The new phase was marked by a series of modifications of the existing policy instruments which was done to keep them in tune with the changing perspective of the policy makers. The first instrument whose effectiveness was curbed during this phase was the Capital Issues (Control) Act. This legislation was enacted in 1947 to keep a check on the expansion of the private sector and it did so by putting limits on the amount of capital a company could mobilise from the capital market. In 1966 the Government decided that except for bonus shares (issued for capitalisation of undistributed profits which are held as reserves), issue of capital by private limited companies, government companies and banking and insurance companies would not require the sanction of the Controller of Capital Issues, the implementing authority of the Capital Issues (Control) Act. A large number of companies could, therefore, raise capital for expansion of their production units in an uninhibited manner.

Relaxation involving the other instrument of policy, Industries (Development and Regulations) Act, followed soon after. In November 1966, the Government passed an order which allowed companies to freely diversify production upto 25 per cent of their total output without any licence under the Act. In the specific area of import of technology, the other purpose for which foreign business interests were invited, the Government gave expression to its attitude in accepting the Mudaliar Committee's report on Foreign Collaboration. The major recommendations of this Committee, which submitted its report in 1967, were:

1. a positive approach is needed to the problem of import of know-how, particularly of process know-how, or product design;

2. generally speaking, in industries where substantial import of capital goods is involved and where the Government's policy allows foreign capital participation, joint ventures involving foreign equity participation are more beneficial as compared to other forms of collaboration;

3. no rigid rule should be followed in the matter of duration of technical collaboration agreements; normally, the duration of the original agreements should be between 5 to 10 years from commencement of production;

4. on the question of avoidance of repetitive import of technology, where a number of collaborations, say 5 or 6, had already been approved in a particular field of industry, it would be more appropriate to consider the likelihood of an existing unit giving process know-how or product design to a consultancy firm on the basis of a negotiated agreement. Fiscal incentives should be given to existing units which pass their know-how to others; and

5. a liberal approach would be worthwhile in regard to foreign collaborations in the case of substantially export oriented industries.

The Government accepted these recommendations in general, and these were incorporated in the Fourth Plan framework, adopted in 1969. This marked a major shift in the policy for technology import, as the Government had been maintaining till then, that foreign technology was permitted to enter only in high technology areas and in areas when plan priorities demanded their entry.

Following the recommendations of the Mudaliar Committee, the Government considered that a number of steps should be taken to secure two important objectives:

1. there should be no undue delay in the disposal of cases for foreign collaboration and as far as possible, all applications should be disposed of within 3 months; and

2. intending collaborators should know clearly about the facilities available for foreign investment.

With a view to minimising the procedural delays in the disposal of applications relating to foreign investment and collaboration, the Government laid down a procedure for the disposal of such applications. The Foreign Investment Board was set up in 1968 and was assigned responsibility for expeditious disposal of the applications. In January 1969, the Government issued three illustrative lists of industries where-

1. financial collaboration was permitted

2. only technical collaboration was permitted, and

3. no collaboration was considered necessary.

This step taken by the Government has been interpreted by some as the toughening of attitude towards foreign capital, but viewed in association with the immediately following course of events, which took a more liberal view of foreign participation, this move by the Government appears more like a statement of intentions and not like a policy statement. In 1970, the collaboration policy was further liberalised along with the new licensing policy. This was done, as the Government contended, with a view to bridge technological gaps that existed in several sectors of the economy. An illustrative list of 121 items in which technological gaps existed and for which foreign collaboration would be permitted, was drawn up. Similarly, illustrative list of 123 items where there was likelihood of sustained demand for the product and scope of investment, was also published to enable entrepreneurs to avail of the opportunities afforded by liberalisation. Majority foreign participation was permitted in certain low priority areas and non essential fields of production for cases where production was largely for exports. The earlier policy of not allowing foreign collaboration in trading activities was relaxed where such collaboration was needed to augment exports.

