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Lesson 13: Industrial Policy in India

13.1 13.2

Introduction Industrial Policy Resolutions

13.2.1 Industrial Policy Resolution of 1948 13.2.2. Industrial Policy Resolution of 1956 13.2.3 Industrial Policy Resolution of 1977 13.2.4 Industrial Policy Resolution of 1980 13.2.5 Industrial Licensing Policy 13.2.6 Industrial Policy Resolution of 1990 13.2.7 Industrial Policy Resolution of 1991 13.3 Summary 13.4 13.5 13.6 13.7 Check your Progress Key Concepts Self-Assessment Questions Answers check your progress

13.8 Suggested Readings

Objectives:
After studying this lesson, you will be able to understand Meaning of industrial Policy Industrial policy resolutions

13.1 Introduction:
When India became independent in 1947, the industrial base of the economy was very small and industries were beset with many problems such as shortage of raw materials, deficiency of capital, bad industrial relations, etc The investors were not sure about the industrial policy of the new national government and the industrial (and investment) climate was wrought with uncertainties and suspicions in the minds of investors and entrepreneurs. The conference held a resolution for industrial peace and recommended a clear-cut division of industries into the public sector and the private sector. The Concept of Industrial Policy is comprehensive and it covers all those procedures, principles, polices, rules and regulations which control the industrial undertakings of a country and shape the pattern of industrialization. It incorporates fiscal and monetary policies, the tariff policy, labor policy and governments attitude not only towards external assistance but the public and private sectors.

13.2 Industrial Policy Resolutions:


As a part of industrial policy government of India was issued various industrial policies in India such as: Industrial Policy Resolution of 1948 Industrial Policy Resolution of 1956 Industrial Policy Resolution of 1977 Industrial Policy Resolution of 1980 Industrial Policy Resolution of 1990 Industrial Policy Resolution of 1991

Let us have a glance at different Industrial Policy Resolutions and their objectives and achievements.

13.2.1 Industrial Policy Resolution of 1948:


The first important industrial policy resolution was issued on April 6, 1948. Following were the main features of this policy are: a) It accepted the importance of both public and private sectors and assigned active role to the state sector. Consequently the resolution adopted a two-pronged strategy. b) The resolution divided industries into four categories: i) ii) iii) iv) Industries where State had a Monopolies Mixed Sector The field of Government Control The field of Private Enterprise

c) This resolution accepted importance of small and cottage industries and the role of foreign capital in industrial development. The 1948 policy remained in vogue for full 8 years and determined the nature and pattern of industrial development in the country. This period was marked by some significant changes in the economy. The country had completed one five year plan. Industries act was passed in 1951 and got experience in regulating and controlling industries it the private sector.

13.2.2 Industrial Policy Resolution of 1956:


A second Industrial Policy Resolution was adopted in April, 1956, replacing the Resolution of 1948. Important provisions of 1956 Resolution were: i) New Classification of industries: The resolution laid down three categories which bear a close resemblance to the earlier classification, but were more sharply defined and were broader in coverage as to the role of the State. These categories were: monopoly of the state mixed sector of public and private enterprises industries left for private sector

ii) In order that the private sector may feel confident and function efficiently the state was to facilitate and encourage the development of industries in the private sector by ensuring the development of transport, power and other services and by appropriate fiscal and other measures.

iii) Encouragement to village and small scale enterprises by restricting the volume of production in the large scale sector, by differential taxation, or by direct subsidies. iv) The Resolution stressed the necessity to reducing the regional disparities in levels of development in order that industrialization may benefit the country as a whole.

To conclude, as DK Rangnekar rightly comments: The Industrial Policy Resolution of 1956 set out some of the principles of Nehrus philosophy though it retained sufficient ambivalence to placate the uncommitted elements. As later developments showed, the loopholes and exceptions were more readily availed of by businessmen and industrialists.

