Industrial policy of India

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Industrial policy of India An overview

Industrial policy 1948
Laid down the foundation of mixed economy, with a socialist undertone Industries divided in four categories State Monopolies : Arms and ammunition, atomic energy, and rail transport (3) Mixed sector : Coal, iron and steel, aircraft manufacturing, ship building, manufacturing of telephones, telegraph, and wireless apparatus (excluding radio sets ) and mineral oils ( 6). New undertaking were to be set up by state. The government was to review the performance of private industries after 10 years and if felt necessary may acquire any, after paying compensation.

Industrial policy of India :1948

Privately owned but under government regulation : Not owned by government but was put under government regulation like automobile, heavy chemicals, heavy machinery, machine tools, fertilizer, electrical ,engineering , sugar, paper, cement, cotton, and woollen textile Private sector : Rest of the industries

Industrial policy of India :1956 The Back ground

The first five year plan ( 1951-52to55-56) was completed. Optimism was running high First General election completed Congress Party in its Awed Session declared that it is for socialist pattern of society Second Five year plan : Rapid Industrialization, infrastructure and institution building to priority Consumer good deficiency model to over come the shortage of investment
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Industrial policy of India :1956 The Back ground

Lack of confidence in private sector : Low profitability, balanced regional development. Self reliance : Apprehension towards foreign capital. To reduce the disparities of wealth and income. Soviet influence.
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Industrial policy of India :1956 The Back ground

To prevent monopolies To Build a large and growing cooperative sector Public sector Commending heights

Industrial policy of India :1956 The Salient features

State monopoly : 17 industries ( schedule A) Out of these four industries : Arm and Ammunition, atomic energy Rail and Air transport were the exclusive domain of the state In rest the 13 private sector was allowed to continue but new private units were to be allowed when the national interest so required.
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Industrial policy of India :1956 The Salient features

Mixed sector : 12 industries ( scheduled B) State increasingly establish units but not to discourage private sector Private sectors The industrial policy 1956 relied heavily on Industrial Development and Regulation Act 1951 for implementation to which licensing was the main instrument.

Industrial policy of India :1956 Operational mechanism

The industrial policy 1956 relied heavily on Industrial Development and Regulation Act 1951 for implementation to which licensing was the main instrument. This Act was a mechanism to regulate industries as per the plan priorities, and other objectives of social policy of government Protect small industries and develop cooperative sector
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Industrial policy of India :1956 Operational mechanism

Direct investment in to the desired spheres : Activities and areas Correlate supply and demand Optimum utilization of social capital Enquires about the functioning of industries Control on prices and distributions. Central Advisory boards and development boards of various industries.

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Industrial policy of India :1956 Lessons Leant u Monopolies Enquiry commission 1964
R.K Hazari Committee 1965 Dutt Committee 1967 Underutilization of capacity Large industries restricted output and allowed price to rise Oligopoly became the feature : pre-emption of investment opportunities Rent seeking
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Industrial policy of India :1956 Lessons Leant

Regional Imbalances :1979 to 1992 Maharashtra , Gurjarat,Tamil Nadua and West Bengal- 46 percent license Bihar , Orrisa, M.P. and U.P. about 16 percent Even the Backward areas of developed state was favourved vis--vis of poor states. The backward areas of the four industrially advanced state got 37,6 percent and of backward state mentioned above only 9.8 percent
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Industrial policy of India :1956 Lessons Leant

MRTP & FERA : Growth of Parallel Economy In some instances private sector was denied opportunity to enter in the industries badly needed e.g. Birla was not given license to start steel plant

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Industrial policy of India :1956 Lessons Leant

Tata made 119 proposal between 1960-1989 none was approved Birlas shifted to East Asian countries

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Industrial policy of India :1956 Lessons Leant

The East Asian countries which also has more problem of resources ( financial and managerial, technical ) vis--vis India govt. took active role in providing resources to private sector to grow. The Democratic compulsions vis--vis authoritarian government
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Industrial policy of India :1991

Objective To build on the gains already made To correct the distortion or weakness that might have crept in Maintain sustain growth in productivity and gainful employment International competitiveness.

