Industrial Policy in India

Objec­tives#

The main objec­tives of the Indus­trial Pol­icy of the Gov­ern­ment in India are:

• to main­tain a sus­tained growth in pro­duc­tiv­ity;
• to enhance gain­ful employ­ment;
• to achieve opti­mal util­i­sa­tion of human resources;
• to attain inter­na­tional com­pet­i­tive­ness; and
• to trans­form India into a major part­ner and player in the global arena.

Indus­trial Poli­cies in India since Inde­pen­dence#

a. Indus­trial Pol­icy Res­o­lu­tion of 1948- It defined the broad con­tours of the pol­icy delin­eat­ing the role of the State in indus­trial devel­op­ment both as an entre­pre­neur and author­ity.

It made clear that India is going to have a Mixed Eco­nomic Model.

It clas­si­fied indus­tries into four broad areas:

• Strate­gic Indus­tries (Pub­lic Sec­tor): It included three indus­tries in which Cen­tral Gov­ern­ment had monop­oly. These included Arms and ammu­ni­tion, Atomic energy and Rail trans­port.
• Basic/Key Indus­tries (Pub­lic-cum-Pri­vate Sec­tor): 6 indus­tries viz. coal, iron & steel, air­craft man­u­fac­tur­ing, ship-build­ing, man­u­fac­ture of tele­phone, tele­graph & wire­less appa­ra­tus, and min­eral oil were des­ig­nated as “Key Indus­tries” or “Basic Indus­tries”.

These indus­tries were to be set-up by the Cen­tral Gov­ern­ment.

How­ever, the exist­ing pri­vate sec­tor enter­prises were allowed to con­tinue.

Impor­tant Indus­tries (Con­trolled Pri­vate Sec­tor): It included 18 indus­tries includ­ing heavy chem­i­cals, sugar, cot­ton tex­tile & woollen indus­try, cement, paper, salt, machine tools, fer­tiliser, rub­ber, air and sea trans­port, motor, trac­tor, elec­tric­ity etc.

These indus­tries con­tinue to remain under pri­vate sec­tor how­ever, the cen­tral gov­ern­ment, in con­sul­ta­tion with the state gov­ern­ment, had gen­eral con­trol over them.

Other Indus­tries (Pri­vate and Coop­er­a­tive Sec­tor): All other indus­tries which were not included in the above men­tioned three cat­e­gories were left open for the pri­vate sec­tor.

The Indus­tries (Devel­op­ment and Reg­ula­tion) Act was passed in 1951 to imple­ment the Indus­trial Pol­icy Res­o­lu­tion, 1948.

b. Indus­trial Pol­icy State­ment of 1956 : Gov­ern­ment revised its first Indus­trial Pol­icy (i.e.the pol­icy of 1948) through the Indus­trial Pol­icy of 1956. It was regarded as the “Eco­nomic Con­sti­tu­tion of India” or “The Bible of State Cap­i­tal­ism”.

The 1956 Pol­icy empha­sised the need to expand the pub­lic sec­tor, to build up a large and grow­ing coop­era­tive sec­tor and to encour­age the sep­a­ra­tion of own­er­ship and man­age­ment in pri­vate in­dus­tries and, above all, pre­vent the rise of pri­vate monop­o­lies.

It pro­vided the basic frame­work for the gov­ern­ment’s pol­icy in regard to in­dus­tries till June 1991. IPR, 1956 clas­si­fied indus­tries into three cat­e­gories -

Sched­ule A con­sist­ing of 17 indus­tries was the exclu­sive respon­si­bil­ity of the State. Out of these 17 indus­tries, four indus­tries, namely arms and ammu­ni­tion, atomic en­ergy, rail­ways and air trans­port had Cen­tral Gov­ern­ment monop­o­lies; new units in the remain­ing indus­tries were devel­oped by the State Gov­ern­ments.

Sched­ule B, con­sist­ing of 12 indus­tries, was open to both the pri­vate and pub­lic sec­tors; how­ever, such indus­tries were pro­gres­sively State-owned.

Sched­ule C- All the other indus­tries not included in these two Sched­ules con­sti­tuted the third cat­e­gory which was left open to the pri­vate sec­tor. How­ever, the State reserved the right to under­take any type of indus­trial pro­duc­tion.

The IPR 1956, stressed the impor­tance of cot­tage and small scale indus­tries for expand­ing employ­ment oppor­tu­ni­ties and for wider decen­tral­i­sa­tion of eco­nomic power and activ­ity.

The Res­o­lu­tion also called for efforts to main­tain indus­trial peace; a fair share of the pro­ceeds of pro­duc­tion was to be given to the toil­ing mass in keep­ing with the avowed objec­tives of demo­c­ra­tic social­ism.