13.2.3 Industrial Policy Resolution 1977:


In December 1977 the Janata Government announced its New Industrial Policy by way of a Statement in the Parliament. The main elements of the new policy were: i) This statement mentioned the emphasis on industrial policy so far has been mainly on large industries, neglecting cottage industries completely relegating small industries to a minor roleThe main thrust of the new industrial policy will be on effective promotion of cottage and small industries. ii) It proposed to set up in each district an agency called District Industries Centre (DIC) to serve as the focal point of development of small scale and Cottage industries. iii) It is proposed to revamp the Khadi and Village Industries Commission with a view to enlarge its areas of operation iv) This Resolution also shown interest in developing large scale sector but in restricted areas and the funds of the public sector financial institutions would be largely available for the small sector and large scale sector would have to

rely on their own internally generated resources for financing new projects or expansion of the existing ones. v) This policy statement specified that the public sector would not only be the producer of important and strategic goods of basic nature, but it would also be used effectively as a stabilizing force for maintaining essential supplies for the consumer. To conclude, Janatas industrial policy failed to impose a ban on multinational or Indian big business houses to produce ordinary items which should have been legitimately reserved for the small scale sector. Contrary to common expectations, the Industrial policy 1977 did not contain any radical policies regarding foreign companies and multination but instead continued the same policy being followed since 1948.

13.2.4 Industrial Policy of 1980:


The 1956 resolution forms the basis for announcement of this policy by the congress government. The main emphasis was given to the public sector for this purpose, government decided to launch a drive to revive the efficiency of public sector undertakings. Its objective is to integrating industrial development in the private sector by promoting the concept of economic federalism. While making all efforts towards integrated industrial development, it is proposed to promote the concept of economic federalism with setting up of a few nucleus plants in each district, identified as industrially backward, to generate as many ancillaries and small and cottage units as possible. Other important elements of the policy were: 1. In order to boost the development of small-scale industries, government decided, to increase the limit of investment in the case of tiny units from Rest. 1 lakh to 2

lakhs and the same for small scale units from Rs 10 lakhs to Rs 20 Lakhs and to increase the limit of investment in the case of ancillaries from Rs 15 lakhs to Rs 25 lakhs. 2. It was emphasized the need to promote suitable industries in rural areas to generate higher employment and higher per capita income for the villagers in the country. 3. In order to correct regional imbalances, the government would encourage dispersal of industry and setting up of units in industrially backward areas. To sum up the industrial policy 1980 was guided merely by considerations of growth. It liberalized licensing for large and big business but by blurring the distinction between small scale and large scale industries it seeks to promote the latter at the cost of the former. Broadly speaking, the industrial policy chose a more capital intensive path of development and thus, it underplayed the employment objective.

13.2.5 Industrial Licensing Policy:


Industries (Development and Regulation) Act, 1951 was passed to implement the Industrial policy resolution of 1948. The important provisions of the act were: No new industrial units could be established or substantial extension to existing plants made without a license from the central government, and while granting license for new undertakings, government could lay down conditions regarding location, minimum size, etc., if necessary. Government could make investigation into certain specified industries, a) which showed a fall in production, a deterioration in the quality of the product, a rise in the price of the product, or which showed tendencies in these directions b) Which

used resources of national importance c) Which were managed in a manner likely to do harm to the interests of the shareholders or consumers, and issue proper directions for rectifying the drawbacks. Government could take under its own management undertakings which failed to carry out its instructions for improvement in management and policies. This Act also empowered the government to prescribe prices, methods and the volume of production and channels of distribution.

It was felt that the industries Act 1951 had not served its purpose fully. Dr R.K Hazari reviewed the working of industrial licensing under the act and made some sensational disclosers. Hazari Report: Some of the important recommendations made by the Hazari committee were: i) Some leading houses followed the practice of multiple applications for the same product, and for a wide variety of products which were meant to foreclose licensable capacity. ii) The concerns on behalf of which licenses were applied were not necessarily very efficient and well managed industrial units iii) The principle of first come, first served basis in issuing of licenses resulted in big industrial houses to fore close capacity. iv) Industrial licenses did not bring about balanced regional development.

v)

The most disappointing feature of industrial licensing was the absence of follow of action one the licenses were issued.

vi)

The large industrial houses prevented the entry of new investors, consequently industrial licensing which was supposed to act as an instrument of industrial development became an impediment.