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Industrial policy of India :1991

Industrial Licensing In 1991 was restricted to 18 categories but now only six industries viz
alcohol cigarettes hazardous chemicals, electronics aerospace defense equipments drug and pharmaceuticals( excluding bulk drugs)

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Industrial policy of India :1991

Public sector Monopoly Initially 8 industries but now only 3. Atomic energy minerals specified in the scheduled to atomic energy Rail Transport

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Progress Since 1991

License No approval of government is required . The entrepreneur submit Industrial Entrepreneur Memorandum (IEM) to the secretariat of Industrial Approval Till 2004- 55335 IEM submitted , Investment Rs 13,75,152 crore Employment 107 Lakh person Letter Intent 3,966 Investment 1,14,841 crore Employment 8.60 lakhs
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Industrial Policy -1991

The location of industries are subject to following regulations Local Authorities Land use planning Like master plan and zonal plan Regulation of Ministry of Forest and Environment If the proposed location is not in designated industrial area, it ought to be at least 25 K.M. from 25 kilometers from the million plus city (1991 census). The electronic , printing and soft ware and non polluting industries are excluded from these provision
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Foreign Technology and Investment

Foreign Technology and Investment Prior 1991 Very restricted &Allowed only in priority areas In. Other areas on merit linked to export.Three categories were 1. Foreign Investment (FI)was allowed 2. Only technological collaboration (No FI) 3. NO collaboration ( FI or Technology) Foreign (Investment) equity ceiling 40 percent Foreign royalty payments: limited for 5 years
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Foreign Technology and Investment Since 1991

Foreign Investment in most of the industries is allowed through direct route (NO approval pf RBI & Government ) In 1991 only 36 industries was in this category FDI up to 51 percent later modified it in various ways

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Foreign Technology and Investment Since 1991

Now excluding the followings all industries are in the automatic approval Industries requiring license Only 24 percent foreign equity is permissible in items reserved for Small scale sector. All items requiring industrial license in terms of location.
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Industrial Development Average Annual growth rate

Sector Weight 1980-81 in to Index 1991-92 Post reforms VIII Plan 1992-92 to 1996-97 6.8 8.9 8.5 6.6 13.4 4.8 7.4 IX Plan 1997-98 2001-02 4.1 4.7 5.8 5.5 10.7 3.8 5.0
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Basic goods Capital Goods Intermediate Goods Consumer Goods Durable Non Durable All Index

35.5 9.3 26.5 28.7 5.4 23.3 100

7.4 9.4 4.9 6.0 10.8 5.3 7.4

Industrial Development Average Annual growth rate

Sector /goods Basic Capital Inter Consumer Pre reform 7.4 9.4 4.9 6.0 2002-03 2003- 2004-05 04 4.9 10.5 3.9 7.1 5.4 13.6 6.4 7.1 5.5 13.9 6.1 11.7 2005-06 2006-07 2007-08 6.7 15.8 2.5 12.0 10.3 18.2 12.0 10.1 8.4 20.8 10.1 5.2

Durable Non Durable All Index

10.8 5.3 7.4

-5.3 12.0 5.7

11.6 5.8 7.0

14.4 10.8 8.4

15.3 11.0 8.2

9.2 10.4 11.6

-1.7 7.8 9.2

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Industrial Progress : 1951-55 to 1960-65

Creating Industrial Base Significant growth The 1st plan , 5.7 % compound annual growth rate increased to 7.2 % in 2nd plan to 9.0 %in 3rd plan Massive investment in industries and mineral in 2nd &3rd plan 2.8 %( about 55 crores) of the total expenditure of 1st plan to 20.1 percent in 2nd and 3rd plan ( 938 cores and 1726 crores these plan respectively at current prices ).
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Industrial Progress : 1951-55 to 1960-65

Creating Industrial Base High growth rates attributed to growth of Capital goods industries from 9.8 % in 1st plan , to 13.1 % in 2nd plan to 19.6 % in 3rd plan Basic industries, from 4.7 % in 1st plan to 12.1 % in 2nd plan to 10.4 % in 3rd plan
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Creating Industrial Base

Creating Industrial Base Besides small scale industries also attributed for about 2.1 % , 4.0% and 2.8 percent of the total plan expenditure. In absolute terms about 42,187 and 241 croes respectively

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Creating Industrial Base

Power and Energy also accounted for about 7.6 %, 9.7 % and about 14.6 % of the total plan out lay ( In absolute terms about 149, 452 and 1252 crores, at current prices )

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Industrial Deceleration 1965-80

The growth rate decelerated from 9 percent of 3rd plan to 4.1 % between 1965-76 If this is included the growth rate comes to be 3.1 % The growth picked up in fifth plan to 6.1% These growth rates are not actual reflection as these include the sharp increase of 10.6 % in 1976-77 In 1979-80 the growth rate was (-)1.6 %
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Industrial Deceleration 1965-80

