Industrial Policy

UNIT 14 INDUSTRIAL POLICY

Structure
14.0 Objectives
14.1 Introduction
14.2 Industrial Policy Resolution
14.2.1 Industrial Policy Resolution, 1948
14.2.2 Industrial Policy Resolution, 1956
14.2.3 Industrial Policy Statement, 1977

14.2.4 Industrial Policy Statement, 1980

14.3 New Industrial Policy, 1991

14.4 Indicators of Industrial Growth
14.5 Let Us Sum Up
14.6 Key Words
14.7 Terminal Questions

14.0 OBJECTIVES
After going through this unit, you will be able to:
• Explain the meaning of industrial policy;
• Analyse industrial policies drafted by the government at different points of
time and amendments made therein;
• Identify indicators of industrial growth in India and their significance; and
• Identify the factors that have played a defining role in shaping industrial
policies after independence.

14.1 INTRODUCTION
Industrial revolution, that began in Europe and later spread to the entire world,
is one of the most notable achievements in the history of mankind. As industrial
revolution resulted into mass scale production in short time.The industrialized
states promoted exports of manufactured goods through fiscal incentives and
policy support. The competitive industrialization in different parts of Europe first
and later in the other parts of the world, forced states/governments to encourage
innovations.The science and technology were promoted, educational institutes
were set up. These developments facilitated them to supply skilled human capital
and build infrastructure in the country. Industrial revolution helped them amass
huge wealth and achieve technological advancements and eventually benefitted
them in becoming the industrially advanced economies or First World nations
in the world. In this Unit, you will learn the industrial Policy resolution, new
industrial policy and indicators of industrial growth in India.

