Indian Economy, 5th edition (41 page)

Introduction

Many of the western economies have already written their success stories of industrialisation leading to accelerated growth and development by the time India became an independent economy. Independent India needed to rejuvenate its economy from a completely dilapidated state. The country had many tasks in front of it—the abject mass poverty, shortage of foodgrains, healthcare, etc. calling for immediate attention. The other areas of attention included industry, infrastructure, science and technology and higher education, to name a few. All these areas of development required heavy capital investment as they had been severly avoided by the colonial ruler for the last 150 years or so. Increasing the growth of economy and that too with a faster pace was the urgent need of the economy. Looking at the pros and cons of the available options, India decided the sector industry to be the ‘prime moving force’ (PMF) of the economy—the logical choice for a faster growth (a fully established idea at that time, all over the world). The secondary sector will lead the economy, was well-decided in the 1930s itself by the dominant political force among the freedom fighters.

As the government of the time had decided upon an active role for the governments in the economy, naturally, the industrial sector was to have a dominant state role—the expansion of the government-owned companies (i.e the PSUs) to glorious heights. In many ways the development of the Indian economy has been the development of the government sector. Once this idea of state’s role in the economy went for a radical change in the early 1990s with the process of economic reforms, the hangover or the drag of it is still visible on the economy. The industrial policies which the governments announced from time to time basically moulded the very nature and structure of the economy. Any discussion on the Indian economy must start with a survey of the industrial policies of the country. Here we have a brief review of the various industrial policies of India till date:

Industrial Policy Resolution,
1948

Announced on April 8, 1948 this was not only the first industrial policy statement of India but it decided the model of the economic system (i.e. the mixed economy), too. Thus, it was the
first
economic policy of the country also. The major highlights of the policy are given below:

1.
India will be a mixed economy
1
.

2.
Some of the important industries were put under the
Central List
such as coal, power, railways, civil aviation, arms and ammunition, defence, etc.

3.
Some other industries (usually of medium category) were put under a
State List
such as paper, medicines, textiles, cycles, rickshaws, two-wheelers, etc.

4.
Rest of the industries (not covered by either the central or the
s
tate Lists) were left open for private sector investment—with many of them having the provision of compulsory licencing.

5.
Review of the policy after 10 years.

Industrial Policy Resolution,
1956

The Government was encouraged by the impact of the industrial policy of 1948 and it was only after eight years that the new and more crystallised policies were announced for the Indian industries. The new industrial policy of 1956 had the following major provisions:

1. Reservation of Industries

A clear-cut classification of the industries (also known as the
Reservation of industries
) were affected with three schedules:

(i) Schedule A

This schedule had 17 industrial areas in which the centre was given complete monopoly. The industries set up under this provision were known as the
c
entral
p
ublic Sector Undertakings (CPSUs) later getting popularity as the ‘PSUs’. Though the number of industries were only 17, the number of the PSUs set up by the Government of India went to 254 by 1991. They included those industrial units too which were taken over by the government between 1960 to 1980 under the
nationalisation
drives
2
. These industries belonged to Schedules B and C (other than Schedule A).

(ii) Schedule B

There were 12 industrial areas put under this schedule in which the State governments were supposed to take up the initiatives with a more expansive follow up by the private sector. This schedule also carried the provisions of compulsory licencing. It should be noted here that neither the states nor the private sector had monopolies in these industries unlike the Schedule A which provided monopoly to the centre.
3

(iii) Schedule C

All industrial areas left out of Schedules A and B were put under this in which the private enterprises had the provisions to set up the industries. Many of them had the provisions of licencing and have
necessarily
to fit into the framework of the social and economic policy of the state and were subject to control and regulation in terms of the Industries Development and Regulation (IDR) Act and other relevant legislations.
4

The above classification of industries had an in-built bias in favour of the government-owned companies (i.e. the CPSUs) which went according to the ideas of the planning process, too. Thus, expansion of the public sector became almost a directive principle of economic policy and the PSUs did expand in the coming times.
5

It was this industrial policy in which the then PM
p
andit Jawaharlal Nehru had termed the PSUs the
‘temples of modern India’,
symbolically pointing to their importance
6
. There was a time soon after independence when the PSUs were regarded as the principal instrument for raising savings and growth in the economy.
7
The rapid expansion of the PSUs accounted for more than half of the GDP of the economy by 1988–89.
8

2. Provision of Licencing

One of the most important developments of independent India, the provision of compulsory licencing for industries, was cemented in this policy. All the
s
chedule B industries and a number of
s
chedule C industries came under this proivision. This provision established the so-called
‘Licence-Quota-Permit’
regime (
raj
) in the economy.
9

3. Expansion of the Public
s
ector

Expansion of the Public
s
ector was pledged for the accelerated industrialisation and growth in the economy—glorification of the government companies did start with this policy. The emphasis was on heavy industries.

4. Regional Disparity

To tackle the widening
regional disparity,
the policy committed to set up the upcoming PSUs in the comparatively backward and underdeveloped regions/areas in the economy
10
.