Crit­i­cism: The IPR 1956 came in for sharp crit­i­cism from the pri­vate sec­tor since this Res­o­lu­tion reduced the scope for the expan­sion of the pri­vate sec­tor sig­nif­i­cantly.

The sec­tor was kept under state con­trol through a sys­tem of licenses.

Indus­trial Licenses#

• In order to open new indus­try or to expand pro­duc­tion, obtain­ing a license from the gov­ern­ment was a pre­req­ui­site.
• Open­ing new indus­tries in eco­nom­i­cally back­ward areas was incen­tivised through easy licens­ing and sub­si­diza­tion of crit­i­cal inputs like elec­tric­ity and water. This was done to counter regional dis­par­i­ties that existed in the coun­try.
• Licenses to increase pro­duc­tion were issued only if the gov­ern­ment was con­vinced that the econ­omy required more of the goods.

c. Indus­trial Pol­icy State­ment, 1977- In Decem­ber 1977, the Janata Gov­ern­ment announced its New Indus­trial Pol­icy through a state­ment in the Par­lia­ment.

• The main thrust of this pol­icy was the effec­tive pro­mo­tion of cot­tage and small indus­tries widely dis­persed in rural areas and small towns.
  • In this pol­icy the small sec­tor was clas­si­fied into three groups, cot­tage and house­hold sec­tor, tiny sec­tor and small scale indus­tries.
  • The 1977 Indus­trial Pol­icy pre­scribed dif­fer­ent areas for large scale indus­trial sec­tor- Basic indus­tries,Cap­i­tal goods indus­tries, High tech­nol­ogy indus­tries and Other indus­tries out­side the list of reserved items for the small scale sec­tor.
  • The 1977 Indus­trial Pol­icy restricted the scope of large busi­ness houses so that no unit of the same busi­ness group acquired a dom­i­nant and monop­o­lis­tic posi­tion in the mar­ket.
  • It put empha­sis on reduc­ing the occur­rence of labour unrest. The Gov­ern­ment encour­aged the worker’s par­tic­i­pa­tion in man­age­ment from shop floor level to board level.
  • Crit­i­cism: The indus­trial Pol­icy 1977, was sub­jected to seri­ous crit­i­cism as there was an absence of effec­tive mea­sures to curb the dom­i­nant posi­tion of large scale units and the pol­icy did not envis­age any socio­eco­nomic trans­for­ma­tion of the econ­omy for curb­ing the role of big busi­ness houses and multi­na­tion­als.

D. Indus­trial Pol­icy of 1980 sought to pro­mote the con­cept of eco­nomic fed­er­a­tion, to raise the effi­ciency of the pub­lic sec­tor and to reverse the trend of indus­trial pro­duc­tion of the past three years and reaf­firmed its faith in the Monop­o­lies and Restric­tive Trade Prac­tices (MRTP) Act and the For­eign Exchange Reg­u­la­tion Act (FERA).

E. New Indus­trial Pol­icy Dur­ing Eco­nomic Reforms of 1991#

The long-awaited lib­er­alised indus­trial pol­icy was announced by the Gov­ern­ment of India in 1991 in the midst of severe eco­nomic insta­bil­ity in the coun­try. The objec­tive of the pol­icy was to raise effi­ciency and accel­er­ate eco­nomic growth.

Fea­tures of the New Indus­trial Pol­icy#

• De-reser­va­tion of Pub­lic sec­tor: Sec­tors that were ear­lier exclu­sively reserved for pub­lic sec­tor were reduced. How­ever, pre-emi­nent place of pub­lic sec­tor in 5 core areas like arms and ammu­nition, atomic energy, min­eral oils, rail trans­port and min­ing was con­tin­ued.
  • Presently, only two sec­tors- Atomic Energy and Rail­way oper­a­tions- are reserved exclu­sively for the pub­lic sec­tor.
• De-licens­ing: Abo­li­tion of Indus­trial Licens­ing for all projects except for a short list of indus­tries.
  • There are only 4 indus­tries at present related to secu­rity, strate­gic and envi­ron­men­tal con­cerns, where an indus­trial license is cur­rently required-
    • Elec­tronic aero­space and defence equip­ment
    • Spec­i­fied haz­ardous chem­i­cals
    • Indus­trial explo­sives
    • Cig­ars and cig­a­rettes of tobacco and man­u­fac­tured tobacco sub­sti­tutes
• Dis­in­vest­ment of Pub­lic Sec­tor: Gov­ern­ment stakes in Pub­lic Sec­tor Enter­prises were reduced to enhance their effi­ciency and com­pet­i­tive­ness.
• Lib­er­al­i­sa­tion of For­eign Invest­ment: This was the first Indus­trial pol­icy in which for­eign com­pa­nies were allowed to have major­ity stake in India. In 47 high pri­or­ity indus­tries, upto 51% FDI was allowed. For export trad­ing houses, FDI up to 74% was allowed.
  • Today, there are numer­ous sec­tors in the econ­omy where gov­ern­ment allows 100% FDI.
• For­eign Tech­nol­ogy Agree­ment: Auto­matic approvals for tech­nol­ogy related agree­ments.
• MRTP Act was amended to remove the thresh­old lim­its of assets in respect of MRTP com­pa­nies and dom­i­nant under­tak­ings. MRTP Act was replaced by the Com­pe­ti­tion Act 2002.

