Industrial Growth and Policy

Chapter - Industrial Growth and Policy
B.Com(Hons.)
Subject: Commerce
Paper XVIII Indian Economy: Performance and Policies
Fellow:Dr.Kawal Gill, Associate Professor

Department/ College: Department of Commerce, Sri
Gobind Singh College of Commerce, University of Delhi
Author: Dr. Anupma Rajput

Department/ College: JDM College, University of Delhi
Reviewer: Dr. Uma Kapila (Retd.)

Department/ College: Miranda College, University of Delhi
Institute of lifelong learning, University of Delhi

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Table of Contents
o 2.1 Industrial Policy Framework in India

o 2.2 Industrial Growth in India:
o 2.3 Prospect and Outlook of Industrial Sector in India
o Summary
o Exercises
o Glossary
o References

2
Chapter : Industrial Growth and Policy

The industrial policy means the procedures, principles, policies rules and regulations which
control the industrial undertaking of the country and pattern of industrialization. It explains the
approach of Government in context to the development of industrial sector. These policies no
doubt have resulted in creation of diversified industrial structure but caused a number of
inefficiencies, distortions and rigidities in the system. Thus during late 70’s and 80’s,
Government initiated liberalization measures in the industrial policy framework. The drastic
liberalization measures were however, carried out in 1991. The Chapter provides an overview of
the industrial policy framework of India. It details the pattern of Industrial growth in India with
special focus on the prospect and outlook of Industrial sector in India.
2.1 Industrial Policy Framework in India
2.1.1 Industrial Policies Prior to 1991
In India the key objective of the economic policy is to achieve self-reliance in all sectors of the
economy and to develop socialistic pattern of society. The industrial policy in the pre-reform
period i.e. before1991 put greater emphasis on the state intervention in the field of industrial
development. The national consensus was that the economic sovereignty lay in the rapid
industrialization including the promotion of industrial infrastructure. India's Industrial Policy
evolved through successive Industrial Policy Resolutions and Industrial Policy Statements
followed the economic strategy with basic elements as:
 Emphasis on the role of heavy industry in economic development which was sought to
build up the capital goods sector as soon as possible.
 The plans envisaged a leading role for the public sector in the structural transformation
of the economy.
 The major investments in the private sector were to be carried out according to the
priorities of national plan and not by the test of private profitability.
 The plans emphasized technological self-reliance, and for much of the period, an
extreme inward orientation in the sense that if anything could be produced in the
country, regardless of the cost, it should not be imported.
The important industrial policy statements and resolutions during this period are outline in the
following paragraphs:
2.1.1.1 Industrial Policy Resolution, 1948:

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The first important industrial policy statement was made in the Industrial policy
Resolution (IPR), 1948. The main thrust of IPR, 1948 was to lay down the foundation of mixed
economy whereby the private and public sector was accepted as important components in the
development of industrial economy of India. The policy divided the industries into four broad
categories:
(i) Industries with Exclusive State Monopoly: It included industries engaged in the activity of
atomic energy, railways and arms and ammunition.
(ii) Industries with Government Control: It included industries of national importance which
need to be registered. 18 such industries were put under this category e.g. fertilizers, heavy
chemical, heavy machinery etc.
(iii) Industries in the Mixed Sector: It included industries where private and public sector were
allowed to operate. Government was allowed to review the situation to acquire any existing
private undertaking.
(iv)Industries under Private Sector: Industries not covered by above categories fell in this
category.
IPR, 1948 gave public sector vast area to operate. Government took the role of catalytic
agent of industrial development. The resolution assigned complementary role to small-scale and
cottage industries. The foreign capital which was seen with suspect in the pre-independent era
was recognized as an important tool to speedup industrial development. Subsequently, the Indian
Constitution was adopted in January 1950, the Planning Commission was constituted in March
1950 and the Industrial (Department and Regulation) Act (IDR Act) was enacted in 1951.
2.1.1.2 Industries (Development and Regulation) Act (IDRA), 1951:
IDRA, 1951 is the key legislation in the industrial regulatory framework. IDRA, 1951
gave powers to the government to regulate industry in a number of ways. The main instruments
were the regulation of capacity (and hence output) and power to control prices. It specified a
schedule of industries that were subject to licensing. Even the expansion of these industries
required prior permission of the government which means the output capacity was highly
regulated. The Government was also empowered to control the distribution and prices of output
produced by industries listed in the schedule. The IDR Act gave very wide powers to the
Government. This resulted in more or less complete control by the bureaucracy on the industrial
development of the country.
The main provisions of the IDRA, 1951 were:
a) All existing undertakings at the commencement of the Act, except those owned by the
Central Government were compulsorily required to register with the designated authority.

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b) No one except the central Government would be permitted to set up any new industrial
undertaking “except under and in accordance with a license issued in that behalf by the
Central Government.”
c) Such a license or permission prescribed a variety of conditions, such as, location,

minimum standards in respect of size and techniques to be used, which the Central
Government may approve.
d) Such licenses and clearances were also required in cases of „substantial expansion‟ of an
existing industrial undertaking.
Thus the basic objective of IDRA, 1951 was to empower the Government to take necessary
steps to regulate the industrial development through Industrial licensing.
2.1.1.3 Industrial Policy Resolution, 1956 (IPR, 1956):
IPR, 1956 was the first comprehensive strategy for industrial development in India. It was
shaped by the Mahalanobis Model of growth that emphasized on heavy industries to achieve a
long term higher growth path. The Resolution widened the scope of the public sector. The
important provisions of IPR, 1956 are as follows:
i) New classification of Industries: IPR, 1956 divided the industries into the following three
categories:
(a) Schedule A industries: The industries that were the monopoly of state or Government. It
included 17 industries. The private sector was allowed to operate in these industries if national
interest so required.
(b) Schedule B industries: In this category state was allowed to establish new units but the
private sector was not denied to set up or expand existing units e.g. chemical industries,
fertilizer, synthetic, rubber, aluminum etc.
(c) Schedule C industries: The industries not mentioned in the above category formed pat of
Schedule C. Thus the IPR, 1956 emphasized the mutual existence of public and private sector
industries.
ii) Encouragement to Small-scale and Cottage Industries: In order to strengthen the small-
scale sector supportive measures were suggested in terms of cheap credit, subsidies, reservation
etc.
iii) Emphasis on Reduction of Regional Disparities: Fiscal concessions were granted to open
industries in backward regions. Public sector enterprises were given greater role to develop these
areas.
The basic rationale of IPR, 1956 was that the state had to be given primary role for
industrial development as capital was scarce and entrepreneurship was not strong. The
public sector was enlarged dramatically so as to allow it to hold commanding heights of the
economy.
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Value addition: Historical Context

Basic Approach to Pre-1991 Industrial Policy
Professor Prasanta Chandra Mahalanobis is the architect of Independent India's
industrialization strategy that was embodied in the Second Five Year Plan (1956-61). This
was elaborated in his celebrated paper "The Operational Research Approach to Planning in
India" which was published in Sankhya, the Indian Journal of Statistics, in 1955. This
became famous as the Mahalanobis model.
Three distinct elements of this strategy influenced the course of industrialization in India:
the autarchic approach of self-reliance, emphasis on basic and heavy machine-building
industries to maximize long-term growth and finally, the dominant role of the public sector
in basic and heavy industries. This was sought to be implemented through centralized
industrial investment planning in the economy.
Source: Suresh D. Tendulkar at www.india-today.com/itoday/millennium/100people/pc.html
2.1.1.4 Monopolies Commission:
In April 1964, the Government of India appointed a Monopolies Inquiry Commission

