in the rural areas compared to 2004-05. This is due to implementation of NREGA. As regards, the share of regular workers there has been a marginal increase in all categories of workers.

Casualisation of employment does not assure adequate days of employment and income to meet the basic necessities of labour households. This along with low wage rates adversely affects growth rate of average daily wage earnings of the casual labour depriving them of fulfilling the basic needs.


Section B


3. Explain the major crises Indian agriculture is facing. Which reforms would you like to suggest to solve these crises.

Ans) Farming is Becoming an Unprofitable Business

Farming is quickly becoming an unviable solo occupation, unable to support entire households, due to the increasing fragmentation of holdings. Agriculture is on its way out. Crop yields are at a standstill. Farming is no longer profitable, and it no longer draws people. Urbanisation is slowly but surely devouring fertile lands. These assertions include some truth, but they add up to a 'crisis' narrative that has engulfed talks about Indian agriculture.

Agriculture has a slow and moderate growth rate.

Since 1950, India's agriculture has grown at an annual pace of 2.7 percent on average. In the last 30 years, the rate has risen barely above 3%, and in the last fifteen years, it has been less than 2%, falling far short of the four percent target established in successive recent Five-Year Plans.

The results, however, have differed from state to state. Between 2000-01 and 2007-08, agriculture in seven large states (Gujarat, Chhattisgarh, Rajasthan, Maharashtra, Andhra Pradesh, Madhya Pradesh, and Orissa) expanded at a rate of more than 4%. When the comparatively terrible agricultural years of 2008-09 and 2009-10 are included in, this reality remains unchanged. Furthermore, the majority of these states are more water-stressed than the national average. It implies that what these countries have accomplished can be replicated by others. That's a beautiful sight. To attain and sustain four percent growth, most analysts believe it will take either tremendous luck (with the weather) or a sweeping change in policy design and implementation.

Labor Shortage: A Conundrum

Today's situation reflects labour shortages that were formerly episodic and localised, but have now become structural and pervasive as the economy has grown, opening up new job opportunities in industry, construction, and other sectors. Despite pockets or infrequent periods of scarcity, labour supply was never an insurmountable concern. One of the most serious issues confronting Indian agriculture today is the continued strain of manpower on the country's limited land resources, owing to a lack of alternative employment possibilities. This isn't a price issue, but rather a more challenging and fundamental one.

Increasing the level of automation

The frontier of farm mechanisation in India ten years ago, if not less, was limited to tractors or equipment for harvesting paddy and wheat in the northern Green Revolution region. Sugarcane harvesters and milking machines are now part of the mechanisation world. In some ways, the establishment of a market for herbicides to replace human weeding activities is a manifestation of the same process, though herbicides are chemical rather than mechanical means. The governments of Maharashtra and Andhra Pradesh are currently subsidising cane harvesters by 25%. It has been set at 50% in Gujarat, and it also applies to milking machines. There is a need to take a thorough look at these and determine whether or not they can be scaled up to the national level. Recurrent fertiliser subsidies are preferable than a one-time capital concession on direct paddy-seeding machinery. Furthermore, it should aid in the development of a thriving farm equipment services industry. Farmers could delegate much of their field operations to these companies, leaving them free to focus on running their farms.

Farm Size and Affordability

Concerns about the small size of Indian farms and the resulting affordability issues. The divergent environment in which India's agricultural modernisation is unfolding is a notable aspect. Agriculture's aggregative physical metrics demonstrate tremendous progress. Surprisingly, despite high agricultural production, India's rural areas have dismal development metrics. Harnessing agricultural modernisation for the development of rural areas and people is a long-term goal that must be handled in stages.

Farming's rising costs and low productivity

Farmers' profits have been eroding due to rising costs. Fertilizer prices remained stable for a long time, from 2002-03 to 2009-10. Prices of non-urea fertilisers were deregulated in April 2010, resulting in a 30-40% increase in their cost. With the government preparing to decontrol urea pricing as well, farmers would face even more cost pressures in this area, which they were previously relatively sheltered from. Agriculture faces a number of issues, including low production and high agricultural product costs. Indian agriculture's well-known flaws include fragmented landholdings, low input consumption, poor pre- and post-harvest techniques, and a major reliance on unpredictable monsoons, all of which contribute to low yields and high production costs.


4. What do you mean by inequality of income? How are the inequalities of income measured in an economy? Examine the policy implications of widespread poverty and inequality in the Indian economy.