14.2 INDUSTRIAL POLICY RESOLUTIONS

In the colonial period, Indian raw materials exported largely to England,
processed in mills in factories there, and sold back to India as finished goods.
When the Britishers left, India inherited industries that was inefficient and was 217
Sectoral Development-II: not producing any exportable surplus. After independence, the Government felt
Industrial and Services
an urgent need to change the very nature and type of industries in the country.
The first Prime Minister Jawaharlal Nehru too realized the fundamental problem
of industrial sector in India and held that industrialization was the key to India’s
success. Nehru also believed that India should be economically self-sufficient,
although his approach to self-sufficiency led through large-scale industrialization
rather than village industries. In India, there has been a consensus for long
on the role of government in providing infrastructure and maintaining stable
macroeconomic policies. It is due to policy initiative during early years of
planning- particularly the second and third five year plans- that India now has
a strong and diversified industrial base and is a major industrial nation of the
world. However, manufacturing capabilities of China, South Korea and Thailand
are well developed.
Industrial Policy is defined as the strategic effort by the state to encourage
economic transformation, i.e. the shift from lower to higher productivity activities.
Industrial policy refers to any type of selective government intervention or policy
that attempts to alter the structure of production in favour of sectors that are
expected to offer better prospects for economic growth. So, Industrial Policy is
the set of standards and measures set by the Government to evaluate the progress
of the manufacturing sector that ultimately enhances economic growth and
development of the country. It is a vision document that provides a direction to
the government to achieve certain predetermined goals in a stipulated period.
An industrial policy has its pre-decided aims and objective that are to be achieved
in the given time frame. Following can be some of the common objectives of an
Industrial Policy;
• To maintain steady growth in productivity
• To create more employment opportunities
• Utilize the available human resources effectively
• To accelerate GDP growth rate
14.2.1 Industrial Policy Resolution, 1948
The Government of India set out in their Resolution dated 6 April, 1948 the
policy which they proposed to pursue in the industrial field. The Resolution
emphasised the importance to the economy of securing a continuous increase in
production and its equitable distribution.It pointed out that the State must play
progressively active role in the development of Industries. It laid down that arms
and ammunition, atomic energy and railway transport would be the monopoly
of the Central Government.The State would be exclusively responsible for the
establishment of new undertakings in six basic industries. If the State realises the
necessity to secure the cooperation of private enterprise in the national interest, the
state may do so. The rest of the industrial field was left open to private enterprise
though it was made clear that the State would also progressively participate in
this field. Some of the important take away points this resolution were as follows;
• Mixed Economy: The Industrial Policy Resolution, 1948 was first major
policy of independent India which was launched to lay the foundation of
a mixed economy.In mixed economy both private and public enterprises
would march hand in hand to accelerate the pace of industrial development.
It means there would be co-existence of public sector and private sector. The
decision regarding price determination, resource allocation and distribution
218 in public sector shall be taken by the government. Tata Steel, Hero Motors
 and Hindustan Unilever fall under the domain of public sector.However, Industrial Policy
the market shall take all economic decisions in case of the private sector.
Hinduja, Tata and Birla are examples of the private sector.
• Priority to Small scale and cottage industries: Small scale and cottage
industries were given the importance due to their wide spread, labour
intensive nature and low capital and low skill requirements.
• Restrictions on foreign investments: The government restricted foreign
investments to protect domestic industries from global competition.
• Industries were divided into 4 categories
• State monopolies:Exclusive monopoly of central government in arms and
ammunitions, production of atomic energy and management of railways.
According to Cambridge Dictionary, “State monopoly is a situation wherein
an organization owned by a government supplies of all particular product or
service, with no competitors”. For example, LIC, Air India and BSNL used
to be state monopoly in India.
• New undertaking undertaken only by state (coal, iron and steel, aircraft
manufacturing, ship building, telegraph, telephone etc).
• Industries to be regulated by the government(Industries of basic importance):
The entire secondary sector was by and large regulated by the government.
• Remaining sectors were open to private enterprise, individuals and
cooperatives. Although, there was not much important left behind for the
private sector to perform outstandingly well.
During the early years after independence, the Government adopted a policy that
favoured industrialization through public sector intervention and giving limited
space to the private sector. The reason was the private sector had neither enough
resources not willingness to undertaken projects of nation building. The private
sector unlike the Government had no capacity to mobilize funds for megaprojects
from anywhere. India needed to develop heavy and basic industries like iron and
steel, power generation, heavy engineering, to name a few.The Industrial Policy
Resolution, 1948 – historically important policy document that declared India
as a Mixed economy- was a step towards right direction to develop industries
through state participation. It showed that the Indian Government had a socialist
bent. It provided some ownership rights of assets but at the same time, the private
sector did get some space to participate in the process of industrialization between
1948 and 1956.
14.2.2 Industrial Policy Resolution, 1956
The Industrial Policy Resolution of 1948 was followed by the Industrial Policy
