New Industrial Policy, 1991 and the changing role of the public sector

1. Background

The Industrial Policy Resolution of 1948 declared a mixed economy; the Industrial Policy Resolution of 1956 divided industries into three schedules: Schedule A (17 industries) reserved for the State, Schedule B (12) where the State would take the lead and private firms supplement, and the rest open to the private sector. The Industries (Development and Regulation) Act, 1951 required a licence for setting up or expanding units; the MRTP Act, 1969 restricted large houses; FERA, 1973 limited foreign equity. By the 1980s this “licence-permit raj” was producing delays, high-cost and inefficient industry, and losses in many public enterprises.

In 1991 India faced a balance of payments crisis: foreign exchange reserves fell to a level sufficient for only a few weeks of imports, the Gulf war raised oil prices, and the fiscal deficit was high. The government of P.V. Narasimha Rao, with Manmohan Singh as Finance Minister, began the reforms known as LPG (liberalisation, privatisation, globalisation). The New Industrial Policy was announced on 24 July 1991.

2. Features of the New Industrial Policy, 1991

1. Abolition of industrial licensing for all industries except 18 (relating to security, strategic concerns, hazardous products, environment and items of elitist consumption). The list has since been cut to a handful, such as defence items, hazardous chemicals, industrial explosives and tobacco products.
2. Reduction of the reserved public sector from 17 industries to 8, later cut further, until only atomic energy and railway operations remained reserved. The SHANTI Act, 2025 has since opened civil nuclear power to private companies.
3. Disinvestment of a part of government equity in public sector enterprises, to raise resources and widen ownership.
4. MRTP reform: the asset threshold for MRTP companies was removed, so large firms no longer needed prior approval to expand. The MRTP Act was later repealed and replaced by the Competition Act, 2002, with the Competition Commission of India.
5. Foreign investment: automatic approval for foreign equity up to 51 per cent in high-priority industries (Annexure III), and an investment board to negotiate larger proposals. FERA was later replaced by FEMA, 1999.
6. Foreign technology agreements: automatic permission within specified limits of royalty and lump-sum payments; hiring of foreign technicians freed.
7. Location policy: no industrial licence needed except in cities with more than one million population, where polluting industries must be located outside a set boundary.
8. Abolition of the phased manufacturing programme (compulsory increase in local content).
9. Small sector: a companion policy for small, tiny and village enterprises (August 1991) allowed other undertakings to hold up to 24 per cent equity in small-scale units, to bring in capital and technology.
10. Revival of sick PSUs through the Board for Industrial and Financial Reconstruction, and MoU-based autonomy for public enterprises.

Assessment. Industrial and overall growth accelerated, competition improved quality and choice, foreign investment grew, and telecom, automobiles and IT expanded rapidly. Critics point to job losses in closed or privatised units, slow growth of manufacturing’s share in GDP, increased regional concentration of investment, and pressure on small industry from imports and large firms.

3. Role and contribution of the public sector

• Infrastructure and basic industries: steel (SAIL), power (NTPC), coal (Coal India), oil (ONGC, IOC), heavy engineering (BHEL), railways, ports and telecom, where private capital was unwilling or unable to invest.
• Capital formation: it accounted for a large share of investment in the plan period.
• Employment in the organised sector, with better conditions of work.
• Balanced regional development: plants set up in backward areas (Bhilai, Rourkela, Durgapur, Bokaro).
• Self-reliance in defence, atomic energy, space and heavy machinery.
• Prevention of concentration of economic power in private hands.
• Revenue to government through dividends, taxes and disinvestment.
• Export promotion and import substitution.
• Social welfare: supply of essential goods at reasonable prices, financial inclusion through public sector banks, and the LIC.

4. Problems of the public sector

1. Low rate of return; many units ran persistent losses.
2. Over-capitalisation and cost overruns; delays in completing projects.
3. Over-staffing and low labour productivity.
4. Political interference in appointments, pricing and location.
5. Lack of autonomy and accountability: managers answerable to ministries, Parliament, the CAG and vigilance agencies.
6. Under-utilisation of capacity.
7. Defective pricing policy: administered prices below cost.
8. Poor industrial relations and frequent changes in top management.

5. Reforms of the public sector since 1991

• Memoranda of Understanding (from 1988) between enterprises and ministries, fixing targets in exchange for autonomy.
• Navratna (1997), Miniratna and Maharatna (2009) status, giving profitable enterprises greater financial and operational freedom.
• Disinvestment, now managed by the Department of Investment and Public Asset Management (DIPAM), including strategic sales; Air India was sold to the Tata group in 2022.
• New Public Sector Enterprise Policy for Atmanirbhar Bharat (2021): in four broad strategic sectors (atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and minerals; banking, insurance and financial services) a bare minimum of public enterprises will be retained; in other sectors enterprises are to be privatised or closed.
• Closure of chronically sick units and listing of enterprises on stock exchanges for market discipline.

How this is examined

June/July 2025 (80 marks): “Explain the features of New Industrial Policy, 1991” or “Explain the contribution of Public Sector in India’s economic development” (10). January/February 2025: “Explain New Industrial Policy of 1991” (10), with “Problems of public sector” or “Role of public sector” (6). June/July 2025 (100 marks): “Examine the roles of public sector in the development of India” (16). For the policy answer: background, ten features, assessment.