“to inquire into the existence and effect of concentration of economic power in private
hands.” The Commission looked at concentration of economic power in the area of industry.
On the basis of recommendation of the commission, Monopolistic and Restrictive Trade
Practices Act (MRTP Act), 1969 was enacted. The act sought to control the establishment
and expansion of all industrial units that have asset size over a particular limit.
2.1.1.5 Industrial Policy Statement, 1973:
The Policy Statement of 1973 drew up a list of industries to be started by large

business houses so that the competitive effort of small industries was not affected. The
entry of competent small and medium entrepreneurs was encouraged in all industries. Large
industries were permitted to start operations in rural and backward areas with a view to
developing those areas and enabling the growth of small industries around.
2.1.1.6 Industrial Policy Statement, 1977: The main elements of the new policy were:
i) Development of Small-Scale Sector:
The main thrust of the new industrial policy was an effective promotion of cottage
and small industries. Government initiated wide-spread promotional and supportive
measures to encourage small sector. The small sector was classified into 3 categories viz.
Cottage and household industries which provide self-employment; tiny sector and small-
scale industries. The purpose of the classification was to specifically design policy measures
for each category. The policy statement considerably expanded the list of reserved items for
exclusive manufacture in the small-scale sector.
ii) Restrictive Approach towards Large Business Houses:
The large scale sector was allowed in basic, capital goods and high-tech industries.
The policy emphasized that the funds from financial institutions should be made available

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largely for the development of small sector. The large sector should generate internal
finance for financing new projects or expansion of existing business.
iii) Expanding Role of Public sector:
The industrial policy stated that the public sector would be used not only in the
strategic areas but also as a stabilizing force for maintaining essential supplier for the
consumer.
Further, the policy statement reiterated restrictive policy towards foreign capital whereby
the majority interest in ownership and effective control should rest in Indian hands.
2.1.1.7 Industrial Policy, 1980:
The industrial policy 1980 emphasized that the public sector is the pillar of economic
infrastructure for reasons of its greater reliability, for the large investments required and
the longer gestation periods of the projects crucial for economic development. The IPR 1956
forms the basis of this statement. The important features of the policy were:
i) Effective Management of Public Sector:
The policy emphasized the revival of efficiency of public sector undertaking.
ii) Liberalization of Industrial licensing:
The policy statement provided liberalized measures in licensing in terms of automatic

approval to increase capacity of existing units under MRTP and FERA. The asset limit under
MRTP was increased. The relaxation from licensing was provided for large number of
industries. The broad-banding concept was introduced so that flexibility is granted to the
industries to decide the product mix without applying for a new license.
iii) Redefinition of Small-Scale Industries:
The investment limit to define SSI was increased to boost the development of this
sector. In case of tiny sector the investment limit was raised to Rs.1 lakh; for small scale
unit the investment limit was raised from Rs.10 lakh to Rs.20 lakh and for ancillaries from
Rs.15 lakh to Rs. 25 lakh.
Industrial policy, 1980 focused attention on the need for promoting competition in
the domestic market, technological up gradation and modernization. The policy laid the
foundation for an increasingly competitive export based industries and for encouraging
foreign investment in high-technology areas.
2.1.1.8. Era of Liberalization after 80’s:
After 1980, an era of liberalization started, and the trend was gradually to dilute the
strict licensing system and allow more freedom to the entrepreneurs. The steps that were
taken in accordance with the policy included:
i) Re-endorsement of licenses:

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The capacity indicated in the licenses could be re-endorsed, provided it was 25 percent
more than the licensed capacity (1984).
ii) Liberalization of 1990: The measures were as follows:
a) Exemption from licensing for specific new units.
b) Investment of foreign equity up to 40 percent was freely allowed.
c) Location restrictions were removed.
2.1.2 Major Features of Pre-1991 Industrial Policy
2.1.2.1. Protection to Indian Industries:
Local industries were given shelter from international competition by introducing

partial physical ban on the imports of products and high imports tariffs. Protection from
imports encouraged Indian industry to undertake the manufacture of a variety of products.
There was a ready market for all these products.
2.1.2.2. Import-Substitution Policy:
Government used its import policy for the healthy development of local industries.
Barring the first few years after Independence, the country was facing a shortage of foreign
exchange, and so save scarce foreign exchange imports-substitution policy was initiated
i.e. Government encouraged the production of imported goods indigenously.
2.1.2.3. Financial Infrastructure:
In order to provide the financial infrastructure necessary for industry, the

Government set up a number of development banks. The principal function of a
development bank is to provide medium and long-term investments. They have to also play
a major role in promoting the growth of enterprise. With this objective, Government
established the Industrial Finance Corporation of India (IFCI) (1948), Industrial Credit and
Investment Corporation of India (ICICI) (1955), Industrial Development Bank of India
(IDBI) (1964), Industrial Reconstruction Corporation of India (1971), Unit Trust of India
(UTI) (1963), and the Life Insurance Corporation of India (LIC).
2.1.2.4. Control over Indian Industries:
Indian industries were highly regulated to ensure that the private investments
conform to the priorities of the plan through measures as follows:
 Industrial licensing: It entailed that any enterprise which wished to manufacture a

new article or sought a substantial expansion of its existing capacity had to obtain a
license from the relevant government authority;
 Strict regime of import controls;
 Subsidization of exports through special measures;
 Administered prices;
 Investments by multinationals were generally subject to strict controls.

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These legislations and control measures restricted the production, expansion and pricing of
output of almost all kinds of industries in the country.
2.1.2.5. Regulations on Foreign Capital under the Foreign Exchange and
Regulation Act (FERA):
FERA restricted foreign investment in a company to 40percent. This ensured that

the control in companies with foreign collaboration remained in the hands of Indians. The
restrictions were also imposed on technical collaborations and repatriations of foreign
exchange by foreign investors.
2.1.2.6. Encouragement to Small Industries:
Government encouraged small-scale industries (SSIs) by providing a number of

support measures for its growth. Policy measures addressed the basic requirements of the
SSI like credit, marketing, technology, entrepreneurship development, and fiscal, financial
and infrastructural support.
2.1.2.7. Emphasis on Public Sector:
The Government made huge investments in providing infrastructure and basic facilities to
industries. This was achieved by establishing public sector enterprises in the key sectors
such as power generation, capital goods, heavy machineries, banking, tele- communication,
etc.
2.1.3. Review of Pre-1991 Industrial Policy
The pre- 1991 industrial policies created a climate for rapid industrial growth in the
country. It has helped to create a broad-base infrastructure and basic industries. A diverse
industrial structure with self-reliance on a large number of items had been achieved. At the
time of independence the consumer goods industry accounted for almost half of the
industrial production. In 1991 such industries accounted for only about 20 percent. In
contrast capital goods production was less than 4 percent of the total industrial production.
In 1991 it had gone up to 24 percent. Industrial investment took place in a large variety of
new industries. Modern management techniques were introduced. An entirely new class of
entrepreneurs has come up with the support system from the Government, and a large
number of new industrial centers have developed in almost all parts of the country. Over
the years, the Government has built the infrastructure required by the industry and made
massive investments to provide the much-needed facilities of power, communications, roads
etc. A good number of institutions were promoted to help entrepreneurship development,
provide finance for industry and to facilitate development of a variety of skills required by
the industry.
However, the implementation of industrial policy suffered from shortcomings. It is

argued that the industrial licensing system has promoted inefficiency and resulted in the
high-cost economy. Licensing was supposed to ensure creation of capacities according to
plan priorities and targets. However, due to considerable discretionary powers vested in the

