06 Aug New Economic Policy and Industry in Post-Liberalization Era

New Economic Policy and Industry in Post-Liberalization Era

The New Economic Policy (NEP) introduced in 1991 marked a paradigm shift in India’s industrial and economic trajectory. It dismantled the decades-old protectionist regime and ushered in an era of liberalization, privatization, and globalization (LPG). The industrial sector, which had previously been shackled by the License-Permit-Quota Raj, suddenly found itself in a more open, competitive, and opportunity-rich environment.

This article explores the evolution of India’s industrial sector in the post-liberalization era, with special emphasis on policy changes, sectoral performance, structural transformations, challenges, and the way forward. It is a core topic under Paper 2 of the UPSC Economics Optional syllabus.

1. Industrial Scenario Before Liberalization

1.1 License-Permit-Quota Raj

• Industrial development before 1991 was governed by excessive regulation, with firms requiring multiple licenses to operate or expand.
• Investment decisions, production capacity, import of raw materials, and pricing were often subject to state control.

1.2 Public Sector Dominance

• The Industrial Policy Resolution of 1956 classified industries into Schedule A (exclusive to the state), Schedule B (state-led with private participation), and Schedule C (open to private sector).
• Monopolistic state-run enterprises dominated core industries like steel, coal, power, heavy machinery, and defense.

1.3 Performance Challenges

• Growth stagnation: Industrial growth averaged around 4-6% in the 1980s.
• Low productivity and inefficiency in PSUs.
• Limited foreign technology and investment.

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2. The 1991 New Economic Policy: Key Reforms

2.1 Liberalization

• Abolition of industrial licensing for most industries (except a few in defense, atomic energy, etc.).
• Deregulation of industries and easing entry barriers for private players.
• Disbanding of MRTP Act controls on capacity expansion and mergers.

2.2 Privatization

• Disinvestment of equity in public sector undertakings (PSUs).
• Encouragement of private sector in areas previously reserved for the state.

2.3 Globalization

• Reduction in import tariffs and quantitative restrictions.
• Permission for Foreign Direct Investment (FDI) in several sectors.
• Adoption of TRIMs, TRIPs, and GATS under WTO commitments.

3. Impact of Economic Reforms on Industry

3.1 Positive Outcomes

• Higher Growth Trajectory: Manufacturing growth rose to 7-9% in the early 2000s.
• Foreign Investment: Surge in FDI, especially in telecom, auto, chemicals, and pharmaceuticals.
• Increased Efficiency: Competitive pressures encouraged innovation, modernization, and cost efficiency.
• Export Growth: Industrial exports like automobiles, electronics, and textiles increased substantially.
• Emergence of MSMEs: Small and medium industries flourished with support from policy incentives and technology.
• Improved Ease of Doing Business: India’s ranking jumped from 142 (2014) to 63 (2020).

3.2 Negative Consequences

• Regional Imbalances: Industrial development concentrated in coastal and metropolitan regions (Maharashtra, Gujarat, Tamil Nadu).
• Jobless Growth: Capital-intensive industries expanded, but employment elasticity declined.
• Neglect of Traditional Industries: Handloom, handicrafts, and small-scale units struggled to compete.
• Rise of NPAs: Rapid liberalization without credit monitoring led to high non-performing assets in the banking sector.

4. Major Industrial Policies and Programs (Post-1991)

• National Manufacturing Policy (2011): Aimed to increase manufacturing sector’s share in GDP to 25% and create 100 million jobs.
• Make in India (2014): Promoted domestic manufacturing and encouraged foreign firms to invest and produce in India.
• Start-up India: Provided tax incentives, funding access, and simplified compliance for entrepreneurs.
• Production Linked Incentive (PLI) Scheme (2020): Linked subsidies to incremental production in sectors like electronics, pharma, textiles, auto, etc.
• Industrial Corridor Projects: Delhi-Mumbai Industrial Corridor (DMIC), Bengaluru-Mumbai Corridor to improve logistics and connect economic hubs.

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5. Sectoral Analysis Post-Liberalization

5.1 Manufacturing Sector

• Improved efficiency and export competitiveness.
• Greater private and foreign investment.
• Issues: stagnation post-2012 due to global slowdown and domestic credit crunch.

5.2 Services-Driven Growth

• Shift of economic momentum to IT, telecom, finance, and retail.
• Industry failed to keep pace with services sector boom.

5.3 MSME Sector

• Contribution to GDP: ~30%.
• Major employment generator but suffers from lack of access to credit and technology.

6. Infographic and Mind Map

7. Challenges in Industrial Development

• Infrastructure Bottlenecks: Power, roads, ports, and transport still lag behind industrial needs.
• Regulatory Compliance: Despite reforms, cumbersome labor laws and compliance procedures exist.
• Credit Access: NBFC and banking crisis post-2018 affected industrial credit growth.
• Skill Deficiency: India’s youth lacks vocational and industry-relevant technical skills.
• Environmental and Land Acquisition Issues: Industrial projects face delays due to land and environmental clearances.

8. Way Forward

• Strengthen infrastructure via public-private partnerships (PPPs).
• Boost skill development aligned with industry demand.
• Ease regulatory burdens through labor law simplification and digitization.
• Ensure access to affordable and timely credit, especially for MSMEs.
• Promote R&D, digital technology, and sustainable industrialization under the Net-Zero roadmap.

9. UPSC Previous Year Questions

9.1 Economics Optional – Paper 2

• “Discuss the role of new industrial policy in restructuring India’s industrial growth post-1991.” (2021)
• “Critically evaluate the performance of public sector enterprises in the liberalized Indian economy.” (2019)
• “Examine the implications of globalization on Indian industrial competitiveness.” (2020)

9.2 GS Paper 3

• What are the challenges faced by MSMEs in India? Discuss government initiatives to support them.
• How does the PLI Scheme enhance India’s manufacturing capabilities?

10. Probable Questions for UPSC 2025

10.1 Mains

• “Evaluate the impact of New Economic Policy on India’s industrial structure and growth.”
• “Discuss the policy reforms needed to boost India’s manufacturing sector in the context of global supply chain disruptions.”
• “How far has Make in India contributed to India’s goal of self-reliant industrial development?”

10.2 Prelims

• Which of the following was NOT a feature of New Industrial Policy, 1991? [a] Licensing liberalization [b] FDI introduction [c] PSU expansion [d] MRTP deregulation
• Which scheme offers financial incentives based on incremental output in selected sectors? [a] Make in India [b] Start-up India [c] PLI Scheme [d] NITI Aayog

11. Conclusion

The New Economic Policy of 1991 was a watershed moment in India’s industrial development. It unleashed the private sector, integrated India into the global economy, and laid the foundation for sustained industrial modernization. However, challenges such as skill shortages, infrastructure gaps, and regional disparities persist. For India to truly harness its demographic dividend and become a global manufacturing hub, inclusive and innovation-driven industrial policies must take center stage.

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