Liberalisation, Privatisation and Globalisation: Industrial and Financial Sector Reforms

Industrial Sector Reforms and the New Industrial Policy

• In order to initiate necessary reforms within the industrial sector, the Government of India introduced its new industrial policy on $July\,24,\,1991$.

Specific Measures of Industrial Policy Reforms

• Reduction in Industrial Licensing: The new industrial policy abolished the requirement for industrial licensing for all projects, with the exception of $18$ specific industries. This number was subsequently further reduced to just $5$ industries. These mandatory licensing categories include:
  • (i) Distillation and brewing of alcoholic drinks.
  • (ii) Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
  • (iii) Electronic Aerospace and defence equipments.
  • (iv) Industrial explosives.
  • (v) Specified Hazardous chemicals.
• Rules for New and Existing Units: Under the reformed policy, no licenses are required for the following activities (provided they do not fall under the list of $5$ reserved industries):
  • To set up new industrial units.
  • To expand or diversify already existing lines of manufacture.
• Compulsory Licensing Rationale: The requirement for compulsory licensing in the aforementioned $5$ industries is maintained specifically on account of environmental, safety, and strategic considerations.
• Decrease in the Role of the Public Sector: A striking feature of these reforms was the substantive reduction in the public sector's role in the future industrial development of the country.
  • Under the New Economic Policy, the number of industries reserved exclusively for the public sector was initially reduced from $17$ to $8$.
  • This was further reduced to just $3$ industries in the period of $2010-11$.
  • The $3$ remaining industries reserved for the public sector are: Atomic Energy, Railways, and Defence Equipments.
• De-reservation under Small-Scale Industries: Many goods previously reserved for production by small-scale industries were de-reserved.
  • In many industries, the market was permitted to determine prices through the natural forces of the market (supply and demand) rather than through the directive policy of the government.

Monopolies and Restrictive Trade Practices (MRTP) Act Replacement

• Elimination of Prior Approval: With the introduction of liberalisation and expansion schemes, the requirement for large companies to seek prior government approval for expansion, the establishment of new undertakings, mergers, and amalgamations was eliminated.
• Evolution of Legislation: The Monopolies and Restrictive Trade Practices (MRTP) Act was replaced by the more liberal Competition Act, $2002$.
  • The Competition Act, $2002$ was subsequently refined through the Competition (Amendment) Act, $2007$.
  • It was amended again by the Competition (Amendment) Act, $2009$.

Financial Sector Reforms and the Role of the Reserve Bank of India (RBI)

• Composition of the Financial Sector: The financial sector includes various financial institutions such as:
  • Commercial banks.
  • Investment banks.
  • Stock exchange operations.
  • Foreign exchange market.
• Role of the Central Bank: The financial sector in India is controlled and regulated by the Reserve Bank of India (RBI).
  • The RBI is recognized as the apex (supreme) body, occupying the topmost position in the country's monetary and banking system.
  • The RBI decides the amount of money (deposits) that banks are required to keep with themselves.
  • The RBI fixes interest rates.
  • The RBI determines the nature of lending to various sectors of the economy.

Structural Transformation of the RBI's Role

• Shift from Regulator to Facilitator: A primary reform in the financial sector was reducing the role of the RBI from a "regulator" to a "facilitator" of the financial sector.
• Impact on Financial Autonomy: This change allowed the financial sector to take decisions on many matters without the necessity of consulting the RBI.
• Pre-liberalisation (Regulator Role): Prior to liberalisation, the RBI functioned as a regulator, fixing the specific interest rate structures for Commercial Banks.
• Post-liberalisation (Facilitator Role): In the post-liberalisation era, the RBI facilitates free market forces to act accordingly.
• Increased Functional Autonomy: These reforms have ensured greater autonomy for financial institutions in their day-to-day operations and general functioning.