Similarly, majority foreign participation in new enterprises was considered-

1. if the development of the particular industry was essential in national interest;

2. if the field of technology was one where little or inadequate progress was made or where considerable additional development was considered necessary; or

3. if it was felt that the project in question could not be set up without foreign participation.

The policy of inducting domestic equity in foreign majority companies was strengthened in 1972. Till then, the extent of dilution by foreign majority companies was done by examining each case individually and to overcome the long delays caused by this procedure it was decided to introduce the "dilution formula." According to the formula, whenever a foreign majority company undertook an expansion programme, was required to issue a certain share of fresh equity to Indians. A company having 75 per cent or more of foreign equity was required to issue 40 per cent of the additional equity to the Indians. Companies having foreign equity between 60 and 75 per cent were required to issue a third of their new equity to the Indians and all the other foreign majority companies were required to issue a fourth of their issue to the Indians. The dilution formula set the tone for the Foreign Exchange Regulation Act in 1973, the single most important policy initiative towards foreign capital in India, which was brought in soon after.

By a large measure FERA, 73 provided an opportunity to foreign business interests to consolidate their holdings in the country. For the first time the Government made a formal declaration that foreign companies upto 40 per cent foreign equity would be treated as Indian Companies and could be allowed unrestricted access to any segment of industrial activity. This was probably the assurance foreign companies were looking for, from the Government. Immediately after this pronouncement several wholly owned subsidiaries and branches of foreign companies expanded their capital base manifold after keeping it unchanged at a particular level for a long time. Some of the prominent companies in this category were Colgate Palmolive, Ponds, Abbott Laboratories.

The formulation of the Fifth Plan in 1974 saw the Government expressing similar sentiments as those expressed by Prime Minister Nehru in 1949. It said, "Foreign collaboration must serve to supplement and accelerate the development and utilisation of indigenous technologies and production capabilities in a manner which advances the country's efforts to attain overall self-reliance as rapidly as possible." But while the Government was expressing its intents of making foreign private capital to serve the national interests in the best possible manner, it did not evolve any mechanism to ensure that the expected results were achieved. Thus, it is found that while the Government wanted to exercise selectivity in import of technology and avoid imports when technology was available domestically, technology imports have been allowed to take place freely. It can, thus, be seen that in nearly three decades after the attainment of political independence, the State as the major initiator of development policies in the country, had adopted policies which basically did not militate against the operation of foreign capital in the country. What started as a strong anti-foreign capital position was slowly, yet unmistakingly, diluted. The changes in policies and enactment of new legislations like FERA, 73 did not militate against the interests of the foreign companies. Majority ownership was never the prime consideration of the foreign companies, as we have shown earlier. The foreign investors were more keen on having complete control over the joint venture they were participating in and they did enough to ensure their control. There were, however, certain policies which were aimed at reducing the area of activity of the foreign companies. The nationalisation of insurance activity in the 1950s and that of coal and oil in the 1970s foreclosed the option of private foreign capital to operate in these areas, but these moves by the Government do not appear to have affected the areas of influence of foreign capital in the country in any significant manner. In the post-independence period, foreign companies were moving away from their traditional sectors of involvement, i.e., extractive and trading activities, which characterised the colonial pattern of investment.

Manufacturing sector was gaining prominence during this period. The manufacturing sector tacitly adopted the priorities set forth by the developed countries and in pursuance of these priorities dependence on foreign private capital was taken as inescapable by the policy makers (the various policy statements referred above testify this). The urgency shown by policy makers stemming from the fact that they considered foreign private capital as necessary, was reflected in the series of relaxation of policy. What emerged after the relaxations of policy, especially after the policy change effected in 1969, was that foreign private capital was sought to be given a virtual monopoly position in the Indian economy.

This policy change allowed financial collaboration, (i.e., setting up joint ventures in India), only in areas where indigenous technology was not available. The new policy, in effect, discriminated against the Indian companies which, from the same year, 1969 were brought under the Monopolies and Restrictive Trade Practices Act (MRTPA) and were subjected to various regulations.