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licensing authorities the system tended to promote corruption and rent-seeking. It resulted
into pre-emption of entry of new enterprises and adversely affected competition. The
system favored large enterprises and discriminated against backward regions. Although
government announced a number of liberalization measures in the industrial policy of 1970,
1973 and 1980, dramatic liberalization efforts were made in the industrial policy, 1991.
2.1.4. New Industrial Policy, 1991
India‟s New Industrial Policy announced in July 1991 (hereafter NIP) was radical
compared to its earlier industrial policies in terms of objectives and major features. It
emphasized on the need to promote further industrial development based on consolidating
the gains already made and correct the distortion or weaknesses that might have crept in,
and attain international competitiveness. (Ministry of Industry, 1991).
Distinctive Objectives of New Industrial Policy

(NIP), 1991:
NIP had two distinctive objectives compared to

the earlier industrial policies:
i) Redefinition of Concept of Self-Reliance:
NIP redefined the concept of economic self-

reliance. Since 1956 till 1991, India had always
emphasized on Import substitution industrialization (ISI)
strategy to achieve economic-self reliance. Economic
self-reliance meant indigenous development of
production capabilities and producing indigenously all
industrial goods, which the country would demand rather
than importing from outside. The goal of economic self-
reliance necessitated the promotion of ISI strategy. It
helped to built up the vast base of capital goods,
intermediate goods and basic goods industries over a
period of time. NIP redefined economic self-reliance to
mean the ability to pay for imports through foreign
exchange earnings through exports and not necessarily
depending upon the domestic industries.
ii) International Competitiveness:
NIP emphasized the need to develop indigenous

capabilities in technology and manufacturing to world
standards. None of the earlier industrial policies, either
explicitly or implicitly, had made reference to
international technology and manufacturing capabilities
in the context of domestic industrial development
(Ministry of Commerce and Industry, 2001). For the first
time, NIP explicitly underlined the need for domestic
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industry to achieve international competitiveness.
The liberalized Industrial Policy aimed at rapid and substantial economic

growth and integration with the global economy in a harmonized manner. The
Industrial Policy reforms have reduced the industrial licensing requirements,
removed restrictions on investment and expansion, and facilitated easy access to
foreign technology and foreign direct investment.
NIP initiated changes in India‟s industrial policy environment, which gained

momentum gradually over the decade. The important elements of NIP can be classified
as follows:
2.1.4.1. Public sector de-reservation and privatization of public sector through dis-
investment;
2.1.4.2. Industrial Delicensing;
2.1.4.3. Amendments of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969;
2.1.4.4. Liberalized Foreign Investment Policy;
2.1.4.5. Foreign Technology Agreements (FTA);
2.1.4.6. Dilution of protection to SSI and emphasis on competitiveness enhancement.

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2.1.4.1. Public Sector De-Reservation and Privatization through Dis-Investment:
Till 1991, Public Sector was assigned a pre-eminent position in Indian Industry to
enable it to achieve “commanding heights of the economy” under the Industrial Policy
Resolution (IPR), 1956. Accordingly, areas of strategic importance and core sectors were
exclusively reserved for public sector enterprises. Public enterprises were accorded
preference even in areas where private investments were possible.
Since 1991, the public sector policy consists of:
2.1.4.1.1 Reduction in the number of industries reserved for public sector:
Now only two industries (viz. atomic energy and railway transport) are reserved for
the Public Sector. They are known as “Annexure I” industries (Ministry of Commerce and
Industry, 2001). The essence of government‟s Public Sector Undertakings (PSUs) policy
since 1991 has been that government should not operate any commercial enterprises. The
policy emphasized to bring down government equity in all non-strategic PSUs to 26 percent
or lower, restructure or revive potentially viable PSUs, close down PSUs, which cannot be
revived and fully protect the interests of workers. Government‟s withdrawal from non-core
sectors is indicated on considerations of long-term efficient use of capital, growing financial
un-viability and the compulsions for these PSUs to operate in an increasingly competitive
and market oriented environment (Disinvestment Commission, 1997).
2.1.4.1.2 Implementation of Memorandum of Understanding (MOU):
As a part of the measures to improve the performance of public enterprises, more

and more of public sector units have been brought under the purview of Memorandum of
Understanding (MoU) system. A memorandum of understanding is a performance contract,
a freely negotiated document between the Government and a specific public enterprise.
2.1.4.1.3 Referral to BIFR:
Many sick public sector units have been referred to the Board for Industrial and
Financial Reconstruction (BIFR) for rehabilitation or, where necessary, for winding up.
2.1.4.1.4 Manpower Rationalization:
In order to make manpower rationalization Voluntary Retirement Scheme (VRS) has

been introduced in a number of PSUs to shed the surplus manpower.
2.1.4.1.5 Private Equity Participation:
PSUs have been allowed to raise equity finance from the capital market. This has
provided market pressure on PSUs to improve their performance.
2.1.4.1.6 Disinvestment and Privatization:

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Disinvestment and privatization of existing PSUs has been adopted to improve
corporate efficiency, financial performance and competition amongst PSUs. It involves
transfer of Government holding in PSUs to the private shareholders.
2.1.4.2 INDUSTRIAL DELICENSING:
The removal of licensing requirements for industries, domestic as well as foreign,

commonly known as “de-licensing of industries” is another important feature of NIP. Till the
1990s, licensing was compulsory for almost every industry, which was not reserved for the
public sector. This licensing system was applicable to all industrial enterprises having
investment in fixed assets (which include land, buildings, plant & machinery) above a
certain limit. With progressive liberalization and deregulation of the economy, industrial
license is required in very few cases. Industrial licenses are regulated under the Industries
(Development and Regulation) Act 1951. At present, industrial license is required only for
the following:
(i) Industries retained under compulsory licensing (five industries are reserved under
this category).
(ii) Manufacture of items reserved for small scale sector by larger units:
An industrial undertaking is defined as small scale unit if the capital investment does
not exceed Rs. 10 million (approximately $ 222,222). The Government has reserved certain
items for exclusive manufacture in the small-scale sector. Non small-scale units can
manufacture items reserved for the small-scale sector if they undertake an obligation to
export 50 percent of the production after obtaining an industrial license.
Value addition: Interesting Facts

List of Industries Requiring Compulsory Industrial Licensing:
1. Distillation and brewing of alcoholic drinks.
2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
3. Electronic Aerospace and defense equipment: all types.
4. Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose
and matches.
5. Specified Hazardous chemicals.
List of Industries Reserved for the Public Sector:

