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Monday, July 23, 2018

Express Economic History Series: Industrial policy and the importance of political context

The new policy statement allowed foreign direct investment up to 51 per cent and automatic approval for technology agreements in high-priority industries.

Written by Shaji Vikraman | New Delhi | Updated: April 5, 2017 6:09:17 pm
Industrial policy, economic liberalisation, Manmohan Singh, India economic liberalisation,  indian economy, india news, nation news Manmohan Singh

Almost 25 years into India’s economic liberalisation, the 1991 Budget, and Finance Minister Manmohan Singh’s invoking of the country’s Victor Hugo moment, remains high on recall.

But the real gamechanger — the policy that was to unleash the “animal spirits” of entrepreneurs and industry — had been quietly released earlier on July 24, 1991 — several hours before Singh rose to present his famous Budget at 5 pm. This was the Industry Ministry’s statement on industrial policy — which did away with industrial licensing for all industries and projects except for a short list of industries related to strategic and security concerns, hazardous chemicals, and items of elite consumption, which were to be reserved for the public sector.

The new policy statement allowed foreign direct investment up to 51 per cent and automatic approval for technology agreements in high-priority industries that need large investments and technology, divestment of holdings in state-owned units, and greater management autonomy for these companies.

To encourage competition, it opened up to private firms areas hitherto reserved for the public sector, and sought an amendment of the Monopolies and Restrictive Trade Practices (MRTP) Act to remove the threshold limit on assets of an “MRTP company”.

All this meant cutting out prior approvals of the government for promoting new projects and expansion, mergers and amalgamations, and the appointment of directors in one fell swoop. Indian industry was pushed to invest more in research and development.

Over two decades on, this might appear facile — but getting through the policy then was quite another story. There had been fleeting attempts to bring about some change starting from the late 70s — much of it incremental given the prevalent economic and political philosophy, and the cosy club of Indian industralists. Some of it was based on the reports submitted in 1979-80 by three committees — led by Vadilal Dagli, former Planning Commission member V G Rajadhyaksha, and former Heavy Industries Secretary Mantosh Sondhi. After becoming Prime Minister in 1984, Rajiv Gandhi sounded out his advisors on a new policy framework for Indian industry, but could not take it forward because of resistance from older, more Nehruvian colleagues in the Cabinet — including some who were in charge of the Industry Ministry — and the Congress party.

Soon after the P V Narasimha Rao government took over in June 1991, discussions got under way on potential reform measures that could be outlined before the IMF loan could be contracted that year. Industrial policy reform was one step. The then Industry Secretary Suresh Mathur, then Economic Advisor in the Ministry of Industry Rakesh Mohan, Principal Secretary to the Prime Minister Amar Nath Verma, and Jairam Ramesh, then Officer on Special Duty in the Prime Minister’s Office, worked on the policy paper.

Finance Minister Manmohan Singh — who had been part of a similar initiative while at the Planning Commission a few years earlier — was consulted, as was Rangarajan Kumaramangalam, who was handling the MRTP Commission. It helped matters that Amar Nath Verma was a former Industry Secretary.

In the second week of July 1991, the note prepared by the Ministry on a new industrial policy, and featuring radical changes, was taken to the Cabinet — only to be met with fierce resistance. Leading the charge was the old guard in the Congress — Arjun Singh, M L Fotedar, Balram Jakhar and a few others — who argued that it negated all that the Congress had ever stood for.

That forced Narasimha Rao to take the policy to a Group of Ministers. Verma, Ramesh and P Chidambaram then got together to re-work the original Cabinet note. However, all that changed was the introduction of the political backdrop, and three critical paragraphs. They threw in Nehru’s vision for India, Indira Gandhi’s contribution in 1980, and the changes introduced by Rajiv Gandhi in 1985 and 1986. That was all that was needed for the Cabinet to approve it — with the old guard cheering along.

A little after that came the Foreign Investment and Promotion Board or FIPB, which was housed first in the Prime Minister’s Office, and headed by Verma. Few recall that the Industry Ministry was under the PM’s charge then.

As political dispensations now realise, it is the political context that can make the critical difference in pushing through landmark policy change.

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