Resolution of 1956.The objective was to accelerate the rate of economic growth
and the speeding up of industrialisation as a means of achieving a socialist pattern
of society. It was regarded as the “Economic Constitution of India” or “The Bible
of State Capitalism”. In 1956, capital was scarce and the base of entrepreneurship
not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy
to the role of the State to assume a predominant and direct responsibility for
industrial development. 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.
The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis 219
Sectoral Development-II: Model of growth. This Model suggested for a shift in the pattern of industrial
Industrial and Services
investment towards building up a domestic consumption goods sector.This
required investment in building a capacity in the production of capital goods or
heavy industries leading to an economy with a long term higher growth path. It
provided the basic framework for the government’s policy in regard to industries
till June 1991.
The Industrial Policy Resolution - 1956 classified industries into three categories;
a) Schedule A: The first category comprised 17 industries (included in Schedule
A of the Resolution). These industries were exclusively under the domain
of the Government. These included inter alia, railways, air transport, arms
and ammunition, iron and steel and atomic energy.
b) Schedule B: The second category comprised 12 industries (included in
Schedule B of the Resolution). These industries were envisaged to be
progressively State owned but private sector was expected to supplement
the efforts of the State.
c) Third Category: The third category contained all the remaining industries
and it was expected that private sector would initiate development of these
industries. The industries would remain open for the State as well.
The Resolution widened the scope of the public sector, rather established the
dominance of the public sector in most of the key areas of the economy. Some of
the public sector enterprises grew too big in size. It was envisaged that the State
would facilitate and encourage development of these industries in the private
sector, in accordance with the programmes formulated under the Five Year Plans.
The appropriate fiscal measures and adequate infrastructure would be insured.
Despite the demarcation of industries into separate categories, the Resolution
was flexible enough to allow the required adjustments and modifications in the
national interest.
Following the Theory of Infant Industry Argument, the domestic industry was
protected from global competition, through import quota, import licensing and
other import trade barriers. However, 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 IPR, 1956 was a landmark policy statement
and it formed a basis of subsequent policy announcements.
14.2.3 Industrial Policy Statement, 1977
The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on
the role of small-scale, tiny and cottage industries.This policy was an extension
of the 1956 policy, but it focussed on prioritization of small scale industries and
home based units to decentralize economic power in India. Its important focus
was on;
• Employment to the poor and reduction in the concentration of wealth.
• Decentralisation of industries
• Priority to small scale Industries
• Created a new unit called “Tiny Unit”
• Imposed restrictions on Multinational Companies (MNC)
This Statement emphasized decentralization of industrial sector with increased role
for small scale, tiny and cottage industries. It also provided for close interaction
220 between industrial and agricultural sectors. Highest priority was accorded to power
generation and transmission. It expanded the list of items reserved for exclusive Industrial Policy
production in the small scale sector from 180 to more than 500. For the first time,
within the small scale sector, a tiny unit was created. The tiny unit is defined as a
unit with investment in machinery and equipment up to Rs0.1million and situated
in towns or villages with a population of less than 50,000 (as per 1971 census).
Basic goods, capital goods, high technology industries important for development
of small scale and agriculture sectors were clearly delineated for large scale
sector. It was also stated that foreign companies that diluted their foreign equity
up to 40 per cent under Foreign Exchange Regulation Act (FERA) 1973 were
to be treated at par with the Indian companies. Fully owned foreign companies
were allowed only in highly export oriented sectors or sophisticated technology
areas. For all approved foreign investments, companies were completely free to
repatriate capital and remit profits, dividends, royalties, etc. Further, in order to
ensure balanced regional development, it was decided not to issue fresh licenses
for setting up new industrial units within certain limits of large metropolitan
cities (more than 1 million population) and urban areas (more than 0.5 million
population).
14.2.4 Industrial Policy Statement, 1980
The industrial Policy Statement of 1980 placed accent on promotion of
competition in the domestic market, technological upgradation and modernization
of industries. Some of the socio-economic objectives spelt out in the Statement
were as follows;
i) optimum utilisation of installed capacity,
ii) higher productivity,
iii) higher employment levels,
iv) removal of regional disparities,
v) strengthening of agricultural base,
vi) promotion of export oriented industries and
vii) consumer protection against high prices and poor quality.
Policy measures were announced to revive the efficiency of public sector
undertakings (PSUs) by developing the management cadres in functional fields
viz., operations, finance, marketing and information system. An automatic
expansion of capacity up to five per cent per annum was allowed, particularly in
the core sector and in industries with long-term export potential. Special incentives
were granted to industrial units which were engaged in industrial processes and
technologies aiming at optimum utilization of energy and the exploitation of
alternative sources of energy. In order to boost the development of small scale
industries, the investment limit was raised to Rs.2 million in small scale units
and Rs.2.5 million in ancillary units. In the case of tiny units, investment limit
was raised to Rs.0.2 million.

