Industrial Policies - Thought Chakra

Industrial Policies – UPSC Notes – Indian Geography

Industrial Policies comprise standards and measures established by the Government to assess the advancement of the manufacturing sector, thereby fostering economic growth and national development.

The government implements initiatives to stimulate and enhance the competitiveness and capabilities of diverse firms.

Government intervention plays a pivotal role in shaping the ownership and structure of industries while impacting their performance. This intervention encompasses subsidies, financial assistance, and regulatory measures. It involves a spectrum of elements such as procedures, principles (reflecting the economic philosophy), policies, regulations, incentives, punishments, tariff policies, labor policies, and the government’s stance on foreign capital.

Objectives

The primary goals of the Industrial Policy set by the Government of India are:

  • Sustained growth in productivity,
  • Augmentation of gainful employment,
  • Optimization of human resources utilization,
  • Attainment of international competitiveness, and
  • Transformation of India into a significant partner and player in the global arena.

Industrial Policies in India since Independence

Industrial Policy Resolution of 1948

The Industrial Policy Resolution of 1948 outlined the State’s role in industrial development, functioning both as an entrepreneur and an authority. It established India’s adoption of a Mixed Economic Model. Industries were categorized into four main areas:

  1. Strategic Industries (Public Sector): These encompassed areas where the Central Government held a monopoly, including Arms and ammunition, Atomic energy, and Rail transport.
  2. Basic/Key Industries (Public-cum-Private Sector): Six industries, such as coal, iron & steel, aircraft manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and mineral oil, were labeled as “Key Industries” or “Basic Industries.” These were to be established by the Central Government, with existing private sector enterprises allowed to continue.
  3. Important Industries (Controlled Private Sector): This category comprised 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 remained under the private sector, with general control vested in the central government, in consultation with state governments.
  4. Other Industries (Private and Cooperative Sector): All industries not covered in the above categories were designated for the private sector or cooperative sector.

To enforce the Industrial Policy Resolution, the Industries (Development and Regulation) Act was enacted in 1951.

Industrial Policy Statement of 1956

The Industrial Policy Statement of 1956 marked a significant revision of the initial Industrial Policy of 1948. Widely known as the “Economic Constitution of India” or “The Bible of State Capitalism,” it laid out crucial guidelines for the country’s industrial landscape until June 1991.

This policy emphasized:

  • Expansion of the public sector,
  • Development of a robust and expanding cooperative sector,
  • Encouragement of the separation of ownership and management in private industries, and
  • Prevention of the emergence of private monopolies.

Under the IPR, 1956, industries were classified into three categories:

  1. Schedule A: Consisting of 17 industries, it was exclusively the responsibility of the State. Four industries, namely arms and ammunition, atomic energy, railways, and air transport, were under Central Government monopolies.
  2. Schedule B: Comprising 12 industries, it was open to both the private and public sectors, with a tendency towards state ownership over time.
  3. Schedule C: All other industries not included in the first two schedules fell into this category, which remained open to the private sector, although the State reserved the right to undertake any form of industrial production.

The policy underscored the importance of cottage and small-scale industries for expanding employment opportunities and fostering decentralization of economic power. It advocated for industrial peace and ensured that the benefits of production were fairly distributed among the masses, aligning with the principles of democratic socialism.

However, the policy faced criticism from the private sector, primarily due to its restrictive nature, which significantly curtailed the scope for private sector expansion. The private sector was subjected to state control through a licensing system.

Industrial Licenses

Acquiring a license from the government was a mandatory requirement for establishing new industries or expanding production.

To encourage the establishment of new industries in economically backward regions, the government offered simplified licensing procedures and subsidies for essential inputs such as electricity and water. This initiative aimed to address the regional disparities prevalent across the country.

Licenses for production expansion were granted selectively, contingent upon the government’s assessment of the economy’s demand for additional goods.

Industrial Policy Statement, 1977

In December 1977, the Janata Government unveiled its New Industrial Policy with a statement in Parliament.

The primary focus of this policy was the effective promotion of cottage and small industries, particularly in rural areas and small towns.

Under this policy, the small sector was categorized into three groups: cottage and household sector, tiny sector, and small-scale industries.

For the large-scale industrial sector, the 1977 policy designated specific areas such as Basic industries, Capital goods industries, High technology industries, and other industries beyond the scope of those reserved for the small-scale sector.

Furthermore, the policy aimed to curtail the dominance of large business houses to prevent the acquisition of monopolistic positions in the market.

It also emphasized mitigating labor unrest and advocated for worker participation in management, extending from the shop floor to the board level.

However, the Industrial Policy of 1977 faced significant criticism. Critics highlighted the lack of effective measures to address the dominance of large-scale units and the failure to outline a comprehensive plan for socioeconomic transformation, particularly in curbing the influence of big business houses and multinationals.

Industrial Policy of 1980

The Industrial Policy of 1980 aimed to promote the concept of economic federation, enhance the efficiency of the public sector, and reverse the downward trend in industrial production over the previous three years.

It reaffirmed the government’s commitment to the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).

New Industrial Policy During Economic Reforms of 1991

In 1991, amidst severe economic instability, the Government of India finally unveiled the much-anticipated liberalized industrial policy.