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1. Atomic Energy
2. Railway transport Sector
Thus, excluding these, investors are free to set up a new industrial enterprise, expand an
industrial enterprise substantially, change the location of an existing industrial enterprise
and manufacture a new product through an already established industrial enterprise. The
objective of industrial delicencing is to enable business enterprises to respond to the fast
changing external conditions. Entrepreneurs will be free to make investment decisions on
the basis of their own commercial judgment. This will facilitate the technological dynamism
and international competitiveness. Further industries will have freedom to take advantage of
„economies of scale‟ as well as „economies of scope‟ in the current industrial policy
environment.
It is important to note that Earlier industrial licensing was also required if the
proposed location attracts locational restrictions:
The industrial undertakings to be located within 25 kms of the standard urban area
limit of 23 cities having a population of 1 million as per 1991 census required an
industrial license. Since 2008, Government has removed this locational stipulation (i.e.
in setting up of industries in cities with population of one million and above as per 1991
census). Entrepreneurs are now free to select the location for setting up industry.
However, Zoning and land use regulations as well as environmental legislations
continue to regulate industrial locations.
2.1.4.3. Amendment of Monopolies and Restrictive Trade Practices (MRTP) Act,

1969:
An important objective of India‟s earlier industrial policies was to prevent emergence

of private monopolies and concentration of economic power in a few individuals.
Accordingly, Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 was enacted and
MRTP Commission was set up as a permanent body to periodically review industrial
ownership, advice the government to prevent concentration of economic power, investigate
monopolistic trade practices and inquire into restrictive trade practices, which are prejudicial
to public interest. An MRTP firm was mainly defined in terms of asset size. An MRTP
company had to obtain prior approval of the government for setting up a new enterprise as
well as for expansion. However, MRTP Act was applicable only to private sector companies.

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Since 1991 MRTP Act has been restructured and pre-entry restrictions have been
removed with regard to prior approval of the government for the establishment of a new
undertaking, expansion, amalgamation, merger, take over, and appointment of directors of
companies. The asset restriction and market share for defining an MRTP firm has been done
away with. MRTP Act is now applicable to both private and public sector enterprises and
financial institutions. Today only restrictive trade practices of companies are monitored and
controlled. The MRTP act has been replaced by the Competition Act, 2002. This law aims at
upholding competition in the Indian market. The competition commission has been
established in 2003 which mainly control the practice that have an adverse impact on
competition.
2.1.4.4. Liberalized Foreign Investment Policy:
India‟s earlier industrial policies welcomed FDI but emphasized that ownership and
control of all enterprises involving foreign equity should be in Indian hands. The Balance of
Payments (BOP) difficulties in the mid 1960s forced the country to adopt a more restrictive
approach towards FDI through the setting up of a Foreign Investment Board, which
classified industries into two groups: banned and favored for foreign technical
collaboration and FDI. The number of industries for foreign investment was steadily
narrowed down and by 1973 there were only 19 industries where FDI was permitted. The
enactment of FERA, 1973 marked the beginning of the most restrictive phase of India‟s
foreign investment policy. The NIP radically reformed foreign investment policy to attract
foreign investment. The important foreign investment policy measures are as follows:
i) Repeal of FERA, 1973:
FERA, 1973 has been repealed and Foreign Exchange Management Act (FEMA) has
come into force with effect from June 2000 (RBI, 2003). Investment and returns can be
freely repatriated except where the approval is subject to specific conditions such as lock-in
period on original investment, dividend cap, foreign exchange neutrality, etc. as specified in
the sector specific policies. The condition of „dividend balancing‟ was withdrawn for
dividends declared. A foreign investor can freely enter, invest and operate industrial
enterprises in India,
ii) Dilution of Restrictions on Foreign Direct Investment (FDI):
FDI is allowed in all sectors including the services sector except atomic energy and
railway transport. FDI in small scale industries is allowed up to 24 percent equity. Use of
brand names/trade marks is allowed. Further, FDI up to 100 percent is allowed under the
automatic route in all activities/sectors except the following which require prior approval of
the Government:-
 Sectors prohibited for FDI;

 Activities/items that require an industrial license;
 Proposals in which the foreign collaborator has an existing financial/technica
collaboration in India in the same field;
 Proposals for acquisitions of shares in an existing Indian company in financial
service sector and where Securities and Exchange Board of India
(substantialacquisition of shares and takeovers) regulations, 1997 is attracted;
 All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI
is not permitted.

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Thus most of the sectors fall under the automatic route for FDI.
iii) Foreign Technology Agreement:
The automatic approvals for technology agreement are allowed to industries within
specified parameters. Indian companies are free to negotiate the terms of technology
transfer with their foreign counterparts according to their own commercial judgment.
iv) Dilution of Protection to Small Scale Industries (SSI) and Emphasis on

Competitiveness:
SSIs enjoyed a unique status in Indian economy due to its diversified presence
across the country and thereby utilizing resources and skills, which would have otherwise
remained unutilized. Due to their potential to generate large-scale employment, produce
consumer goods of mass consumption, alleviate regional disparities, etc., industrial policies
protected the sector for its growth. The principal protective measures for SSI comprised:
a) Demarcating SSI from the rest of industry through a definition under the IDR Act, 1951,
b) Concessional credit from the banking system,
c) Fiscal concessions,
d) Exemption from industrial licensing and labor legislations,
e) Preferential access to scarce raw materials, both domestic and imported,
f) Market support from the government through reservation of products for government
purchase and price preferences, and
g) Reservation of products for exclusive manufacturing in SSIs and restrictions on the

growth of output and capacity in the large-scale sector for products reserved for SSI
manufacturing. These policy measures protected SSIs from both internal and external
competition.
However, since 1991 the protective emphasis of SSI policy has undergone dilution.
In August 1991, government of India brought out an exclusive policy for SSI. The policy
marked: (i) the beginning of an end to protective measures to small industry and (ii)
promotion of competitiveness by addressing the basic concerns of the sector namely
technology, finance and marketing. Subsequently, the number of items reserved exclusively
for small industry manufacturing has been gradually brought down. This policy has lost its
relevance to a large extent because though these products could not be manufactured by
large enterprises domestically, they can be imported from abroad due to the removal of
quantitative and non-quantitative restrictions on most imports by April 1, 2001 (Ministry of
Finance, 2002). Concession element in lending rates for small industry has been largely
withdrawn during the 1990s (RBI, 2003). The number of products reserved exclusively for
purchase from small industry by the government has been reduced to 358 items from 409
items. Measures have been adopted to improve technology and export capabilities of SSIs.
Thus the overall promotion orientation of SSI has shifted from protection towards
competitiveness.

