UNIT 7 INDUSTRIAL STRUCTURE AT THE

TIME OF INDEPENDENCE
Structure
7.0
7.1
7.2

7.3

Objectives
Introduction
General Structure of the Industry
Performances of Major Industries at the Time of Independence
7.3.1 Cotton Industry
7.3.2 Jute Industry
7.3.3 Iron and Steel Industry
7.3.4 The Sugar Industry
7.3.5 The Cement Industry
7.3.6 The Chemicals Industry

7.4

The Organisation ofthe Indian Industries

7.4.1 Organ~sat~onal
Structure Based on Caste and Joint Family

. 7.4.2 The Managing Agency System

7.4.3 Joint Stock Company

7.5
7.6
7.7
7.8
7.9

Industrial Policy at the Time of Independence

Let Us Sum Up
Key Words
Some Usehl Books and References
Answers or Hints to Check Your Progress Exercises

7.0 OBJECTIVES
This unit gives an overview of industrial structureand nature of industrial organisation
in India at the time of her Independence. The unit will enable you to:
a learn general structure of the industry;
a discuss performances of some major industries at the time of Independence; and
a understand the organisation of the industry.

7.1 INTRODUCTION
Before the anival of the British, India was industrially more advanced than many of
the today's West European countries. But, under the British rule, much of its industrial
base was destroyed systematically,transforming the Indian industries into mere
suppliers of primary products to the advantage of the manufacturing industriesin
Britain. All these culminated in a weak industrial base, underdeveloped infrdsstructure
and a stagnant economy at the time of Independence. The structure of ownership
was highly concentrated and manufacturing industry was hardly export-oriented.
Moreover,the industry suffered fiom shortageof supply oftechnical and managerial

Il~clustrinl D e v e l o p m e n t
i r ~lnclin

7.2 GENERAL STRUCTURE OF THE INDUSTRY

Industries are classified in two ways. One is the broad sectoral classification such
as mining and quarrying, manufacturing, and electricity and gas. Other classification
is usually done in terms of use-based (such as basic goods, capital goods, intermediate
goods, consumer goods) and input-based (such as agriculture-based,metal-based,
chemical-based, transport equipment, electricity and allied).
But at the time of Independence, industries were not as diversified as to apply the
above classificationsthat the present industrial structure allows us to do. Among the
manufacturing industries, cotton textiles, leather goods, paper, cement and iron and
steel, were the most prominent industries. The industrial development in Indiaprior
to the First Five Year Plan beginning in 1951, was confined largely to consumer
goods sector. Cement and iron and steel were perhaps the only significant
intermediate-good producing industries.Other intermediate-goodindustries like coal,
power, non-ferrous metals, chemicals and alcohol were also established but their
production was small as the productive capacity was considerably below
requirements. As far as the capital goods sector is concerned, only a small beginning
was made after the Independence.
The weak industrial base prior to Independence, largely due to colonial exploitation
by the British rule, was severely exposed during the Second World War when even
the dominant industries of that time like textiles, paper, and leather, that required
large quantitiesofchemicals, found their supplies cut OKAt the same time, with the
fall ofFrance, bombing on British factories and the large-scale sinking ofBritish
ships, British rulers realised the need for developing India as quickly as possible as
an industrial base for the Allied powers. Demand for industrial products like cement
and iron and steelincreased beyond any imagination. New firms, which had earlier
faced the threat af entry amidst over-production, found a ready market. Already
estziblished f m s could also expand their sales and almost all industriesoperated at
full capacity.The wartime demand was also supported by large public outlay, which
increased by 400 per cent between 1939-40 and 1944-45.
Among the already establishedindustries that expanded during the war period were
cement, textiles, iron and steel and sugar. Cement behg amaterial for construction,
increase in its demand and growth is understandable. Iron and steel industry also
grew but less strikingly. By 1942, Tata's had expanded steel ingot capacity to a
million tons and the Steel Corporation ofBengal had built up a capacity of2.7 lakh

The new industries that started production during the wartime were Felrro alloys,
sewing,
non-ferrous metals (like copper, copper-sheets,wires and cables), puml~s,
. :---..
machine, machine tools, bicycles and chemicals like caustic soda, chlorine, and
super-phosphates.
Owing to the huge demand for war goods and relatively small capacity of large
scale industries in India, increasing reliance was placed on small producers who
supplied large and increasingquantities ofblankets,tents, parach~lesilk cloth, leather
and rubber goods, socks and hoses.

development ofcapital goods.

The immediate post-war period was marked by political uncertainty, riots, influx of
refbgees and partition that disrupted not only industrial growth but also economic
growth in general. Cotton and jute textiles suffered heavily from the partition as
most ofthe sources for their raw materials went to East Pakistan (today's Bangladesh).
With alljute mills in India, she was left with only 19per cent ofrawjute production.
In respect ofcotton textiles, on the other hand, Indiahad 99 per cent of the mills with
only 60 per cent ofraw cottonproduction. Inflation and political strifepushed industrial
unrest to new heights as strikes and lock-outs became rampant. It was only around
1950,on the eve of the First FiveYear Plan, that the country's economytumed the comer.