Self-assessment Exercise A
1) What are the objectives of industrial policy?
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221
Sectoral Development-II: 2) Write three important focus of industrial policy statement, 1977.
Industrial and Services
........................................................................................................................
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3) Write full forms of the following terms.
FERA ............................................................................................................
MRTP.............................................................................................................
MNC...............................................................................................................
IPR .................................................................................................................
4) Write three objectives of Industrial Policy Statement, 1980.
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14.3 NEW INDUSTRIAL POLICY, 1991

In India, regulatory mechanisms were enforced in various ways. For instance,
industrial licensing under which every entrepreneur had to get permission from
government officials to start a firm, close a firm or decide the amount of goods
that could be produced. Private sector was not allowed in many industries. Some
goods could be produced only in small-scale industries, and controls on price
fixation and distribution of selected industrial products. During late 1980s and
early 1990s, India faced high level of debt, double digit inflation, slow GDP
growth and Balance of Payment (BOP) crisis. The Government’s financial health
was unsound and it was on the verse of collapse. The reasons put forth by experts
included high tax rates, industrial licensing, MRTP act and FERA, among others.
International Monetary Fund (IMF) suggested us to adopt economic reforms,
famously called New Industrial Policy, 1991 or LPG reforms, in a major way.
Government decided to take a series of initiatives in respect of the policies
relating to the following areas. Industrial Licensing, Foreign Investment, Foreign
Technology Agreements, Public Sector Policy, MRTP Act. The reform policies
introduced in and after 1991 removed many of these restrictions. Industrial
licensing was abolished for almost all but product categories; alcohol, cigarettes,
hazardous chemicals, industrial explosives, electronics, aerospace and drugs
and pharmaceuticals. The only industries which are now reserved for the public
sector are a part of atomic energy generation and some core activities in railway
transport. Many goods produced by small-scale industries have now been de-
reserved. In most industries, the market has been allowed to determine the prices.
Therefore, the New Industrial Policy, 1991 had the following important features;
i. Creation of a positive business environment by simplifying procedures,
reducing documentation and offering fiscal incentives.
ii. Allowing foreign investment by lowering controls and regulations.
iii. Privatization of public sector enterprises, particularly sick units.
iv. Exit policy for the sick units in private sector for a smooth exit without
222 affecting welfare of labour.
v. Financial sector reforms to deregulate interest rates, improve credit Industrial Policy
availability and to create a conducive environment for banking and finance
sector.
vi. Reducing tariff and non-tariff barriers on imports and simplifying procedure
for import of goods and services.
vii. Industry friendly approach of the government to promote business.
viii. Devaluation of Indian rupee by 21 per cent and convertibility of Indian rupee
on current account.
The New Industrial Policy, 1991 had the main objective of providing facilities
to market forces and to increase efficiency.
L – Liberalization: It refers to reduction in government control. Different types of
government regulations and controls from businesses or economic activates in the
country are reduced.The government imposes much less restrictions than before
and is therefore said to be more liberal. Industrial licensing was abolished except
for 18 industries. MRTP Act was introduced to check monopolies. The MRTP
Act was relaxed in 1991. MRTP Act was replaced by the Competition Act 2002
that promoted competition and encouraged industries expand their businesses,
incorporate mergers and acquisitions and adopt best practices in business.
P – Privatization: It refers to increase in the role and scope of Private sector.
De-reservation of the sectors that were originally reserved for the government.
This encouraged the private sector to participate in different economic activities
for better management, efficient use of resources and become competitive.
G – Globalisation:It refers to integration of the Indian economy with the world
economy. Globalization aimed at making Indian economy part of the global
network of trade and commerce, of transport and communication. More and more
goods and services, investments and technology are moving among countries.
Most regions of the world are closer. It could be done by removing all kinds
of barriers; qualitative and quantitative on the export and import of goods and
services, man (labour) and machines (capital), etc. It provided an opportunity for
Indian firms to explore their markets in different parts of the world. However,
this also meant that foreign corporations were offered Indian markets that were
formally protected from global competition. Now they can sell their goods and
services.
In pursuit of the objectives of economic reforms, Government took a series of
initiatives in respect of the policies relating to the following areas including
Industrial Licensing, Foreign Investment, Foreign Technology Agreements, Public
Sector Policy and MRTP Act.
Industrial Licensing:Industrial licensing was a system of obtaining a license
through a complex procedure, lengthy documentation and mal-practicingfrom
the Government for setting up an industry. It discouraged entrepreneurs to set up
industrial units and hampered industrialization in the country. Industrial Licensing
is governed by the Industries (Development & Regulation) Act, 1951. The
Industrial Policy Resolution of 1956 identified the following three categories of
industries: (i) those that would be reserved for development in the public sector,
(ii) those that would be permitted for development through private enterprise
with or without State participation, and (iii) those in which investment initiatives
would ordinarily emanate from private entrepreneurs. The License Raj or Permit
Raj used to be a draconian act discouraging industrial activities in India. It had
created a pessimistic business environment in the country. 223
Sectoral Development-II: Industrial licensing, under the broad umbrella of economic reforms, was abolished
Industrial and Services
for all industries, except those specified, irrespective of levels of investment. That
means, anyone can set an industrial unit without obtaining a license except certain
conditions. These specified industries (Annex-II), will continue to be subject
to compulsory licensing for reasons related to security and strategic concerns,
social reasons, problems related to safety and over-riding environmental issues,
manufacture of products of hazardous nature and articles of elitist consumption.
The exemption from licensing aimed at helping many dynamic small and medium
entrepreneurs who have been unnecessarily hampered by the licensing system. As
a whole the Indian economy will benefit by becoming more competitive, more
efficient and modern and will take its rightful place in the world of industrial
progress.
Foreign Investment: Foreign investments in an economy has several advantages
including technology transfer, marketing expertise, introduction of modern
managerial techniques and new possibilities for promotion of exports. Prior to
the LPG reforms initiated since 1991, The Government had restricted entry of
foreign capital through numerous controls and regulations or tariff and non-tariff
barriers. While freeing Indian industry from official controls, opportunities for
promoting foreign investments in India after 1991 was a step in the right direction.
This exposed the Indian industry not only to foreign capital but has brought in
advanced technologies, professional experience and unleash its own potential
for a rapid industrial development.
In order to invite foreign investment in high priority industries, requiring large
investments and advanced technology, it has been decided to provide approval
for direct foreign investment upto 51% foreign equity in such industries. This
group of industries has generally been known as the “Appendix I industries”
and were areas in which FERA companies have already been allowed to invest
on a discretionary basis. Promotion of exports of Indian products calls for a
systematic exploration of world markets possible only through intensive and
highly professional marketing activities. To the extent that expertise of this nature
is not well developed so far in India. Attraction of substantial investment and
access to high technology involves interaction with some of the world’s largest
international manufacturing and marketing firms.Another important policy move
was replacing FERA with Foreign Exchange Management Act (FEMA). The
FEMA unlike FERA is less regulatory in nature. Presently, the RBI only manages
foreign exchange in the country. It means there are no limits on foreign exchange
spending. This has encouraged import of advanced technologies and superior
machines which eventually benefit local industries in India.
Foreign Technology Agreements
There is a great need for promoting an industrial environment where the
acquisition of technological capability receives priority. In the fast changing world
of technology the relationship between the suppliers and users of technology
must be a continuous one. Such a relationship becomes difficult to achieve when
the approval process includes unnecessary governmental interference on a case
to case basis involving endemic delays and fostering uncertainty. The Indian
entrepreneur has now come of age so that he no longer needs such bureaucratic
clearances of his commercial technology relationships with foreign technology
suppliers. Indian industry can scarcely be competitive with the rest of the world
if it is to operate within such a regulatory environment.