Ans) Income inequality in India refers to the unequal distribution of wealth and income among its citizens. According to the CIA World Factbook, the Gini index of India, which is a measure of income distribution inequality, was 35.2 in 2011, ranking 95th out of 157.[1] Wealth distribution is also uneven, with one report estimating that 54 percent of the country's wealth is controlled by millionaires, the second highest after Russia as of November 2016.[2] The richest 1% of Indians own 58.4% of wealth. The richest 10 % of Indians own 80.7 % of the wealth. This trend is going in the upward direction every year, which means the rich are getting richer at a much faster rate than the poor.[2] Inequality worsened since the establishment of income tax in 1922, overtaking the British Raj's record of the share of the top 1% in national income, which was 20.7% in 1939–40.

The pattern of income distribution in the UDCs shows wide inequalities: a large proportion of income generated in the economy accrues to a smaller section of the society, whereas a larger proportion of population is left to thrive on a smaller slice of income. For instance, evidence from 44 UDCs suggests that, on an average, only about six per cent of the population, whereas 30 to 56 per cent of national income is obtained by the highest 5-20 per cent of the population.

Economists generally agree on an asymmetrically U-shaped relationship between income distribution and economic growth as shown with the help of Kuznets’ curve in above Figure. The inequality widens during the early phase of economic growth, relatively stabilises at a given level, and then narrows in the advanced stages of growth.

Inequalities in Distribution of Income in India

The extent and magnitude of inequalities of income in India can be studied based on available data relating to: (1) income distribution, (2) wealth distribution, (3) consumption expenditure, and (4) distribution of savings in the country. 1) The data relevant to income distribution is contained in several studies carried out to measure the extent of inequalities. A conclusion common to all the studies is: the gross inequalities of income exist in India. For example, according to UNDP’s Human Development Report 2009, the top 10 per cent of the population had 31.1 per cent of total income while the bottom 10 per cent has to do with only 3.6 per cent of income. The Ginni coefficient worked out to be 0.368.

Inequalities are wider in distribution of wealth, as brought out in a 2009-end study. It highlights that the top 10 per cent of the population had 52.9 per cent of the country’s wealth, while the top 1 per cent had 15.7 per cent. In contrast, the bottom 1 per cent of the population own a meagre 0.2 per cent of the country’s wealth and the bottom 20 per cent own just 1 per cent. The Ginni coefficient for wealth in China is 0.550 and in US it is 0.801).

Information on the distribution of the household consumption is available from the data collected by the National Sample Survey Organisation (NSSO). What is more, inequality of wealth has been consistently higher than even income inequality. The Ginni Coefficient of wealth distribution has been around 0.65.

Similarly, distribution of savings originating in the household sector also brings out the fact of inequalities in income distribution. According to NCAER, the bottom 70 per cent save 6 per cent of that total while the top 10 per cent save 68 per cent and the top 5 per cent save 50 per cent. In particular, the lowest 45 per cent of the urban people saved 4 per cent, while the top 10 per cent saved 56 per cent.

Ginni Index

Ginni index for India has been estimated as 32.5 (index value of 0 implies perfect equality and 100 implies an extreme of inequality). Among a group of 106 countries, India ranks at 51, way above counties like Ethiopia, Pakistan, Bangladesh, Sweden, Norway and Germany. (Surprisingly, the value of Ginni coefficient is higher in counties like China and Russia.)

Another evidence of inequality in income distribution is brought out by a recent World Bank publication (Equity in a Globalising World, 2010). There is no middle class in India. Middle class includes people with an income above $10 day but excluding the top 5 per cent of that country, in India, everyone at over $10 a day is in the top 5 per cent of the country.

According to Thomas Piketty, there is a "huge" gap in data about income tax in India. Since most of the population is out of income-tax database, most of the calculations (such as NSSO) is based on consumption-expenditure data instead of income data. According to the World Bank, the Gini coefficient in India was 0.339 in 2009. The Gini coefficient in India went up from 0.43 (1995–96) to 0.45 (2004–05). According to the 2015 World Wealth Report, India had 198,000 high net worth individuals (annual income over $1 million) with a combined wealth of $785 billion.[9] In 2016, the International Monetary Fund in its regional economic outlook for Asia and Pacific said that India’s Gini coefficient rose to 0.51 in 2013 from 0.45 in 1990.


5. What is capital market? Trace the development reforms of the capital market in India and evaluate the impact of these reforms in the growth of equity and the foreign exchange market.

Ans) Capital market facilitates the transfer of capital (financial) assets from savers to investors. It provides the significant amount of liquidity which refers to how easily an asset can be converted to currency without loss of value. A side benefit of a capital market is that the transaction price provides a measure of the value of the asset. The major functions of capital market include disseminate information efficiently, enable quick valuation of financial instrument, provides insurance against market risk and price risk, enable wider participation, provide operational efficiency through simplified transaction procedure, lowering settlement timings and lowering transactional costs. The capital market also plays a vital role for developing integration among real and financial sector, equity and debt instruments, long term and short-term funds, private sector and government sector, and domestic funds and external funds. It also directs the flow of funds into efficient channels through investment, disinvestment and reinvestment. The various roles of capital market include mobilisation of savings and acceleration of capital formation, promotion of industrial growth, raising of long-term capital, provision of a variety of services, and efficient and optimum channelisation of funds.