5. Emphasis on Small Industries

Emphasis committed on small industries as well as the khadi and village industries.

6. Agriculture Sector

A
griculture sector was pledged as a priority.

Importance

This is considered as the most important industrial policy of India by the experts as it decided not only the industrial expansion but structured the very nature and scope of the economy till 1991 with minor modifications. All the industrial policies were nothing but minor modifications in it except the
n
ew
i
ndustrial
p
olicy of 1991 which affected deeper and structural changes in it with which India started a wider process of the economic reforms.

Industrial Policy Statement,
1969

This was basically a licencing policy which aimed at solving the shortcomings of the licencing policy started by the Industrial
p
olicy of 1956. The experts and the industrialists (new comers) complained that the industrial licencing policy was serving just the opposite purpose for which it was mooted. Inspired by the socialistic ideals and nationalistic feelings the licencing policy had the following reasons:

(i)
e
xploitation of resources for the development of all

(ii)
p
riority of resource exploitation for the industries

(iii)
p
rice-control of the goods produced by the licenced industries

(iv)
Checking concentration of economic power

(v)
Channelising investment into desired direction (according to planning process)

In practice, the licencing policy was not serving the above-given purpose properly. A powerful industrial house was always able to procure fresh licences at the cost of a new budding entrepreneur. The price regulation policy via licencing was aimed at helping the public by providing cheaper goods but it indirectly served the private licenced industries ultimately (as central subsidies were given to the private companies from where it was to benefit the poor in the form of cheaper goods). Similarly, the older and well-established industrial houses were capable of creating hurdles for the newer ones with the help of different kinds of trade practices forcing the latter to agree for sell-outs and takeovers. A number of committees were set up by the government to look into the matter and suggest remedies.
11
The committees on industrial licencing policy review pointed out several shortcomings of the policy but it also accepted the useful role of industrial licencing.
12
Finally, it was in 1969 that the new industrial licencing policy was announced which affected the following major changes in the area:

(i)
The Monopolistic and Restrictive Trade Practices (MRTP) Act was passed. The Act intended to regulate the trading and commercial practices of the firms and checking monopoly and concentration of economic power.

(ii)
The firms with assets of ‘25 crore or more were put under obligation of taking permission from the Government of India before any expansion, greenfield venture and takeover of other firms (as per the MRTP Act). Such firms came to be known as the
‘
MRTP Companies
’.
The upper limit (known as the
‘
MRTP limit
’
) for such companies was revised upward to ‘50 crore in 1980 and ‘100 crore in 1985
13
.

(iii)
For the redressal of the prohibited and restricted practices of trade, the Government did set up a as
MRTP Commission
.

Industrial Policy Statement,
1973

The Industrial policy statement of 1973 introduced some new thinking into the economy with major ones being as follows:

(i)
A new classificatory term i.e.
core industries
was created. The industries which were of fundamental importance for the development of industries were put in this category such as iron and steel, cement, coal, crude oil, oil refining and electricity. In the future, these industries will be also known as
basic industries, infrastructure industries
in the country.

(ii)
Out of the six core industries defined by the policy, the private sector may apply for licences for the industries which were not a part of
s
chedule A of the Industrial Policy, 1956
14
. The private firms eligible to apply for such licences were supposed to have their total assets at
`
20 crore or more.

(iii)
Some industries were put under the
reserved list
in which only the small or medium industries could be set up
15
.

(iv)
The concept of
‘joint sector’
was developed which allowed partnership among the centre, state and the private sector while setting up some industries. The governments had the discretionary power to exit such ventures in future. Here, the government wanted to promote the private sector with state support.

(v)
The Government of India had been facing the foreign exchange crunch during that time. To regulate foreign exchange the
f
oreign Exchange Regulation Act (FERA) was passed in 1973
16
. Experts have called it a
‘draconian’
act which hampered the growth and modernisation of the Indian industries.

(vi)
A limited permission of foreign investment was given with the Multinational Corporations (MNCs) being allowed to set up their subsidiaries in the country
17
.

Industrial Policy Statement,
1977

The industrial policy statement of 1977 was chalked out by a different political set up from the past with a different political fervour—the dominant voice in the Government was having an anti-Indira stance with an inclination towards the Gandhian-
s
ocialistic views to the economy. We see such elements in this policy statement:

(i)
Foreign investment in the
unnecessary areas
were prohibited (opposite to the IPS of 1973 which promoted foreign investment via technology transfer in the areas of lack of capital or technology). In practice, there was a complete ‘no’ to foreign investment.
18

(ii)
Emphasis on the village industries with a redefinition of the small and cottage industries.

(iii)
Decentralised industrialisation was given attention with the objective of linking masses to the process of industrialisation. The District Industries Centres (DICs) were set to promote the expansion of the small and cottage industries at a mass scale.

(iv)
Democratic decentralisation got emphasis and the
k
hadi and
v
illage Industries were restructured.