Check Your Progress I

1) Tick mark ( 4 ) the correct answer :
a) The industrial developmentin India prior to the First Five Year Plan beginning
in 1951, was confined largely to
i) consumer goods sector

ii) intermediate goods sector

iii) capital goods sector
b) Between 1939-40 to 1944-45,the public outlay increased by
i) 40percent
ii) 400 per cent
iii) 100 per cent
2) Which of the already established industries expanded during the war period ?

(Answer in one sentence.)

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7.3 PERFORMANCES OF MAJOR INDUSTRIES AT

THE TIME OF INDEPENDENCE
Despite an impressive increase in the production of industries like cement, iron and
steel, sugar and paper, the overall expansion of industrial growth was not very
significant during the war-time. Table 7.1 reports the index of industrialproduction
of some of the selected industries during 1937-1945. The general index of industrial

Table 7.1: General Index of Industrial Prbduction

Industries

1937
100

1945
142.9

Chemicals

100

134.1

100

196.5

Cement

100

196.5

Cotton Textiles

100

120.0

100

142.9

Industrial S t r u c t u ~c at ~ I I C
Time o f lrrdepcndencr

production, however, increased by only 20 per cent, which appears insignificant

when compared to index of industrial production in US that moved from 96 in
1939 to 208 in 1944 and in Canada that moved From 101 to 184 during the same
period.
In this section we briefly review the performances of some of the selected industries
immediately before and after the Independence.

7.3.1 Cotton Mill Industry

With the outbreak of World War I India lost some iinportallt markets for her exporzs
of cotton yam and piece goods. Mill machinery and mill stores could not be secured
from England, which was engaged in an all-out war. The number ofcotton mills, in
fact, declined marginally during the war.
The Bombay mills suffered more in comparison with the mills in the inland centres.
There were several reasons for this. The Bombay mills had come into existence in
the early years of the development of the industry and were equipped for the
production of the coarser types of yam and cloth. With the change in market
conditions both at home and abroad, the production of thesevarieties had become
less profitable than the production of finer varieties for which the newly established
inland mills were better equipped.
In April 1932 a TariffBoard for the cotton mill industry was set up for the second
time to go into the question ofcontin~~ance
ofprotection to the industry after March
1933.Japanese competition was still very severe owing to the continued depreciation
in the exchange value of the Japanese currency (yen). On its recommendation the
ad valorem duty on non-British piece goods was raised from 3 1.25to 50 per cent
and the minimum specific duty on plain grey goods to 5!A as per lb.
The Second World War created conditions favourable for the industry's expansion.
Protection was discontinued in 1947.In April 1951, there were already 378 cotton
mills in the country. The industrybecame the third largest in the world. However, the
major setback to the industry came during the partition as about 40 per cent of the
raw cotton production went to Pakistan though almost 99 per cent of the mills
remained in India.

7.3.2 The Jute Mill Industry

Largely due to wartime demand, by 1942-43,the number ofjute mills in India rose
to 113. Of these, 101 were located in West Bengal. But once again the partition had
a telling effect on the fortune of the industry. The story had been similar to that of
cotton textiles: bulk of raw jute supply went to Pakistan, while most ofthejute mills
remained in India. The difficullies in obtaining a steady supply ofraw jute, the
emergence of competition from new jute mills in Pakistan and a dwindling demand
for jute as apackaging material, all contributed to poor performance ofthe jute
industry in India immediately after the Independence.Even the favourable demand
effect ofthe Korean War in 1950 could not revive the industry.
The search of substitutes for jute products in packaging was accelerated after the
Second World War primarily because ofthe high prices ofjute manufactures. Such
a high price itself was brought about by the excess demand forjute products during
the wartime. The switch in demand in favour of the substitute products caused
India's share of production ofthe jute manufacture in the world production to fall
S

Industrial Structure at the

T i m e o f Independence

per cent in 1953-54.The proportion of exports ofjute manufacture in total exports

of India also declined from 89 per cent to 83 per cent during that period.

7.3.3 The Iron and Steel Industry

Attempts to introduce the European processes of iron smelting in India began in the
early nineteenth century. The first successful company was the Bengal Iron and
Steel Company Ltd. The Tata Iron and Steel Company started its production in
1908 at Jamshedpur (then known as Sakchi). Attracted by its success, MessrsBurn and Company established Indian Iron and Steel Company that started producing
ur
pig iron in 1922 at its ~ i r a ~factory.
On the outbreak of the Second World War, iron and steel prices came to be
controlled by the government. Increase in the cost of production was, however,
taken into account in fixing the price, and areturn of 8 per cent on the block capital
was allowed. The industry responded to the wartime increase in demand by raising
the output of steel ingots fiom 1to 1.34million tons. But since the productive capacity
could not be expanded during the war, the additional production was obtained simply
by straining the existing capacity. Thiscaused problems of rehabilitation of plants
and machinery after the war and at the time of Independence.