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2.1.5. Review OF INDUSTRIAL POLICY, 1991:
The all-round changes introduced in the industrial policy framework have given a
new direction to the future industrialization of the country. There are encouraging trends on
diverse fronts. Industrial growth was 1.7 per cent in 1991-92 that has increased to 9.2
percent in 2007-08.The industrial structure is much more balanced. The impact of industrial
reforms is reflected in multiple increases in investment envisaged, both domestic and
foreign. This is due to encouraging response from the private sector. There has been
dramatic increase in FDI since 1991. The foreign investment as a percentage of total GDP
has increased from 0.5 percent in 1990-91 to 5.7 percent in 2006.Investments in
infrastructure sector such as power generation have surged from players of various sizes in
different states. The capital goods have grown at an accelerated pace, over a high base
attained in the previous years, which augurs well for the required industrial capacity
addition.
2.2 Industrial Growth in India:
2.2.1 Sectoral Growth of Industries
The industrial sector consists of three broad sectors: Manufacturing, Mining and quarrying, and
electricity, gas and water supply (Chart 1). The manufacturing sector is divided into two
segments viz. i) Factory Sector ii) Non-Factory Sector.
Chart1: Broad Segments of Industrial Sector in India
The factory sector covers units registered under the Factories Act 1948.The non-factory sector
consists of the remaining manufacturing units. Under the Factories Act, 1948 factory includes
those factories employing 10 or more workers using power and those employing 20 or more
workers without using power. The factory sector is designated as registered or organized sector
and non–factory sector is called as unregistered or unorganized sector.
The changing relative importance of the different segments of the industrial growth is depicted
through Table1 & Table1a. The rapidly changing sectoral contributions to the GDP are an
indication of the significant structural changes taking place in the economy.
Year Agriculture Industry Manufacturing Services

and Allied
1950-51 57 15 9 28
1964-65 49 21 12 31
1980-81 40 24 14 36
1987-88 33 26 16 41
2004-05 21 27 17 52
2005-06 20 19 15 61
2006-07 19 20 15 61

17
2007-08 18 19 15 63
2008-09 17 19 14 64
Table1: Components of GDP (figures are in percent)
Source: K.L.Krishna, Reading in Indian Agriculture and Industry, Table 11. 2 p.306.
Figures of 2005-06 onwards are Author’s Own Calculation based on the data compiled from
CSO
The contribution of industry to the GDP was quite low during the initial period of planning of
just 15 percent of GDP with manufacturing sub-sector contribution only 9 percent. The share of
industry in GDP has increased to 27 percent in 2004-05., while there has been a decline in the
share of agriculture and allied sectors from 57 per cent to 17 per cent during the same period.
The decline in the share of agriculture in GDP has been mostly appropriated by the services
sector, which increased its share from 28 per cent to 64 per cent. The share of industrial sector
however, has stagnated at around 19 percent during the recent period with manufacturing sub-
sector of around 15 percent. The analysis of different segments of industrial sector in Table 1a
shows that the growth in the industrial sector seems to be manufacturing led with a high
percentage of manufacturing sector share in the GDP. The growth rate of different sector of
economy clearly depicts that the industrial growth surpassed the economic growth rate in the
entire planning period with exception of 2007-08 and 2008-09 (Table 2).
Table1a: Share of different Segments of Industrial Sector in GDP (percent)
Year Mining & Quarrying Manufacturing Electricity, Gas &

Water Supply
1950 1.41 8.9 0.31

1960 1.66 11.0 0.56
1970 1.7 12.6 1.13
1980 2.0 13.82 1.61
1990 2.7 14.94 2.17
1995 2.5 16.21 2.48
2000 2.3 15.26 2.43
2005 2.1 15.05 2.2
2009 1.9 14.60 1.97

18
Source: K.L.Krishna, Reading in Indian Agriculture and Industry, Table 11. 2 Figures of
2005-06 onwards are Author’s own calculations from the data compiled from CSO
Table2: Growth Rates of Sectoral GDP (at Factor Cost) (percent)
Year Agriculture Industry Manufacturing Services Economy

and Allied
1951-65 2.9 6.7 6.6 4.7 4.1
1965-81 2.1 4.0 3.9 4.3 3.2
1981-1988 2.1 6.3 7.1 6.5 4.8
1988-2006 3.4 6.5 6.8 7.8 6.3
2006-07 3.9 10.7 11.7 11.3 9.7
2007-08 4.8 7.4 8.2 10.8 9.0
2008-09 1.6 2.0 2.4 9.4 6.7
Source: K.L.Krishna, Reading in Indian Agriculture and Industry, Table 11. 2 p.306.
Figures of 2005-06 onwards are Author’s own calculations from the data complied from CSO
2.2.2 Pattern of Growth of Industrial Sector in India
In order to evaluate the growth pattern of Industrial sector in India, it is convenient to divide the
period since 1950 into different phases. Acharya et al. (2006) divided the period 1950-2002 into
four sub-periods according to policy regimes:
2.2.2.1. 1950-1967: Evolution of Industrial Development Strategy.
2.2.2.2. 1967-1980: Inward Orientation and Industrial Stagnation.
2.2.2.3. 1980-1991: Deregulation, Fiscal Expansion and Growth.
2.2.2.4. 1991-2002: Economic Reforms, Growth and Slowdown.
2.2.2.1. 1950-1967: Evolution of Industrial Development Strategy:
i) Overall Growth Pattern:
At the time of independence, there were a few industrial concentrations. A few consumer goods
industries were scattered at different parts of the country. The launch of the first five year plan in
1951 was the first step in deciding priorities and channeling resources towards these. The first
Five Year Plan (1951-56) accorded primacy to agriculture, irrigation, and infrastructure. The
19
second five year plan (1956-61) based on the Mahalanobis strategy emphasized heavy industry
and public sector dominance. The export pessimism and import substitution industrialization
strategy was pursued. The second five year plan achieved 4.3 percent of growth rate. The
average annual growth rate during the third plan (1961-1966) was 2.8 percent. However, the
industry sector maintained the growth rate of over 6.5 percent (Table 3).
Table3: Growth Rate* of Overall Industrial Production
(Figures are in
percent)
Plan/ Year Growth Rate

I, 1951-56 6.8
II,1956-61 7.1
III,1961-66 6.8
Source: Plan Documents, Planning Commission
* Growth rates are based on Index of Industrial Production (IIP)
The share of industry in the overall GDP and investment increased consistently throughout
this period (Chart1).

20
Chart 1: Share of GDP & Investment of Industry
During the end of first phase, India extended the import substitution policy on
wide range of products. These policies helped India establish a large and well-diversified
industrial sector. There was considerable development of technological capabilities in the
country. The domestic competition however, was marred by the entry barriers in the form of
industrial licensing. Moreover, the Indian industries especially public sector units suffered from
low capacity utilization and over- manning.
Value addition: Did You Know?