Out­comes of New Indus­trial Poli­cies#

• The 1991 pol­icy made ‘Licence, Per­mit and Quota Raj’ a thing of the past. It attempted to lib­er­alise the econ­omy by remov­ing bureau­cratic hur­dles in indus­trial growth.
• A smaller role for the pub­lic sec­tor reduced the bur­den on the Gov­ern­ment.
• The pol­icy pro­vided eas­ier entry of multi­na­tional com­pa­nies, pri­vati­sa­tion, removal of asset limit on MRTP com­pa­nies, lib­eral licens­ing.
  • All this resulted in increased com­pe­ti­tion, which led to lower prices for many goods, such as elec­tron­ics. This brought domes­tic as well as for­eign invest­ment in almost every sec­tor opened to pri­vate sec­tor.
• The pol­icy was fol­lowed by spe­cial efforts to increase exports. Con­cepts like Export Ori­ented Units, Export Pro­cess­ing Zones, Agri-Export Zones, Spe­cial Eco­nomic Zones and lately National Invest­ment and Man­u­fac­tur­ing Zones emerged. All these have ben­e­fit­ted the export sec­tor of the coun­try.

Lim­i­ta­tions of Indus­trial Poli­cies in India#

• Stag­na­tion of Man­u­fac­tur­ing Sec­tor: Indus­trial poli­cies in India have failed to push man­u­fac­tur­ing sec­tor whose con­tri­bu­tion to GDP is stag­nated at about 16% since 1991.
• Dis­tor­tions in indus­trial pat­tern owing to selec­tive inflow of invest­ments: In the cur­rent phase of invest­ment fol­low­ing lib­er­al­i­sa­tion, while sub­stan­tial invest­ments have been flow­ing into a few indus­tries, there is con­cern over the slow pace of invest­ments in many basic and strate­gic indus­tries such as engi­neer­ing, power, machine tools, etc.
• Dis­place­ment of labour: Restruc­tur­ing and mod­erni­sa­tion of indus­tries as a sequel to the new indus­trial pol­icy led to dis­place­ment of labour.
• Absence of incen­tives for rais­ing effi­ciency: Focussing atten­tion on inter­nal lib­er­al­i­sa­tion with­out ade­quate empha­sis on trade pol­icy reforms resulted in ‘con­sump­tion-led growth’ rather than ‘invest­ment’ or ‘export-led growth’.
• Vaguely defined indus­trial loca­tion pol­icy: The New Indus­trial Pol­icy, while it empha­sised the harm­ful effects of dam­age to the envi­ron­ment, failed to define a proper indus­trial loca­tion pol­icy, which could ensure a pol­lu­tion free devel­op­ment of indus­trial cli­mate.

Way For­ward#

• Indus­trial poli­cies in India have taken a shift from pre­dom­i­nantly Social­is­tic pat­tern in 1956 to Cap­i­tal­is­tic since 1991.
• India now has a much lib­er­alised indus­trial pol­icy regime focus­ing on increased for­eign invest­ment and lesser reg­u­la­tions.
• India ranked 77th in the World Bank's Doing Busi­ness Report 2019. Reforms related to insol­vency res­o­lu­tion (the Insol­vency and Bank­ruptcy Code, 2016) and the Goods and Ser­vices Taxes (GST) are impres­sive and will result in long-term gains for the indus­trial sec­tor.
• Cam­paigns such as Make in India and Start up India have helped to enhance the busi­ness ecosys­tem in the coun­try.
• How­ever, elec­tric­ity short­ages and high prices, credit con­straints, high unit labour costs due to labour reg­u­la­tions, polit­i­cal inter­fer­ence and other reg­u­la­tory bur­dens con­tinue to remain chal­lenges for firm growth of the indus­trial sec­tor in India.
• There is a need for a new Indus­trial Pol­icy to boost the man­u­fac­tur­ing sec­tor in the coun­try. Gov­ern­ment in Decem­ber 2018 also felt the need to intro­duce a new Indus­trial Pol­icy that would be a road map for all busi­ness enter­prises in the coun­try.