The worse part of this recession was growth of capital goods was as low as 2.6 percent% per annum ( from 1965 to 76) although it picked up during fifth plan ( 1974-79) to 5.7% but this remained low then the average of first three plan . Similar is the story of basic good industries, average 6.5 percent ( 1965-76) for the ten year period which again picked to 8.4% but remained low compared to previous three plans.
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Industrial Deceleration 1965-80

The reason for deceleration :
Exogenous factors War, 1965,1971 Drought 1966-67 to 1968-69 Oil crisis 1973

Slow growth of agriculture (KN Raj) and Saturation of demand due to persisting inequalities (C. Rangrajan) Decline in public investment ( Prabhat Patnaik) & hence lack of stimulus. Irrigational system ( Srinivas, Pdama Desai)
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Industrial recovery 1981-91

Progress during 1981-991
Classification Basic goods Capital Goods Intermediate Goods Consumer Goods Durable Non Durable All Index 1981-85 1985-90 1990-91

8.7 6.2 6.0 5.1 14.3 3.8 6.4

7.4 14.8 6.4 7.3 11.6 6.4 8.5

3.8 17.4 6.1 10.4 14.8 9.4 8.3

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Industrial recovery 1981-91

Factors resulting in recovery The recovery is associated with better productivity and not associated with growth of factor input. The total factor productivity which meager even negative (-) 0-2 to ()0.3 percent between 1966-67 to 1979-80 picked up in the first of eighties it was 3.4% per annum. ( Isher Judge Alhjwalia) Liberalization of industrial policy ( supply side ) Liberal fiscal regime ( demand boost up)
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Industrial recovery 1981-91

Factors resulting in recovery Growth of Agriculture :
Rural demand of non agriculture product rose from 35 percent in 1967-68 to 47 percent in 1983 More per hectare use of manufactured goods. The percentage of purchased inputs to total inputs ( as a proxy indicator of demand of industrial product in agriculture production ) roughly doubled from 16.4 percent in 1970-71 to 35.6 percent in 1983-84 ( R.Thamarajakashi)
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Industrial recovery 1981-91

Factors resulting in recovery Growth of service sector pushed the growth of consumer durable Resurgence in infrastructure spending , as against 4.2% per annum in 1965-66 to 1975-76 to 9.9% in 1979-8- to 1985-85 and 16 % and 18.3 % in 1985-86 and 1986-87. This investment resulted in discernible improvement in productivity ( I.J Alhuwalia).
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Post Reforms : industrial Progress

In the first year of reform period ( VIII Plan ) the industrial development little less than pre-reform period which decelerated in next five year ( IX plan ) but picked up in X plan period and is substantially higher than reform period . The rate of growth in capital goods and basic goods in post reform period has been initially less but it is higher in X plan vis--vis pre reform period growth rate
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Post Reforms : industrial Progress

In first ten years The rate of growth of non durables was less but in X plan it was higher than the pre reform period. But the growth consumer durables has barring stray exception has been higher than pre reform period.Almost similar is the situation of intermediate goods. The earlier phase of reforms marked with fluctuation but in X plan it remained by and large consistent.
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Post Reforms : industrial Progress

The improved performance in X plan is attributed to improved investment climate , expanding external demand, improved domestic demand, ease in availability of finance and increasing capacity addition in the industrial sector ( RBI report on currency and Finance 2003-04) The areas of concern 17 states has not shown any significant improvement in industrial growth(R. Nagrajan-in Shuji Uchikawa (ed)Economic Reforms and industrial structures in India (2002)
Gujrat, Mharashtra and Tamilnaduaccoutns for about 39% factories, 44 % capital and 44% of the output
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Post Reforms : industrial Progress

The areas of concern Although the initial hiccups to external competition are almost over but industries are facing the problem of dumping. The inadequacies of infrastructure and slowing down of public investment has its impact in low stimulus. Disorderly growth of capital market and the flow funds from institutions to industry is not satisfactory. And a substantial part of the funds is being utilized in acquisition and merger .

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Post Reforms : industrial Progress

The areas of concern
 International volatility  Slow growth of domestic market because of poor agriculture growth and also low expenditure on employment generation programmes in rural area( now being addressed)  Heavy spending on real estates specially in speculation has impact on investment as well expenditure  Increasing inequalities , insecurity of job puts brake on spending in urban areas

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Post Reforms : industrial Progress

The areas of concern Anomalies in tariff structure : leading to import of second capital goods e.g finished capital goods in fertilizer and refinery , enjoyed zero duty but in import duty on components and intermediate products.

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