21
Estimates of Industrial Statistics in India

ANNUAL SURVEY OF INDUSTRIES (ASI) is the principal source of industrial statistics of
India. The ASI covers the industrial units registered Factories Act, 1948 and bidi & cigar
Units registered under the Bidi & Cigar Workers (Conditions of Employment) Act, 1966. All
the establishments under the control of Defence Ministry, oil storage and distribution units,
restaurants and cafes and technical training institutes are kept outside the purview of ASI.
Electricity undertakings registered with the Central Electricity Authority and units engaged
in storage, water works and gas supply, etc. are also excluded from the preview of ASI with
effect from 1998-99 and onwards. In terms of geographical coverage, ASI extends to the
entire country except the states of Arunachal Pradesh, Mizoram, Sikkim and Union Territory
of Lakshadweep.
ii) Sectoral Growth Pattern:
At the beginning of the First Plan, the industrial development in India was confined largely to the
consumer goods sector. Industries producing intermediate products like coal, steel, power, non-
ferrous metals and chemicals had very small productive capacity, whereas capital goods
production had only made a start. From the Second Plan, under the influence of P.C.
Mahalanobis, self-reliance through development of heavy industries was emphasized upon.
Major steps were taken to establish machine tools industries, heavy electrical, machine building
and other heavy engineering industries. As a consequence, there was a sharp decline in relative
importance of consumer goods sector.
2.2.2.2 1967-1980: Inward Orientation and Industrial Stagnation:
In the mid 60’s India suffered two successive droughts that led to substantial fall in the food
grains production. The shortfall was so severe that the very concept of planning over five year
span had to be given a holiday. However, that triggered the Green Revolution and has helped
India to achieve self sufficiency in food grains production within a very short span of time. This
period also witnessed a growth of public sector enterprises. The public sector was reaching
commanding heights in several areas.
Further, during this phase the import-substitution strategy and imposition of governmental
controls through nationalization of major banks and insurance in 1969, FERA, small scale
industries reservations, MRTP Act, were strengthened. Though the share of industrial GDP
remained higher than the earlier phase (Chart 2) yet the industrial growth during this phase
decelerated to around 4.1 percent per annum from 6.3 percent attained in the earlier phase. If the
year 1976-77 that registered sudden jumps in growth rate to 10.6 per cent, is left out, the rate of
annual growth during this period turned out to be even smaller, 3.7 per cent per annum. The
industrial licensing policy and the trade policy were not conducive to faster growth. The import
substitution policy resulted into creation of high-cost industrial structure. The overall impact of
various elements of industrial policy was to impair growth of productivity or efficiency in the
use of factors. This created the doubt about the efficacy of the detailed governmental controls on
industry. (Acharya et al. 2006).

22
Source: Data compiled from Central Statistical Organization and Plan Documents of Planning
Commission.
ii) Sectoral Growth Pattern
Table 4 shows the extent of the deceleration process across the industries that suffered. The part
of manufacturing industry that did not share in the deceleration experience included textiles and
food manufacturing. Mining & quarrying and electricity, on the other hand, behaved quite
differently from each other. Mining experienced a sharp decline in its growth rate from 7.3 per
cent per annum during 1956-65 to 3 per cent per annum during the latter period (i.e. from the
year 1966 to 1982). Electricity & gas showed a negligible decline in average annual growth rate.
Capital goods industries grew only at an annual rate of just 2.6 per cent during this period
compared to 13.1 per cent and 19.6 per cent per annum respectively during Second and Third
Plans.

23
Table 4: Industrial Stagnation (Growth Rate of Net Value Added)
(Figures are in percent)
Industry/Group 1956-57 to 1965-66 1966-67 to 1979-80 1966-7 to 1981-2

Mining & Quarrying 7.3 3 3.3
Electricity & Gas 9.6 8.9 8.7
Manufacturing 6.9 5.5 5.3
(Total)
Source: I.J. Ahluwalia, 1985.
2.2.2.3 1980-1991: Deregulation, Fiscal Expansion and Growth:
The third phase 1980-1991, witnessed a substantial acceleration of overall growth from 3.8
percent per annum in the earlier phase to around 8 percent (Table 5). The share of industry GDP
increased to around 20 percent (Chart 3) and the industry GDP growth increased from 4.1
percent 1980 to 7.1 percent in 1991. The efforts of industrial liberalization, greater willingness to
import technology and foreign private investment were the main factors behind improved growth
performance during this phase.

24
Commission.
Further, the public investment in the infrastructure and energy production (to insulate the
economy from external shocks) and efforts on the rural development was improved dramatically.
The greater reliance was put on the private corporate sector with fiscal incentives provided for
stock market-based financing of industrial investment, as government faced a growing resource
constraint to meet the ambitious planned investment target (R.Nagaraj). Industrial export growth
also improved in the second half of the 1980’s due to the relaxed import restrictions and
depreciation of the currency. The turnaround in the industrial output growth in this decade has
been attributed to liberalization, improvement in public investment and public sector
performance (Ahluwalia, 1992; Nagaraj, 1990). In fact, as noted by Ahluwalia, the important
aspect of revival growth rates during 1980s was not that it was associated with an acceleration of
growth of inputs, but was based on better productivity and performance. The end of the period
however, witnessed a severe balance of payments crisis in the wake of the 1990 Gulf War and oil
price hike.
Source: Data compiled from Central Statistical Organization and Plan Documents of Plannin
Commission.
ii) Sectoral Growth Pattern

25
The substantial acceleration in the growth rate was witnessed across different segments of
industrial sector (Table 5).There had been significant improvement in the growth of value added
in the manufacturing sector and in all its use-based sectors. Basic goods grew at 8.7 per cent per
annum whereas both capital goods and intermediate goods sectors grew at around 6 per cent per
annum during 198 1-85. In the latter half of the 1980s, except basic goods registered marginal
decrease in growth rate, all other sectors grew at a faster rate.
Table5: Industrial Growth (figures in percent)
Industry/Group 1981-82 1986-87 1990-91 1981-91

Mining & Quarrying 17.7 3.8 4.5 8.3
Electricity & Gas 10.1 10.3 7.8 9.0
Manufacturing 7.9 9.4 9.0 7.6

(Total)
Total Industry 9.3 9.1 8.2 7.9
Source: Author’s own Calculation based on the data compiled from CSO: Growth rates
represent the average rate of growth in the annual Index of Industrial Production (IIP). The
calculations are based on IIP adjusted series for base period 1993-94=100.
The IIP use-base growth rate during 80’s depicts that the capital goods sector has grown at 6.7
percent p.a. The relative weights of use-based industrial groups also reflect the change in growth
rate in the different segments of the industry. Table6a depicts the decade wise information on the
share for different groups of registered manufacturing sectors since 1960-61.The share of
consumer goods has increased mainly on account of consumer durable from 35 percent during
70’s to 41 percent during 80’s.The share of capital goods has also increased. The base goods
share witnessed the marginal fall during this period.
2.2.2.4: 1991-2002: Economic Reforms, Growth and Slowdown:
The year 1991 witnessed the introduction of wide ranging reforms in industrial licensing, foreign
trade policy, exchange rate regime, financial sector and fiscal policy. The reform process
especially in the industrial sector aimed at creating a more competitive and challenging industrial
environment. These structural changes resulted in robust industrial performance. The industry
sector growth was above 9 percent. The boom was witnessed in exports and investments. During
1994-97 the GDP growth was above 7 percent per annum. However, the pace of reforms
slackened from 1995 and fiscal balances worsened thereafter, investment and exports lost

26
momentum and growth slowed after 1997 (K.L. Krishna, 2008). The share of industry in GDP
rose from 18.6 percent in 1970 to 27 percent in 1995-96. In fact the annual growth rate of output
of around 14 percent (based on IIP index) in the year 1995-96 was the highest ever recorded in
India (Table 6 & Chart5). However, the share of industry in GDP fell to 22 percent in 1996-97.
The decline in the rate of growth of production during the 90’s is clearly visible in different
sectors of industry (Table 6). Chart 5 gives an overview of growth of industries during this
period. The slow down began in 1996-97 and industry showed signs of slowdown till 1998-99.
Thereafter, the industrial sector witnessed a turnaround. But industrial growth again slowed
down during the year 2000-01 and 2001-02.
Commission.
Table6: Industrial Growth (1991-2002) Economic Reforms, Growth and