7.3.4 The Sugar Industry

Indigenous methods of manufacturing sugar from cane were in use in India from
very ancient times. The sugar manufactured by such methods was not, however, as
refined as the sugar produced in the mills nowadays. Yet, there was fairly large
demand for Indian sugar from many parts of Asia and Europe. The East India
Company exported sugar fiom Bengal for a long time before the British Government
decided to push the sugar grown in the West Indies.
In 1937, the sugar mills.estab1ishedthe Sugar Syndicate that was ajoint marketing
arrangement, in order to reduce excessive competition among them. This arrested
fall in sugar prices to uneconomic levels during 1937-40. In 1942, sugar prices
were subjected to statutory control, which continued into the post-war years except
for a brief period of decontrol during 1947-49.During this period of decontrol, the
Sugar Syndicateartificially raised sugar price, which led the tariffboard to reprimand
the Syndicate in 1950. Thereafter, the Syndicate went into voluntary liquidation.
From the mid 1930s, India was in a position to export sugar to its neighbouring
countries at competitiveprices after meeting its domestic needs. But the International
Sugar Convention of 1937 restricted India to export sugar to only Burma in next
five years. This restriction was relaxed temporarily in 1940to enable India to export
sugar to the United Kingdom. However, such exports did not materialise due to
disagreement of the two countries over the price of exported sugar. But after the
completion of the period of restriction, domestic demand had risen by so much that
it surpassedthe productive capacity ofthe country. Rising domestic cost ofproduction
also took away most of the cost advantages that India had for exports.
In 1947-48 there were about 135 sugar factories in India employing 120,000
workers. But the sugar production being seasonal, most of these workers were
used to be employed for only six to eight months a year..

7.3.5 The Cement Industry

The organisationof the cement industry in India improved with the amalgamationof
temlarge producers into the Associated Cement Company of India Ltd. in 1936.

This enabled the industry to improve both the technique of production and the
marketing ilrrangement. At that time, the other big player in the industry was the
Dalmia group controlling a number of cement companies. This group, however,
remained outside ACCI cartel.
During the Second World War, the demand for cement declined partly due to the
fact that steel, which is a complementary material particularly for construction, was
in short supply. However, exports of cement were arranged and this enabled to
maintain production at a very high level. Thus, the growth of the cement industry
during the wartime was primarily driven by foreign demand. The domestic demand
for cement increased only in the period after the war with the upsurge in construction
activities. On the eve of the Independence, production of cement exceeded 20
lakh tons a year.

7.3.6 The Chemicals Industry

Before the First World War, there was hardly any production ofchemicals in India.
The requirement of chemicals in the cotton textiles and paper industries were met
entirely through imports.Disruption in imports during the First war, led to emergence
of a few chemical plants. But these were not very efficiently planned and as aresult
with the revival of foreign competition after the war, many of these plants turned out
to be economically unviable.
The Second World War once again created situations favourable for the expansion
of the industry. Domestic production started rising as well as diversifjmg in quite a
few chemical items. After the war many of these new chemical plants received
protection under the tariff policy adopted in 1945.The post-Independence period
saw W e r diversification in the production of chemicals in the country.

Check Your Progress 2

1) What do you think are the factors underlying the poor performanceofjute industry

in India immediately h e r the Independence? (Answer in one sentence.)

r

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2) Indicate whether the following statements are true or false:
a) The Sugar Syndicatewas ajoint marketing arrangement.
b) The growth of the cement industry during the Second World War was primarily
driven by domestic demand.
c) At the time of independence, 40% of the raw cotton production went to
Pakistan, while 99% of the Cotton Mills remained in India.

3) Name the first successful iron and steel company in India.

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I n d u s t r i a l Development
in India

promote industrial enterprises.They often provided technical expertise as well. The

Indian Fiscal Commission (1949-50) observed that industries like cotton, iron and
steel,jute and cement came into existence in Indiaprimarily through the "zeal and
fostering care" of the managing agency firms. The most important function of the
managing agency firms was, however, to arrange for finance. They used to arrange
capital not only for initial fixed capital expenditure, but also for subsequent
reorganisation,extensions and modemisations.
But the managing agency system containedwithin itselfpotentialities for abuse, which
ultimately brought the system into disrepute. The interests ofthe managing agency
firms were not in many cases coincided with that of the owners of the companies for
which they were working. The most common case of conflict of interests was the
target of the managing agency firm to produce and sell output levels much higher
than could be profitably sold simply because often its remuneration was based on
the gross output of the business. Consequently,many companies had much larger
scale ofproductionrather than the efficient one.
During the Second World War, rising profits in many industries enabled a number of
managing agents to disposeof their managing agencyrights at fabulousprices without
any concern for the interests of the shareholders.This trafficking in managing agency
rights brought into the forefront the issue of curbing the power and privilege of
managing agents. In October 1950, the Government of India set up a Company
Law Committee to look into this issue along with other aspects of the reform ofthe
Companies Act.