224
With a view to injecting the desired level of technological dynamism in Indian Industrial Policy
industry, Government provides automatic approval for technology agreements
related to high priority industries within specified parameters. Indian companies
are free to negotiate the terms of technology transfer with their foreign
counterparts according to their own commercial judgement. The predictability
and independence of action that this measure is providing to Indian industry is
inducing them to develop indigenous competence for the efficient absorption of
foreign technology. Greater competitive pressure induces our industry to invest
much more in research and development than they have been doing in the past.
Public Sector Policy: The public sector has been central to our philosophy of
development. In the pursuit of our development objectives, public ownership
and control in critical sectors of the economy has played an important role in
preventing the concentration of economic power. It reduces the regional disparities
and ensures that planned development serves the common good. The Industrial
Policy Resolution of 1956 gave the public sector a strategic role in economic
development. Massive investments have been made post-independence to build
a public sector which has a commanding role in the economy. Today key sectors
of the economy are dominated by mature public enterprises that have successfully
expanded production, opened up new areas of technology and built up a reserve
of technical competence in a number of areas.
After the initial success of the public sector entering new areas of industrial
and technical competence, a number of problems have begun to manifest
themselves in many of the public enterprises. Serious problems are observed in
the insufficient growth in productivity, poor project management, over-manning,
lack of continuous technological upgradation, and inadequate attention to R&D
and human resource development. In addition, public enterprises have shown a
very low rate of return on the capital investment. This has inhibited their ability
to regenerate themselves in terms of new investments as well as in technology
development. The result is that many of the public enterprises have become a
burden rather than being an asset to the Government.
Privatization or disinvestment of public sector enterprises (PSEs) is the process
of transferring of the ownership rights from the Government to private sector.
Disinvestment may be undertaken through equity sale at the stock market or
strategic sale to a private company. The term ‘Disinvestment’ was popularized
by Keynes. If the entire government company sold away to private players,
and the Government transfers full control over its ownership to the buyer
then it is called privatization. Disinvestment may be majority disinvestment
(Government retaining more than 50% share in the PSE) or minority disinvestment
(Government’s share reduces to below 50%, so influence on decision making
decreases).
The disinvestment process of CPSEs (Central Public Sector Enterprises) in India
was initiated inthe year 1991 with the advent of Government’s new economic
policy. Disinvestment was started mainly through sale of minority shareholding
in CPSEs and has considerably evolved over the years influenced bymarket
conditions. This is done to bridge resources gap, and recommendation of bodies
like Rangarajan committee and GV Ramakrishna Disinvestment commission.
In 1996, the Government of India set up a Disinvestment Commission under the
Ministry of Industries.The mandate of the commission was to assess the viability
and advice the Government on disinvesting various PSE's.Many important PSEs
like Bharat Aluminium Corporation Limited, Videsh Sanchar Nagar Limited,
Lodhi Hotel, Computer Maintenance Company, Hindustan Zinc and many more 225
Sectoral Development-II: were either privatized or disinvested. Department of Investment and Public Asset
Industrial and Services
Management (DIPAM) under the Ministry of Finance, Government of India is
tasked with the entire process of disinvestment in India. Disinvestment helped
Government realize massive funds that could be used for welfare activities and
financing of infrastructural developmental projects. However, some of the funds
have also been diverted towards financing of the public debt in the country.
Annual CPSE Disinvestment Target vs. Achievement since 1994-95
Year Target Achieved (Rs. Crore) Achievement (in per cent)
1994-95 4,000 4,843 121.08
1995-96 7,000 168 2.41
1996-97 5,000 380 7.59
1997-98 4,800 910 18.96
1998-99 5,000 5,371 107.42
1999-00 10,000 1,585 15.85
2000-01 10,000 1,871 18.71
2001-02 12,000 3,268 27.24
2002-03 12,000 2,348 19.57
2003-04 14,500 15,547 107.22
2004-05 4,000 2,765 69.12
2005-06 0 1,570 N.A.
2006-07 0 0 N.A.
2007-08 0 4,181 N.A.
2008-09 0 0 N.A.
2009-10 25,000 23,553 94.21
2010-11 40,000 22,763 56.91
2011-12 40,000 14,035 35.09
2012-13 30,000~ 23,857 79.52
2013-14 54,000 21,321 39.48
2014-15 58,425 24,349 41.68
2015-16 69,500 24,058 34.62
2016-17 56,500$ 46,378 82.09
2017-18 72,500 1,00,642 138.82
2018-19 80,000 87,513 109.39
2019-20 90,000 50,294 55.88
2020-21 2,10,000 32,742 15.59
Total 10,97,725 5,29,590 48
Source: Sourced from http://bsepsu.com/Annual_Table.asp
Every year, the government fixes a target for disinvestment of PSEs. For instance,
in 1991-92, it was targeted to mobilise Rs 2500 crore through disinvestment.
The government was able to mobilise Rs 3,040 crore more than the target. In
2017–18, the target was about Rs 1,00,000 crore, and the achievement was about
Rs 1,00,057 crore. Critics point out that the assets of PSEs have been undervalued
and sold to the private sector. This means that there has been a substantial loss
to the government and the outright sale of public assets. Moreover, the proceeds
from disinvestment are used to offset the shortage of government revenues rather
than using it for the development of PSEs and building social infrastructure in
226 the country.
The Disinvestment program has come a long way from the cautious start made Industrial Policy
in fiscal 1991-92 when small stakes in select CPSEs was divested to financial
institutions alone. As on 31st January, 2018, CPSEs constituted 10.93% and
11.04% of the total market capitalization of companies listed at BSE and NSE
respectively. Government strategies of disinvestment have taken shape over the
years and have been influenced by political compulsions, budgetary constraints,
market conditions and ideology of ruling political party at the Centre. In a haste
of fund-raising funds through privatization/disinvestment, the government has
resorted to multiple shortcuts in the disinvestment process. It has compromised
both the long-term interests of profitable PSUs, and the basic objectives of the
disinvestment programme itself.
There are disadvantages of economic reforms as well. Reforms leads to too
much of dependence on market resulting into unreasonable price rise, undesired
allocation of resources and regional unbalance in the economic development.
Availability of funds for social welfare like health and education and social
security benefits etc. may decrease. Economic reforms increase exposure to
global competition eventually leading to Indian firms, particularly small scale
industries, struggling to survive in the long. Undue political/policy interference by
multinational companies may be risky from the point of view of national security
as well as political stability of the nation. Reforms may increase temptation of the
Government to sell profit making public sector enterprises as well. The process
of globalisation through liberalisation and privatisation policies has produced
positive, as well as, negative results both for India and other countries. Some
scholars argue that globalisation should be seen as an opportunity in terms of
greater access to global markets, high technology and increased possibility of
large industries of developing countries to become important players in the
international arena. On the contrary, the critics argue that globalisation is a strategy
of the developed countries to expand their markets in other countries. According
to them, it has compromised the welfare and identity of people belonging to poor
countries. It has further been pointed out that market driven globalisation has
widened the economic disparities among nations and people.