The relaxation in Government policies was not done all at once, as we have described above, but it was spread over long stretches of time. This tendency of not going in for relaxation all at once, was the only distinguishable feature of India's development strategy, standing in contrast to the experience of the Latin American countries. But the more recent phase of industrialization, the 1980s, makes the difference between the Indian experience and that of the Latin American countries less marked. The pace of relaxation of policies was accelerated in the 1980s, and in this respect the present phase of industrialization stands out from the earlier phases.

The opening up of the economy since the 1980s has two distinct phases, the dividing line being the change in Government in 1985. While in the first phase, the political leadership did not threaten to pull down the entire edifice of economic development built over the four decades, in the second phase several questions have been raised by the Government about the key elements that constituted the basic economic structure. For instance, the role of economic planning has come to be questioned and not surprisingly, therefore, it is found that for the first time public sector investment planned for in five years is less than that of the private sector in the Seventh Five Year Plan. In keeping with this the role and place of public sector in the Indian economy has come to be questioned quite regularly in the recent past.

The signals for the new developments in the Indian economy were given in 1980 when the Government announced its new industrial policy. The new policy laid the foundations for the liberalisation of economic policies that were to follow. The accent was on improving the price competitiveness of Indian industrial products and this was seen to be possible only with the aid of imported technology. The policy declared "Government will consider favourably, the induction of advanced technology and will permit creation of capacity large enough to make it competitive in world markets, provided substantial exports are likely. The purpose of introducing such a policy would not be only to encourage exports but also to enable industry to produce better quantity products at lower costs which ultimately benefit the consumer in terms of price and quality." A number of steps were taken to meet the demands to the industrial policy statement. In the beginning of 1981, Commerce Ministry announced that 100 per cent export-oriented units would be allowed free access to foreign collaboration without being subjected to the provisions of FERA, 73 and permitted to import capital goods, components and raw materials without any restrictions. Their imports were exempted from import duties and their purchases of indigenous capital goods and raw materials from excise duties. Their finished goods were also exempted from excise duties and other duties. In 1983, further liberalisation of the import policy were effected in order to benefit 100 per cent export-oriented units. The list of items for which no import licence was required was enlarged. The export-oriented units were opened up as an avenue to increase investment by foreign companies and, therefore, these concessions can be interpreted as concessions given to foreign private capital for investing in the country. The liberal policy of importing technology was given a further push in the form of the Technology Policy adopted in 1983. Although the policy had mentioned that gaps in technology available to Indian industry would be identified before technology imports are allowed, in practice, however, very little of this was in evidence. A large number of projects, especially in the public sector, went ahead with maximum foreign assistance and that too in a situation where the public sector organisations were competent to execute such projects.

Several areas of industrial activity were also opened up for foreign investment. The communications industry was earlier reserved for the public sector, but in 1984 foreign equity upto 49 per cent was permitted to enter in the industry. The electronics industry was also opened up simultaneously and the reason given by the Government for free technology imports was that the Indian industry had to be competitive internationally.

Import duties on components were reduced to help the Indian industry develop its competitive edge. The licensing system was made more liberal after 1985 through broad-banding. This measure was introduced to provide flexibility to production units for changing their product-mix within a certain specified range without seeking Government permission to do so. It was first introduced in the machine tools sector and was later extended to the automobile sector and the drugs industry. All this led to a record number of new collaborations in a single year, 1986, in which more than 1200 collaborations were entered with by Indian Companies.

It can thus be seen that throughout the period after the attainment of political independence in 1947, the Indian Government has been trying to adopt a conciliatory position vis-a-vis foreign capital. The Government started with the anti-imperialist rhetoric, a legacy of the pre-independence Congress Party, and it adopted certain regulatory policies aimed at private sector in general, interspersed with policies aimed at foreign private capital as well, but over a period of time it modified these policies in a way which proved to be beneficial for foreign private capital in the long-run.

However a pragmatic policy fully recognising the indispensability of the foreign capital for the rapid development of the country came to be implemented only after advent of economic reforms in 1991-92. This we will consider in the next article