In response to the above-mentioned motives and problems, the principal reform measures undertaken in Indian stock market since 1992 in detail can be discussed as follows:

Establishment of SEBI

Under the Capital Issues (Control) Act, 1947 any firm wishing to issue securities had to obtain approval from the Central Government for the decision of the amount, type and price of the issue. To cope up with the Liberalisation policy of 1991, the said Act was repealed in 1992 for market determined allocation of resources and another regulator Security Exchange Board of India (SEBI) was created and assigned with the main responsibilities for:

  1. protecting the interests of investors particularly of small investors in securities,

  2. promoting the development of the securities market, and

  3. regulating the securities market.

Having been assigned the regulatory jurisdiction not only over the corporate in the issuance of capital and transfer of securities, but also over all intermediaries and persons associated with securities market, SEBI was given concurrent/delegated powers under certain provisions of the Companies Act and the SC(R) Act. Many provisions in the Companies Act having a bearing on securities market are administered by SEBI.

Market Determined Allocation of Resources and Investor Protection

Due to repeal of CC (I) A and establishment of SEBI, Government’s control over issue of capital, pricing of the issues, fixing of premia and rates of interest on debentures etc. ceased and the allocation of resources for competing uses left to the market.

In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) guidelines containing a substantial body of requirements for issuers/intermediaries. SEBI specifies the matters to be disclosed and the standards of disclosure required for the protection of investors in respect of issues and accordingly SEBI has issued directions to all intermediaries and other persons associated with the securities market in the interest of investors or of orderly development of the securities market. Thus, The SEBI guidelines aim to secure fuller disclosure of relevant information about the issue, issuer and the nature of the securities to be issued so that investors can take informed decisions.

Department of Economic Affairs (DEA), Department of Company Affairs (DCA), SEBI have set up investor grievance cells and the Exchanges have for redressal of investor grievance. The exchanges maintain investor protection funds/consumer protection funds/trade guarantee funds to take care of investor claims, which may arise out of non-settlement of obligations by a trading member for trades executed on the exchange. DCA has also set up an investor education and protection fund for the promotion of investors’ awareness and protection of interest of investors.

Demutualisation and Establishment of NSE

The idea of NSE was first contemplated seriously in 1993. At that time the OTCEI was a recent state-sponsored exchange, which had not shown a good record. And also, the fear that NSE would be going up in competition against the established liquidity of the BSE. However, for the benefit of the investors and corresponding to the need of setting up of a demutualised Exchange, equity trading at NSE commenced in November 1994. Within one year of the commencement of equity trading at NSE, it became India’s most liquid stock market. This was a remarkable outcome. The BSE responded rapidly by moving to similar technology to the NSE in March 1995. The benefits of demutualised Exchange with the improvements in the securities market led to regime-shift towards transparency, anonymity, Competition in the brokerage industry, Operational Efficiency etc.

Screen Based Trading

In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide on-line fully automated screen-based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact, and the transaction is executed as soon as it finds a matching sale or buy order from a counter party.

Providing the solution for the problems arising from the open outcry system, in terms of infrastructure, practices and approach, Indian market has become as modern as any developed market of the world. All Exchanges in India switched from floor trading to anonymous electronic trading by 1994.


6. What do you mean by fiscal imbalance? What steps have been taken by the Government of India to correct the fiscal imbalances?

Ans) A fiscal imbalance occurs when a government's revenue powers and expenditure duties are not aligned.

Two forms of fiscal imbalances are measured in the research on fiscal federalism: vertical fiscal imbalance and horizontal fiscal imbalance. Vertical Budgetary Imbalance refers to the fiscal imbalance that exists between two tiers of government (the federal government and the states or provinces). Horizontal fiscal imbalance occurs when the fiscal imbalance between governments is measured at the same level. Regional disparity is another name for this discrepancy.

Vertical fiscal imbalance is a structural issue that requires reassignment of revenue and expenditure responsibilities between the two senior orders of government. While horizontal fiscal imbalance requires equalisation transfers, vertical fiscal imbalance is a structural issue that requires reassignment of revenue and expenditure responsibilities between the two senior orders of government.

Even after 1991, when market-oriented changes were implemented, there was no systematic attempt to streamline the reform process at the state level, even though individual state governments created committees from time to time to reform their tax structures. In the latter half of the 1990s, the pace of tax reform in the United States accelerated. In place of the former sales tax, all states have now implemented a standard Value Added Tax (VAT). The central government has acted as a facilitator in the VAT implementation process. The early experience with the VAT implementation has been positive.