14.4 INDICATORS OF INDUSTRIAL GROWTH

Trends in performance of Industrial sector are primarily monitored through Index
of Industrial Production (IIP) (monthly) and Annual Survey of Industries, ASI.
The Index of Industrial Production (IIP) is an index which shows the growth rates
in different industry groups of the economy in a stipulated period of time. The IIP
index is computed and published by the Central Statistical Organisation (CSO)
on a monthly basis. Whereas enterprise surveys pursuant to Economic Census
provide an idea about the dynamics of unorganized sector. Ministry of Statistics
& PI, through active involvement of both Central Statistics Office & National
Sample Survey Office, is the backbone of Industrial Statistics in India.Various
Ministries/Departments (Department of Industrial Policy and Promotion, Ministry
of Commerce and Industry, Ministry of Micro Small & Medium Enterprises,
Ministry of Corporate Affairs, Indian Bureau of Mines, Ministry of Mines, Office
of Textile Commissioner, Coffee/ Tea Boards etc.) maintain their own statistics.
Indian industry sometimes grew fast, sometimes faster but at times at much slower
rates. The pattern of growth was never same for all years post-independence. The
growth trends in Indian industry can be discussed in various phases as follows.

227
Sectoral Development-II: India Industrial Production
Industrial and Services
Source:https://tradingeconomics.com/india/industrial-production
Phase I-High Growth Phase (1950-51 to 1965-66)

This was the period between 1st plan and 3rd plan that laid down the foundation
for the industrial development. There was a noticeable acceleration in industrial
output due to substantial investments in the industrial sector, particularly in heavy
industries in manufacturing and supporting infrastructure.
Phase ll-Industrial Deceleration and Structural Retrogression (1966-80)
Phase of low growth phase or industrial deceleration from 1965 to 1974. The rate
of growth fell steeply from 9.0% per annum during the 3rd plan to a mere 4.1%
per annum in 1974. However, there was a sharp increase of 10.6% in Industrial
production in the year 1976-77. The rate of industrial growth for the remaining
4 years comes down considerably. Deceleration in industrial growth during the
period 1965-1980 indicates structural retrogression that plagued the industrial
sector during this period.
Phase III-The Period of Industrial Recovery (1981-1991)
The period of 1980s can broadly be termed as a period of industrial recovery.
The rate of industrial growth was 6.4% per annum during 1981-85, 8.5% per
annum during the 7th plan and 8.3% in 1990-91. This is a marked upturn from
growth rates of around 4% achieved during the latter half of sixties and the
seventies. Total factor productivity which registered a negative and negligible
growth of -0.2 to -0.3% per annum in the period 1966-67 to 1979-80 showed a
marked improvement in the first half of the 80s when it registered a growth of
3.4% per annum.
Phase IV-Reforms Phase (July 1991 onwards)
The worst industrial growth was observed in 1991-92 when it grew at a rate of
2.3%, however recovered to 6.0% in 1993-94. Interestingly, the industrial growth
then accelerated to 9.1% in 1994-95 and 13.0% in 1995-96 surpassing the growth
rates of 1980s. Thereafter, it declined to 6.1% in 1996-97, this deceleration
continued in 1997-98 as well. The main reason for the slowdown may be the
tightening of the monetary policy in 1995-96 and consequent credit squeeze with
high interest rates. The Industrial growth slowed down in 2000-01 and 2001-02
due to dismal performance by all broad sectors such as manufacturing, electricity
and mining and all end use groups such as capital goods, intermediate goods and
consumer goods, both durable and non-durables.
228
The year 2004-05 started on a positive note in April 2004 with annual growth Industrial Policy
of 8.9% in the Index of Industrial Production (IIP). The year 2004-05 conforms
to the normal historic pattern of industrial buoyancy, 8.4% growth, following a
good agricultural year.
The Indian economy has inched closer to the Chinese economy with its dominant
manufacturing sector.
Sectoral Growth Rates as per IIP (%) calculated w.r.t. previous year
Sub-Sector Mining Manufacturing Electricity General
Weights 14.37 77.63 7.99 100.00
2012-13 -5.3 4.8 4.0 3.3
2013-14 -0.1 3.6 6.1 3.3
2014-15 -1.4 3.8 14.8 4.0
2015-16 4.3 2.8 5.7 3.3
2016-17 5.3 4.4 5.8 4.6
2017-18 2.3 4.6 5.4 4.4
2018-19 2.9 3.9 5.2 3.8
2019-20 1.6 -1.4 1.0 -0.8
2020-21 -7.8 -9.6 -0.5 -8.4