The primary objective of this policy was to enhance efficiency and accelerate economic growth.

Features of New Industrial Policy


De-reservation of Public Sector:
The policy reduced sectors exclusively reserved for the public sector, maintaining its pre-eminent position in key areas like arms and ammunition, atomic energy, mineral oils, rail transport, and mining.

De-licensing: Industrial Licensing was abolished for most projects, except for a short list of industries related to security, strategic, and environmental concerns.

Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were reduced to enhance efficiency and competitiveness.

Liberalization of Foreign Investment: Foreign companies were permitted majority stake in India, with up to 51% FDI allowed in 47 high-priority industries and up to 74% for export trading houses. Currently, numerous sectors allow 100% FDI.

Foreign Technology Agreement: Automatic approvals were granted for technology-related agreements.

Amendment of MRTP Act: The MRTP Act’s asset threshold limits for MRTP companies and dominant undertakings were removed, and it was eventually replaced by the Competition Act 2002.

Outcomes of New Industrial Policies

The 1991 policy ushered in the end of the ‘Licence, Permit, and Quota Raj’, marking a significant shift towards liberalization by eliminating bureaucratic obstacles hindering industrial growth.

The reduced role of the Public sector lightened the Government’s burden.

The policy facilitated easier entry for multinational companies, privatization, removal of asset limits on MRTP companies, and liberal licensing, fostering increased competition. This competition led to lower prices, particularly noticeable in goods like electronics, attracting both domestic and foreign investment across various sectors opened to the private sector.

Subsequently, special efforts were made to boost exports, introducing concepts like Export Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones, and more recently, National Investment and Manufacturing Zones. These initiatives have significantly benefited the country’s export sector.

Limitations of Industrial Policies in India

Stagnation of Manufacturing Sector: Despite various industrial policies, the manufacturing sector’s contribution to GDP has remained stagnant at around 16% since 1991.

Distortions in Industrial Pattern: Following liberalization, investments have selectively flowed into certain industries, while others such as engineering, power, and machine tools have experienced a sluggish pace of investment.

Displacement of Labor: The restructuring and modernization of industries following the new industrial policy have led to labor displacement.

Absence of Efficiency Incentives: Internal liberalization efforts lacked sufficient emphasis on trade policy reforms, resulting in consumption-led growth instead of investment or export-led growth, with inadequate incentives for efficiency enhancement.

Vaguely Defined Industrial Location Policy: Although the New Industrial Policy highlighted the environmental damage, it failed to establish a clear industrial location policy ensuring pollution-free industrial development.

Way Forward

Shift in Industrial Policies: India transitioned from a predominantly socialistic pattern in 1956 to a capitalistic approach since 1991.

Liberalized Industrial Policy: Presently, India maintains a liberalized industrial policy regime, prioritizing increased foreign investment and reduced regulations.

Reforms and Rankings: India ranked 77th on the World Bank’s Doing Business Report 2018, with noteworthy reforms in insolvency resolution (Bankruptcy and Insolvency Act, 2017) and Goods and Services Taxes (GST), promising long-term gains for the industrial sector.

Government Campaigns: Initiatives like Make in India and Startup India have contributed to enhancing the business ecosystem in the country.

Challenges Persist: Despite progress, challenges such as electricity shortages, credit constraints, high unit labor costs due to labor regulations, political interference, and other regulatory burdens hinder firm growth in the industrial sector.

Call for New Industrial Policy: Recognizing the need for a boost in the manufacturing sector, the Government in December 2018 expressed the necessity for a new Industrial Policy to serve as a roadmap for all business enterprises in the country.

FAQs on Industrial Policies

Q. When was the first Industrial Policy announced in India?

Ans. The first Industrial Policy in India was announced post-independence in 1948. It was presented by Dr. Shyama Prasad Mukherjee.

Q. What is ‘LPG’ as per the New Industrial Policy, 1991?

Ans. The main goals of the New Industrial Policy were:

LLiberalization PPrivatization GGlobalisation

This eligibility criterion differs for candidates belongs to different categories like SC/ST/OBC, etc. aspirants can check the RBI Grade B eligibility criteria at the linked article.

Q. What are the objectives of Industrial Policy?

Ans. The main objectives of Industrial Policy in India include:

  • Maintaining steady growth and productivity
  • Increasing employment opportunities
  • Better usage of existing human resources
  • To match up to the International standards of productivity

Q. What is the IDR Act?

Ans. The Industrial Development and Regulation Act provides the conceptual and legal framework for industrial development and industries in India.

Q. What is the aim of industrial policy?

Ans. The industrial policy seeks to provide a framework of rules, regulations, and reservation of spheres of activity for the public and the private sectors. This is aimed at reducing the monopolistic tendencies and preventing concentration of economic power in the hands of a few big industrial houses.

Q. How does industrial policy affect the economy?

Ans. By using a set of means, such as credit, taxation, subsidies, and entry threshold reduction, industrial policy can decrease market failures caused by factors such as externalities and imperfect market mechanism, improve resource allocation efficiency, and promote industrial development.

Q. What are the advantages of industrial policy?

Ans. The shift of capital and human resources towards manufacturing provides at least four major benefits: productivity growth, development of more and deeper linkages, economies of scale, and new export opportunities.

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