Dutt committee report: Following a discussion of the hazari report, government appointed industrial licensing policy inquiry committee under the chairmanship of Subimal Dutt and its report submitted in July, 1969. Dutt committee came to the following conclusions on the grant of industrial licensing: 1) Share of large industrial houses of the total proposed investment on machinery, of the total value of import of capital goods and in the total approved import of capital goods accounted for 40-60%. 2) He made a very serious comment on working of industrial; licensing in the country. It stated was not, however, necessary to grant multiple licenses to the same house in a given industry. 3) The areas reserved for the public sector were opened to the private sector under one pretext or the other. 4) Dutt committee found that only industrially advanced states were acquired majority licenses. Obviously, the licensing system was unable to help the industrially backward states.

5) One of the saddest features of licensing was foreign collaboration in nonessential consumer goods. It is thus clear that the industrial licensing system failed to achieve the objective of planned economic development as well as of preventing concentration of economic power. It was accepted the recommendation of the Dutt committee and announced its new industrial licensing policy by the government in February, 1970. The industrial policy statement of February, 1970 modified according to the recommendations made by Dutt and Hazari committee members. Soon after resumption of power by congress in 1984, government brought about a sea-change in terms of liberalization licensing policy in favour of large business houses, particularly in terms of making them free from the providence of MRTP act and FERA. The government announced in 1988 further liberalization of the industrial licensing system and also provides incentives to give a stimulus to industrialization of backward area.

13.2.6 Industrial Policy Resolution of 1990:


The Janata Dal Government announced its Industrial policy on May 1990. In its policy it has tried to reorient industrial growth to serve the objective of employment generation, dispersal of Industry in the rural areas and to enhance the contribution of small scale industries to exports. However, industrial policy of 1990 aim to promote small scale and agro-based industries, it did not safeguard against the encroachments by the large sector, failing which promotion of small sector could remain an empty slogan. The onslaught by big business and multinationals in grabbing the market share of small sector in mass

consumption goods was too serious. Unless the arm of state defends the small scale sector in an effective manner, the employment generation of the small sector would be seriously jeopardized by the rapacious activities of big business.

13.2.7 Industrial Policy Resolution of 1991:


The congress Government led by Mr. P V Narasimha Rao announced the industrial policy on July 24, 1991. The main aim of the new industrial policy was to Unshackle the Indian Industrial economy from the cobwebs of unnecessary bureaucratic control, To introduce liberalization with a view to integrate the Indian economy with the world economy, To remove restrictions on direct foreign investment as also to free the domestic entrepreneur from the restricts of MRTP Act. Besides, the policy aimed to shed the load of the public enterprises which have shown a very low rate of return or are incurring losses over the years. All these reforms of industrial policy have led the government to take a series of initiatives in respect of policies in the following areas:

Industrial licensing Foreign Investment Foreign technology policy Public sector Policy

MRTP Act

Industrial Licensing: Industrial licensing abolished for all industries, except those specified, irrespective of levels of investment. These specified industries will continue to be subject compulsory licensing for reasons related security and strategic concerns, social reasons, problems related to safety and over-riding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. Foreign Investment: In order to invite foreign investment it has been decided to provide approval for direct investment of the 51% in industries. For the promotion of exports, the government could encourage foreign trade in countries to assist Indian exporters in export activities. Foreign Technology: It has decided that the government could provide automatic approval for technology agreements related to high priority industries within specified parameters Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgment. Public Sector Policy: Many of the public enterprises have become a burden rather than being an asset to the government. These units accounts for almost one-third of the total losses of central public enterprises. It is time therefore that the government adopt a new approach to

public enterprises. The priority areas for growth of public enterprises in the future will be the following: essential infrastructure, goods and services Exploration and exploitation of oil and mineral resources. Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy where private sector investment is inadequate. Manufacture of products where strategic considerations predominate such as defence equipment. MRTP Act: The growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity in the international market the interference of the government through the MRTP act has become deleterious in its effects on Indian industrial growth. In view of the above government has decided to take the following measures: Industrial licensing will be abolished for all industries except those specified, irrespective of levels of investment In projects where imported capital goods are required automatic clearance will be given Industries reserved for the small scale sector will continue to be so reserved The exemption from licensing will apply to all substantial expansions of existing units