Source: RBI
Annual Growth Rates as per IIP (%) calculated w.r.t. previous year
Use-based Primary Capital Intermediate Infrastructure/ Consumer Consumer
category goods goods goods construction durables non-
goods durables
Weight 34.05 8.22 17.22 12.34 12.84 15.33
2012-13 0.5 0.3 5.1 5.4 4.9 6.1
2013-14 2.3 -3.7 4.6 5.7 5.6 3.7
2014-15 3.8 -1.1 6.1 5 4 3.8
2015-16 5 3 1.5 2.8 3.4 2.6
2016-17 4.9 3.2 3.3 3.9 2.9 7.9
2017-18 3.7 4 2.3 5.6 0.8 10.6
2018-19 3.5 2.7 0.9 7.3 5.5 4
2019-20 0.7 -13.9 9.1 -3.6 -8.7 -0.1
2020-21 -7 -18.6 -9.4 -8.7 -15 -2.2

Source: RBI
It is important to note that the annual growth rate as per the IIP data for the period
between 2012-13 and 2020-21 shows that movement has relatively slowed down
to below 5% in all the sub-sectors of industrial sector, be it primary goods or capital
goods. Further, the growth rates of the three major sub-sectors of manufacturing,
namely, mining, manufacturing and electricity, one can see a downward trend
during the same period. Slowdown in industrial performance is not a good sign for
overall economy of the country because, for instance, manufacturing, value added
(% of GDP) in India was reported at 12.96 % of GDP in 2020. The COVID-19
pandemic is visibly having an adverse impact on the industrial activities in India.

Self-assessment Exercise B
1) Write four features of new industrial policy, 1991.
........................................................................................................................
229
Sectoral Development-II: ........................................................................................................................
Industrial and Services
........................................................................................................................
2) Write three advantages of foreign investment.
........................................................................................................................
........................................................................................................................
........................................................................................................................
3) What do you mean by Liberalization, Privatization and Globalization?
........................................................................................................................
........................................................................................................................
........................................................................................................................

14.5 LET US SUM UP

Evidently, in the process of evolution of industrial policy in India, the Government’s
intervention has been extensive. Unlike many East Asian countries which used
the State intervention to build strong private sector industries, India opted for the
State control over key industries in the initial phase of development. In order to
promote these industries the Government not only levied high tariffs and imposed
import restrictions, but also subsidized the nationalized firms, directed investment
funds to them, and controlled both land use and many prices.
In India, there has been a consensus for long on the role of government in providing
infrastructure and maintaining stable macroeconomic policies. However, the path
to be pursued toward industrial development has evolved over time. The form of
government intervention in the development strategy needs to be chosen from
the two alternatives: ‘Outward-looking development policies’ encourage not
only free trade but also the free movement of capital, workers and enterprises.
By contrast, ‘inward-looking development policies’ stress the need for one’s own
style of development. India initially adopted the latter strategy.
The advocates of import substitution in India believed that we should substitute
imports with domestic production of both consumer goods and sophisticated
manufactured items while ensuring imposition of high tariffs and quotas on
imports. In the long run, these advocates cite the benefits of greater domestic
industrial diversification and the ultimate ability to export previously protected
manufactured goods. This facilitated the economies of scale, low labour costs, and
the positive externalities of learning by doing cause domestic prices to become
more competitive than world prices. However, pursuit of such a policy forced the
Indian industry to have low and inferior technology. It did not expose the industry
to the rigours of competition and therefore it resulted in low efficiency. The inferior
technology and inefficient production practices coupled with focus on traditional
sectors choked further expansion of the Indian industry and thereby limited its
ability to expand employment opportunities. Considering these inadequacies,
the reforms currently underway aim at infusing the state of the art technology,
increasing domestic and external competition and diversification of the industrial
base. Such activities will create additional employment opportunities.
In retrospect, the Industrial Policy Resolutions of 1948 and 1956 reflected the
desire of the Indian State to achieve self-sufficiency in industrial production.
230 Huge investments by the State in heavy industries were designed to put the
Indian industry on a higher long-term growth trajectory. With limited availability Industrial Policy
of foreign exchange, the effort of the Government was to encourage domestic
production. This basic strategy guided industrialization until the mid-1980s.
Till the onset of reform process in 1991, industrial licensing played a crucial
role in channeling investments, controlling entry and expansion of capacity in
the Indian industrial sector. As such industrialization occurred in a protected
environment, which led to various distortions. Tariffs and quantitative controls
largely kept foreign competition out of the domestic market, and most Indian
manufacturers looked on exports only as a residual possibility. Little attention was
paid to ensure product quality, undertaking R&D for technological development
and achieving economies of scale. The industrial policy announced in 1991,
however, substantially dispensed with industrial licensing and facilitated foreign
investment and technology transfers. These activities threw open the areas hitherto
reserved for the public sector.
The policy focus in the recent years has been on deregulating the Indian industry,
enabling industrial restructuring, allowing the industry freedom and flexibility in
responding to market forces. It provides a business environment that facilitates
and fosters overall industrial growth. The future growth of the Indian industry as
widely believed, is crucially dependent upon improving the overall productivity
of the manufacturing sector, rationalisation of the duty structure, technological
upgradation, the search for export markets through promotional efforts and trade
agreements and creating an enabling legal environment.