7.4.3 Joint Stock Company

Thejoint stock company with limited liability of shareholderscame into existence in
India around 1857.One of the most remarkable venture of this type was the Assam
Company formed in 1845 in tea plantation and manufacture. By 1951,the number
ofjoint stock companies had risen to over 28,000, ofwhich almost 12,000were
public limited companies, from around 15,000companies in 1945. The growth in
the number of such companies was, therefore, almost 100per cent over six years.
Over a thousand companies were formed in 1945 alone. On the eve of the First
Five Year Plan in India, companies in which the government had more than 51per
cent share had also come into existence in pursuance of the new Industrjal Policy
Resolution adopted in 1948. The paid up capital of these companies amounted to
Rs. 26.3 crores.

7.5 INDUSTRIAL POLICY AT THE TIME OF

INDEPENDENCE
To improve the weak industrial base that India mherited fiom the British due to their
systematicneglect of industrial and diastructural development,the Government of
India called an Industries Conference in December 1947 to consider ways and
means to utilise the existingcapacity more fully and to harness industry to the growing
needs of the people in the independentIndia. The representatives of the Central and
Provincial governments, industrialistsand labour attended this Conference. To ensure
better relations between the management and employees, a tripartite agreement
was entered into which provided for three-year industrial truce between the
management and workers. The government granted certain tax concessionsto the
industry in 1948-49 and passed theBill to establish the Finance Corporation of

India. The first Industrial Policy Resolution was also passed in 1948,which divided
industries into four categories.
Check Your Progress 3
1) What were the different types of organisational structure of industries in India at
the time of Independence? (Answer in one sentence.)

.....................................................................................................................
.....................................................................................................................
2) Tick mark ( 4 ) the correct answer :
a) The growth in the number ofjoint stock companies during 1945-51 was,

almost 100per cent

b) Company Law Committee was set up in

October 1948

k) October 1950
i$ December 1950

3) Define Managing Agency System. What were their main hnctions ?

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7.6 LET US SUM UP

A weak industrial base and underdeveloped infrastructure marked the Indian
economy at the time of Independence. The structure of ownership was highly
concentrated and manufacturing industry was hardly export oriented. Moreover,
the industrywas marred by short supply of techmcal and managerial skills.
The industrial development in Indiaprior to the First Five Year Plan beginning in
1951, was confined largely to consumer goids sector. Cement and iron and steel
were the only significant intermediate-goodproducing industries.
The organisationof the Indian trade and industry had traditionallybeen based on the
rules ofthe caste a d t h ejoint family. Trading and industrial units were in most of the
cases family-basedpartnerships. A peculiar organisation structure was, however,
the managing agency which used to act as managers or agents for a company to
discharge the functions for which the company to be managed was floated.

7.7 KEY WORDS

Ad valorem Duty :Duty or tax imposed on value.

Managing Agency Firm : Managing Agency Firms used to act as managers or
agents for a company to discharge its functions.

Industrial
T i m e oc
S t rIndependence
~ ~ c t u ar et t h e

Industrial Development i n
India

Tripartite Agreement :Three party agreement the parties are government to

smoothen industrial relations management and workers

7.8 SOME USEFUL BOOKS AND REFERENCES

Bhattacharyya, D., (1979). A Concise History of the Indian Economy, Prentice
Hall of India :New Delhi.
Bagchi, A., (1972). Private Investment in India, 1900-1939, Cambridge
University Press.
Bala, M., (2003). Cement Industry in India :Policy, Structure and Performance,
Shipra Publications, Delhi.
Misra, S.K., and V.K. Puri, (2000). Indian Economy, Himalaya Publishing House,
Mumbai.
V.B. Singh (ed.) (1975). Economic History ofIndia, Allied Publishers.

PROGRESS EXERCISES
Check Your Progress 1
1) a) i b)ii
2) Cement, textiles, iron and steel and sugar. Read Section 7.2
Check Your Progress 2
1) Read Section 7.3
2) a) True b) False c) True
3) Read Sub-section 7.3.3
4) Read Sub-section 7.3.5
5) Read Sub-section 7.3.6
Check Your Progress 3
1) Those based on caste and joint family system;managing agency system;joint
stock company. Read Section 7.4
2) a) i b) ii
3) See Sub-section 7.4.2

14