meandered through several ups and downs since 1951 till the end of last decade of the 20th century,which can be broadly divided into four phases.
Phase I (1951–1965)
After achieving independence in 1947, the role of the new Indian government was to formulate policies and frameworks that would help the economy grow and it started the development programmes by launching its First Five-Year Plan (FYP) (1951–1952). Since independence, theconsumer markets in India were controlled by the socialistic philosophy of India’s first PrimeMinister, Jawaharlal Nehru (Nehru), who believed in self-reliance and local manufacturing whilefocusing on shielding the small-scale industries. He also believed that sturdy economic growthcoupled with greater emphasis on small-scale and rural sectors could significantly increase incomeand consumption among the poor.India’s GDP grew at nearly 4%8 per annum during the first two FYPs (1951–1956 and 1956– 1961, respectively). During the first 4 years of the Third FYP (1961–1966), the growth rateaveraged even higher, at 4.5%.9 The government had more restrictive policies towards industriesthan it had for trade and foreign investment.There were three key elements of the industrial policy as it evolved in phase I – dominant role of the public sector in the development of heavy industry, regulation of private sector investmentthrough licensing and distribution and price controls.
Phase II (1965–1981)
The socialistic system started by Nehru continued even after his death and was perfected byIndira Gandhi. During her Prime Ministership, government’s control on enterprises and the growingtentacles of state ownership saw the average GDP growth rate of India fall from 4.1% during 1951– 1965 to 2.6% during 1965–1975. The population of the country was growing at a rate of 2.3% per annum, which meant that there was per-capita income growth of just 0.3%.11 During this era, thegovernment was entirely in charge of the business sector. Government had the power and control todecide which firm in an industry would produce what and how much. Though there was a hugedemand for products, the government curtailed the production limits and never allowed the privatefirms to increase the supply. Thus, due to the constrained supply of products, prices of most of themwere very high and only the rich could buy them. Taxes were high and it was the government whichcategorised the products or items into needs, comforts and luxuries, whether it was car, oil,shampoo or any other product. The government was also keen on applying additional restrictions onlarge enterprises through the Monopolies and Restrictive Trade Practices Act (MRTP), 1969 andimposed severe restrictions on foreign investment through the Foreign Exchange Regulations Act(FERA), 1973. The license raj12 was further tightened by introducing reservations for small-scaleindustries and nationalisation of banks, insurance companies and oil and coal industries.
Phase III (1981–1988)
During this period, the MNCs were brought under the purview of FERA, making it mandatoryfor the foreign firms to reduce their equity to 40% and to register themselves as Indian companies.(“Phase I (1951–65): Takeoff Under a Liberal Regime”, op.cit. ) The socialist approach of the Indian government ensured to control businesses and avoidmonopolisation for which they imposed stringent trade regulations. Many products were set asideto be manufactured by the small-scale industries. To enter a business and to expand firms, severalcomplex rules and regulations were to be followed. When Rajiv Gandhi became the Prime Minister of India, the economy took few steps towards liberalisation, though they were not completelysuccessful. Gurucharan Das, ex-CEO, Procter & Gamble (P&G) India, summarised his views onfailure of economic reforms by saying, “After fifty years the failure is staggering: four out of tenIndians are illiterate; half are miserably poor, earning less than a dollar a day; one-third of the people do not have access to safe drinking water; only a sixth of the villages have modern medicalfacilities. The irony is that this system, which was made in the name of the poor, in the end did