14.6 KEY WORDS

Industrial policy: Industrial policy refers to any type of selective government
intervention or policy that attempts to alter the structure of production in favour
of sectors that are expected to offer better prospects for economic growth.
Industrial licensing: Industrial licensing was a system of obtaining a license
through a complex procedure, lengthy documentation and mal-practicing from
the Government for setting up an industry.
FERA: Foreign Exchange Regulation Act is a legislation that came into existence
in 1973 with the purpose to regulate certain dealings in foreign exchange, impose
restrictions on certain kinds of payments and to monitor the transactions impinging
the foreign exchange and the import and export of currency.
Disinvestment: Disinvestment means sale or liquidation of assets by the
government, usually Central and state public sector enterprises, projects, or other
fixed assets.
Globalization: Globalization is the process of interaction and integration among
people, companies, and governments worldwide.

14.7 TERMINAL QUESTIONS

Short questions
1. Define industrial policy.
2. Distinguish between privatization and disinvestment.
3. Define industrial licensing.
4. Explain the meaning of globalization.
5. Define liberalization. 231
Sectoral Development-II: 6. Give two reasons behind privatization of public sector enterprises.
Industrial and Services
7. How was the state of economic affairs of the economy of India during the
early years of 1990s that led to LPG reforms in the country?
Essay type of questions
1. Discuss in detail Industrial Policy Resolution, 1956.
2. Explain in detail LPG reforms initiated in India since 1991.
3. Discuss how state controls and regulations like MRTP Act, FERA and
Industrial Licensing acted as obstacles on the road of industrialization.
4. Discuss in detail the indicators of industrial growth in India.

Note: These questions/exercise will help you understand the unit better.
Try to write answers for them. But do not submit your answers to the
University for assessment. These are for your practice only.

FURTHER READINGS
The following textbooks and online resources can be referred for further in-depth
reading on the topics discussed in this unit.
Ahluwalia, I.J. and I.M.D., Little (1998). India’s Economic Reforms and
Development, Oxford University Press, New Delhi.
Bhagwati, Jagdish (2004).In Defense of Globalization, Ukraine: Oxford
University Press, March.
Baldev, Raj Nayar (2014). Globalization and India's Economic Integration, South
Asia in World Affairs Series, Georgetown University Press.
Bhattacharjee, Govind (2020). Public Sector Enterprises in India: Evolution,
Privatisation and Reforms, New Delhi: Sage Publications, July 29.
Bhaduri, Amit and Deepak Nayyar (1996). The Intelligent Person’s Guide to
Liberalisation, Penguin, Delhi.
Government of India Handbook of Industrial Policy and Statistics (Various Issues),
Office of Economic Adviser, Ministry of Commerce and Industry, New Delhi.
Guha, Ashok (Ed.) (1990). Economic Liberalisation, Industrial Structure and
Growth in India. Oxford University Press, New Delhi.
Handbook of Statistics on Indian Economy, Reserve Bank of India for various
years, Mumbai.
Mohan, Rakesh (Ed.) (2017). India Transformed: 25 Years of Economic Reforms,
Brookings Institution Press, August 23.
Sachs, Jeffrey D., AshutoshVarshney and NirupamBajpai (1999). India in the Era
of Economic Reforms, Oxford University Press, New Delhi.
Jalan, Bimal (1996). India’s Economic Policy: Preparing for the Twenty First
Century, Viking, Delhi.
Online references:
https://ncert.nic.in/textbook/pdf/jess204.pdf
https://ncert.nic.in/textbook/pdf/keec103.pdf
232 https://dipam.gov.in