Since the early 1990s, economic liberalisation has unleashed competition among sub-national governments, bringing the essential role of incentives in ensuring sound fiscal policies at all levels of government to the fore. In this context, some noteworthy changes in sub-national fiscal policy include: I 14 states enacting Fiscal Responsibility and Budget Management (FRBM) Acts to institutionalise rule-based fiscal control; (ii) successive finance commissions incentivizing the system of transfers to fiscal performance; and (iii) increasing reliance on state-specific discretionary transfers through memorandums of understanding (MoU) with the cent.

The major goal of state-level fiscal reform programmes is to achieve total fiscal restructuring and consolidation by increasing revenue, decreasing and restructuring expenditure, reducing subsidies, and minimising power sector losses. The current structure in India for state government investment finance is manifestly unsustainable. The issue arose primarily as a result of the lack of a relationship between borrowing and the end use of capital investment expenditures. The issuance of state government guarantees for public sector firms has increased, allowing them to borrow directly from the market. The states' budgeted gross fiscal deficit is 3.2 percent of total state gross domestic product. That's more than double what it was in 2007-08.

The most important result is that states' adoption of rule-based fiscal policies improves fiscal discipline. As a result, state governments face a difficult task in reverting to fiscal austerity. The Thirteenth Finance Commission (FC) suggested larger devolutions, which will help state finances. Implementation of the Goods and Services Tax (GST), States' own attempts to mobilise non-tax income, and prioritisation and rationalisation of expenditure are all anticipated to have substantial ramifications for fiscal consolidation at the state level. States must change their FRBM Acts in order to make credible progress toward fiscal consolidation.


7. “Rapid industrialization and diversification of the industrial structure have been the twin objective of industrial policy in India”- Elaborate.

Ans) New Industrial Policy, 1991

Making a sharp departure from the Industrial Policy Resolution, 1956, the Government announced a new industrial policy on July 24, 1991. The basic philosophy of the new policy has been summed up as: ‘continuity with change’.


  • To consolidate the strengths built up during the first four decades of economic planning and to build on the gains already made;

  • To correct the distortions or weaknesses that may have crept in the industrial structure as it had developed over the first four decades.

  • To maintain a sustained growth in the productivity and gainful employment; And

  • To attain international competitiveness. The pursuit of these objectives will be tempered by (a) the need to preserve the environment, and (b) the need to ensure the efficient use of available resources.

Policy Changes: Important changes in the NIP 1991, including the subsequent changes, can be recounted as follows:

Industrial Licensing Policy

  • Industrial licensing has been abolished for all projects except for a short list of industries1 related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons, and items of elitist consumption.

  • Only three industries groups where security and strategic concerns predominate will be reserved exclusively for the public sector.2

  • In projects where imported capital goods are required, automatic clearance will be given in the following cases:

1)where foreign exchange availability is ensured through foreign equity,

2) if the CIF value of imported capital goods required is less than 25 per cent of the total value of plant and equipment, up to a maximum value of Rs.2 crore.

  • There is no requirement of obtaining industrial approvals from the Central Government (except for industries under compulsory licensing) for location not falling within 25 kms. of cities having population of more than one million.

  • Industries of non-polluting nature such as electronics, computer software and printing can be located within 25 kms. of the periphery of cities with more than one million population. Other industries are permitted only if they are in designated industrial areas.

  • The mandatory convertibility clause will no longer be applicable for term

    loans from the financial institutions for new projects.

  • All existing registration schemes will be abolished.

  • Entrepreneurs will henceforth only be required to file an information memorandum on new projects and substantial expansion.

  • The system of phased manufacturing programmes run on an administrative case-by-case basis will not be applicable to new projects.

  • The exemption from licensing will apply to all substantial expansions of existing units.

Foreign Investment

  • Automatic approval is available to FDI in almost all sectors except a few sensitive ones. Automatic approval is available for 50 per cent, 51 per cent, 74 per cent and even 100 per cent in specified industry groups.

  • To provide access to international markets, majority foreign equity holding up to 51 per cent equity will be allowed for trading companies primarily engaged in export activities.

  • The Foreign Investment Promotion Board has been constituted to negotiate with several large international firms and approve direct foreign investment in select areas.

Foreign Technology Agreements

  • Automatic permission will be given for foreign technology agreements in identified high priority industries up to a lumpsum payment of $ 2 million, 5 per cent royalty for domestic sales and 8 per cent for exports, subject to total payments of 8 per cent of sales over a 10-year period from date of agreement or 7 years from commencement of production.

  • In respect of industries other than those included above, automatic permission will be given subject to the same guidelines as if no foreign exchange is required for any payments.

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