Slowdown
Industry/ 1991-95 1995-97 1997-00 2001 2002 1991-2002
Group

27
Mining & 3.7 3.9 2.5 2.8 1.3 3.1

Quarrying
Electricity & 4.2 10.8 6.1 5.4 2.9 5.9

Gas
Manufacturing 7.4 6.1 6.8 3.9 3.1 6.3

(Total)
Total Industry 4.6 9.6 5.8 4.9 2.8 5.7
Source: Author’s own Calculation; data compiled from CSO; Growth rates represent the
average rate of growth in the annual Index of Industrial Production (IIP). The calculations are
based on IIP adjusted series for base period 1993-94=100. (Figures are in Percent)
The major factors that caused deceleration in the industrial growth were mainly due to internal
constraints in the economy such as: i) lack of domestic demand ii) high interest rates iii)
infrastructure bottlenecks in power and transport iv) industrial restructuring through merger and
acquisitions, v) lack of reforms in land and labor markets and delay in regulatory framework in
key sectors. Further, the slow down of the world economy during this period accentuated the
deceleration (Uma Kapila, 2009-10).
Though there was an improvement in the investment growth especially in the registered
manufacturing sector but this did not translate into output growth as the size of the market was
found to be much smaller than projected (R.Nagaraj). This resulted in creation of huge capacity
in many industries. The investment in the unregistered manufacturing was to an extent adversely
affected by the interest rates in the initial years of reforms. The interest rates came down in the
second half of the 1990s; commercial banks resisted lending for productive sector. In aggregate
however, during this period, the share of industry in GDP increased but only marginally to 25 per
cent over the decade of the 1990s as compared with 51 per cent in China, 47 per cent in
Indonesia, 45 per cent in Malaysia and 28 per cent in Mexico. The relative weights of use-based
industrial groups of registered manufacturing (table 6a) depicts that the share of consumer goods
has gone up from 35 percent in 1970-71 to 43 percent in 1997-98. The share of basic and
intermediate goods has gone down while that of capital goods increased marginally during the
same period.
Table6a: Changes in the Use-Based Classification of Registered Manufacturing Output,
Use-Base Groups 1970-71 1980-81 1990-91 1997-98

1.Basic Goods 30.7 21.3 23.7 23.0

28
2.Intermediate Goods 19.0 16.3 16.8 17.0

3. Capital Goods 15.2 21.2 17.5 16.3
4.Consumer Goods 35.1 41.1 42.0 43.6
4.1 Consumer durable goods 2.8 4.8 6.8 8.8
4.2 Consumer non-durable goods 32.6 36.4 35.2 34.8
Source: Data till 1997-98 is from Table 12.6 from K.L.Krishna and Uma Kapila, Reading in
Indian Agriculture and Industry, 2009.
Commission.
2.2.2.5: Recent Scenario (2003-2010):
The year 2002-03 witnessed industrial recovery which consolidated during the course of 2003-
04, and gathered momentum during the 2004-05. This phase of industrial growth reflected
improved investment climate, expanding external demand, improved domestic demand and ease
in availability of finance. The phase witnessed conducive macroeconomic environment marked
by low inflation, low interest rates and surge in foreign exchange reserves. The strong
performance of the capital goods sector coupled with increased imports of capital goods augurs
well for domestic capacity expansion in a large number of industries. The overall growth in
industrial production, as measured by the Index of Industrial Production (IIP) increased from 2.7
percent in 2001-02 to 5.7 percent in 2002-03 (Table 7). The industrial scenario in the post
liberalization period has been marked by three phases, the first phase from mid 1992 to mid
1996, was marked by rapid expansion followed by a phase of slow down. The third phase
starting from mid 2002 represents a period of robust industrial growth. The industrial production
growth curve had been on a rising trend since 2002-03 when the growth rate as measured by the
Index of Industrial Production (IIP) was 5.7 per cent, which rose to 7.0 per cent in 2003-04 and
to 8.4 per cent in 2004-05.
Table7: Industrial Growth (2002-03 to 2009) (figures in percent)
Year Mining & Manufacturing Electricity General

Quarrying
2002-03 5.8 6.02 3.22 5.78
2003-04 5.29 7.39 5.05 6.99
2004-05 4.38 9.14 5.16 8.38
2005-06 1.01 9.15 5.17 8.17
2006-07 5.35 12.53 7.27 11.53
2007-08 5.14 8.98 6.35 8.49

29
2008-09 2.58 2.76 2.76 2.76
Source: Author’s own Calculation; data compiled from CSO; Growth rates represent the average
rate of growth in the annual Index of Industrial Production (IIP). The calculations are based on
IIP adjusted series for base period 1993-94=100.
The rate of growth of production in respect of manufacturing has been consistently higher than
the overall industrial growth (Table7). The performance of the industrial sector, measured in
terms of the index of industrial production, improved from 8.4% in 2004-05 to 11.6% in 2006-
07. This year is also one of the highest industrial growth rates ever since the industrial
liberalization process was set in motion in 1991. The overall industrial growth during 2007-08
however, moderated to 9.0 per cent, compared to 11.53 per cent in 2006-07. A slowdown in
consumer demand for some industries and a slackening of export demand in a few industries are
among the possible contributors. Further, a rise in interest rates and a depreciation of the US
dollar vis-à-vis market determined currencies such as the Euro, pound, Yen and Rupee could
have contributed to a slackening of demand for goods in interest sensitive and exchange sensitive
sectors (Annual report,2009, Ministry of Industry and Commerce).
Data compiled from Central Statistical Organization and Plan Documents of Planning
Commission.
Thus the fall was mainly due to cyclical slowdown. The overall industrial growth (measured in
terms of IIP) dramatically fell 2.6 percent during 2008-09 compared with 8.5 percent achieved
during 2007-08 mainly due to global economies crisis. The hardening of commodity and food
prices at international market, increase in inflation, liquidity and credit problems and slowdown
30
in global demand has been some of the major challenges faced by Indian Industry. However,
recently, the industrial growth measured in terms of Index of Industrial Production (IIP) is
showing the clear signs of recovery during 2009-10 with growth of 7.9 percent during April
2010. This improved industrial growth in 2009-10 is driven by the manufacturing sector, with a
weighted contribution of 88.8 per cent, higher than its weight of 79.4 per cent in the IIP (Table
6a). The increasingly manufacturing growth is being led by capital goods industries and
consumer durables. Although industrial output decelerated marginally in the month of May 2010
as compared to 15 per cent growth recorded during Q4:2009-10, the pace of the increase is still
robust. Notwithstanding the impact of the base effect and possible weakness in global demand
which may cause some moderation in the pace of growth, industrial activities could be expected
to remain buoyant (Annual Report, Ministry of Industry and Commerce, 2009-10).
Commission.
ii) Sectoral Growth Pattern:
The Comparative growth rates for different segments of industries from 2001-02 to 2008-09 is
given in Table7. During the year 2006-07 the manufacturing sector recorded the robust growth of
around 12 percent. The mining & quarrying and the electricity sub-sectors of the IIP registered
higher growth rates of around 5 per cent and 7.5 per cent respectively.
2.3 Prospect and Outlook of Industrial Sector in India
2.3.1 Constraints facing Industrial Sector in India:
2.3.1.1 Infrastructure Bottlenecks:
A major structural constraint in achieving faster growth in the industrial sector especially
manufacturing is the inadequacy of the physical infrastructure, i.e. roads, railways, ports,
airports, communication and electric power supply. The XIth plan has made an effort to reduce
these constraints through huge infrastructure investments. Growth in infrastructure not only