To provide access to international markets majority foreign equity holding unto 51% equity would be allowed for trading companies engaged in export activities. Automatic permission will be given for foreign technology agreements in high priority industries No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies Sick public enterprises for their revival, be referred to the board for industrial and financial reconstruction The MRTP act could be amended to remove the threshold limits of assets in respect of MRTP companies. In conclusion it may be stated that the new industrial policy may be able to attract foreign investment and give a boost to domestic investment, but whether it shall lead to more employment along with higher output growth is doubtful. Secondly excessive freedom to foreign capital will ultimately affect economic sovereignty as also push the country into a debt trap further. 13.3 Summary At the time independence, the investors were not sure about the industrial policy of the new national government and the industrial (and investment) climate was wrought with uncertainties and suspicions in the minds of investors and entrepreneurs. The conference held a resolution for industrial peace and recommended a clear-cut division of industries into the public sector and the private sector. Keeping in view the objective socialistic pattern of society, government of India issued Industrial policy resolutions time to time. First two industrial policy resolutions i.e., 1948 and 1956 IPRs given more importance to public sector compare with private sector to lay the basis for economic development. The Industrial policy resolution of 1977 issued by Janata government was assigned the

prominant position for the development of small scale industrial development and to reduce the regional imbalances. In the later industrial policy resolutions which were released by congress government initiated economic reforms in a big-way initially in industrial sector followed by other sectors in an economy. 13.4 Key Concepts Industrial Policy : The Concept of Industrial Policy is comprehensive and it covers all those procedures, principles, polices, rules and regulations which control the industrial undertakings of a country and shape the pattern of industrialization. Regional Disparities: Disparities among the different regions interms of incomes, industrialization and agricultural development. Cottage Industries: Industries which are established in rural areas to avail local resources. Self Reliance: Development without dependence on other economies in respect of important macro economic aspects. District Industries Sector; District Industries Centres established during the Janata Government as a part of encouragement of Small Scale and Cottage industries in India Industrial Licensing Policy: The Policy meant for issuing licenses to establish various types of industries. Its objective is to issue of licenses all types of industries without any discrimination. Dutt committee: Industrial licensing enquiry committee appointed under the chairman ship of Dutt to enquire the gaps in License Issuing.

Foreign collaboration: industrial establishment can be taken place with the collaboration of Foreign economies either in the form of direct investment or in the form of technical collaboration. 13.5 Check your Progress

State whether the following statements are True or False 1 First Industrial policy resolution categorizes the industries into four schedules 2 .Second Industrial policy resolutions was issued in the year of 1958 3. District Industrial Centres established in IPR of 1980 4. Liberalization, Privatization and Globalization process was begin in IPR of 1991 5. Industial licensing policy inquiry committee appointed under the chairmanship Of Hazari 13.6 Self-Assessment Questions

Short answer type questions: 1. What is meant by Industrial Policy Resolution? 2. Write a note on IPR 1948. 3. Explain about Industries act 1951. 4. What are the recommendations of Dutt committee? 5. Explain the findings of the Hazari committee. Long answer type questions: 1. Distinguish between the features of IPR 1948 and IPR 1956. 2. Describe the significant changes in the IPR 1991. 3. Critically evaluate the impact of IPR 1992.

13.7

Answers check your progress

1. True 2 False 3 False 4 True 5 False 13.8 Suggested Readings

1. Misra, Puri 2. Kuschal.S 3. Sivaiah & Das 4. Bole Rao & Desai 5. Birthwal.R 6. Bhagwati.J.N & Desei.P 7. Shankar.U

Indian Industrial Economy. Industrial Economics. Industrial Economics. Industrial Economics. Industrial Economics. India: Planning for Industrialization. Industrial policy of India: The nature and growth Of the public sector, Uppal.J.S(Ed) Indias Economic Problems. Industrial growth in India- Stagnation since the Mid 60s. The Indian Economy. Industrial Economics

8. Isher Judge Ahluwalia 9. Pramit Chaudhury 10. Cheruniliam