31
alleviates the supply-side constraints in industrial production, but also stimulates additional
domestic demand required for industrial growth (Economic Survey, 2009-10).
2.3.1.2 Restrictive Labor Regulations:
Indian labor laws are among the most rigid in the world. The labor laws should be made flexible
with an adequate and broad based safety net for the country's workforce.
2.3.1.3 Bureaucratic Controls:
Bureaucratic licensing controls and discretionary approvals have been widely reduced, but
drastic changes are required in the bureaucratic regulatory framework especially at the state-level
clearances system required by investors.
2.3.1.4 Low Penetration of Updated Technology:
Quality management is the key to export markets and retaining a competitive position in the
domestic market. The penetration rates of the latest technologies are still quite low by
international standards, reflecting India’s low levels of per capita income and high incidence of
poverty. Further, there is a need to respond quickly and effectively to the changing demands of
the international market.
2.3.1.5 Lack of Collaborative Research:
There is a vast network of national laboratories and scientific and technical institutional
infrastructure. But the culture of collaborative research involving different institutes and
corporate has not been promoted. There exists an isolation of universities from R&D and a low
degree of commercial orientation. Further, these institutions suffered from resource constraints
with respect to budget, staffing and equipment that limit their effectiveness in both quantitative
and qualitative terms.
2.3.1.6 Regional Imbalances:
India continues to suffer from extreme regional imbalances in the industrial development. While
Maharashtra and Gujarat belong to the most industrialized states, others such as Orissa and the
whole Northeastern region (Assam, etc.) remain poverty-ridden and largely unaffected by
industrialization, particularly manufacturing.
2.3.1.7 Overlapping Industrial Institutional Framework:
Indian Government’s industrial institutional framework is characterized by overlapping and

shifting mandates, barriers to coordination and a lack of a unified industrial development
strategy. It is quite fragmented. For example the industrial policy and investment promotion
looked after by the Department of Industrial Policy and Promotion (DIPP) of the Ministry of
Commerce and Industry, while the Ministry of Small-Scale Industries (SSI) is in charge of all
matters related to micro, small and medium enterprises (MSMEs). In addition, separate
32
Ministries for Agro and Rural Industries (ARI) as well as Heavy Industries & Public Enterprises
were created in October 1999. Besides Central Government, each Indian state has its own
ministry/department in charge of industrial development and/or SME promotion at state level.
2.3.2 Prospects and Challenges:
The industrial sector has gained considerable strength with the liberalization of industrial
controls and reducing tariff barriers since 1991. The liberalization efforts have forced Indian
manufacturers to become more competitive. A number of favorable factors have helped to
improve the investment climate for the industry and to create considerable optimism on the
manufacturing front. India maintained an upward climb in the global competitiveness indices.
The advantages of India as an
Value addition: Interesting Facts

India’s Global Ranking in Manufacturing Competence
India has been ranked second, ahead of the US and South Korea, in terms of manufacturing
competence globally. China, followed by India and South Korea has been ranked first, second
and third respectively in the 2010 Global Manufacturing Competitiveness Index; a result of
the collaboration between Deloitte Touché Tohmatsu and the US Council on Competitiveness.
Under the current competitive index China tops the ranking with the maximum 10 points,
followed by India (8.15), South Korea (6.79), US (5.84), Brazil (5.41) and Japan (5.11).The
report stated that India’s rich talent pool of scientists, researchers, and engineers as well as its
large, well-educated English-speaking workforce and democratic regime make it an attractive
destination for manufacturers. The report noted that since the mid-1990s, India's software
industry has reached to new heights and post-economic liberation has also opened market
opportunities for Indian manufacturing.
The report also stated that the country is also rapidly expanding its capabilities in engineering
design and development and embedded software development, which form an integral part of
many modern-day manufactured products. The importance of India to manufacturing executives
around the world underscores two important points:
First, strength in research and development, paired with engineering, software, and technology
integration abilities, are viewed by global executives as a vital element of the talent-driven and
innovative manufacturing enterprise of the 21st century. Second, manufacturing executives
increasingly view India as a place where they can design, develop and manufacture innovative
products for sale in local as well as in global markets.
These factors explain, in part, India's rise from a low-cost, 'back office' location to a country that
is well-positioned to be an active participant in the entire value chain-as well as it now being
viewed by many executives as an integral part of their global manufacturing enterprise and
location strategy.
Projecting the competitiveness ranking after five years, the report says while China with 10
points would still remain on the top, India would inch closer to China with 9.01 points. South
Korea would remain at the third slot with 6.53 points, while Brazil (6.32) would replace US
(5.38) to the fourth slot. The United States would drop down to the fifth place, followed by
Mexico (4.84), Japan (4.74) and Germany (4.53).

33
Source: Economic Times, Dated 10-07-10, at

www.economictimes.indiatimes.com/news/international-business
investment destination rest upon its strong fundamentals, which include a large and growing
market; world-class scientific, technical and managerial manpower; cost effective and highly
skilled labor; abundant natural resources; a large English speaking population; independent
judiciary e.t.c (Annual Report, Ministry of Industry and Commerce,2009-10). Recently the
cyclical slowdown in the industrial sector that began in 2007-08 got compounded by global
shocks in 2008-09. However, the global economic outlook has now improved and the
international economic growth scenario seems positive. The pace of the industrial growth is
currently quite robust (Economic Survey, 2009-10).
Value addition: Did You Know?

Sources of Data for Industrial Production
There are two sources of data for industrial production. One is the index of industrial production
(IIP) and the other is National Accounts Statistics (NAS) that is based on ASI data. While the IIP
is available at monthly intervals, the NAS is published annually, but with a longer time lag. The
ASI provides growth, composition and structure of organised manufacturing sector. The IIP is
available for 18 two-digit industry groups, as well as five use-based, three input-based and two
sector-based categories. The source of the data used for the index is voluntary reporting of
monthly output by firms with equipment investment of over Rs. 20 lakh in 1980. Generally,
industrial growth is portrayed through growth in IIP. The IIP is a standard measure of the trends
of industrial production and is being published as a monthly series since 1950 by the Ministry of
Industry, Government of India. Revisions of IIP are carried out from time to time by shifting the
comparison base to a more recent period and by reviewing coverage of items/industries for
reflecting changes in the structure of the Indian industry sector.
Source: National Accounts Statistics at www.mospi.nic.in
Summary
The Government policies and procedures in the pre-1991 period aimed at industrial development
of the country, but the enactment of the IDR Act, procedures laid down for obtaining industrial
licensing and various rules acted as a great deterrent to the growth of industries in the country.
The bureaucracy acquired unprecedented powers and authority over all kinds of industrial
activities.
The NIP announced in July 1991, unshackle the industries from the cobweb of bureaucratic
control to allow it to achieve international competitiveness. NIP encouraged foreign investment
in the economy and opened it to greater domestic and international competition. The current
global and domestic scenario offers Indian industry with huge opportunities. Presently, the
demand constraints seem to be relived given the size of Indian market, overall GDP growth and
unmet demand for industrial products. Besides, despite the significant step-up in the Government
borrowing programme, domestic financial market and external resource flows have given the
impression that raising investible resources would not be a major problem. The current global
34
and domestic scenario presents Indian industry with major challenges. Firstly, in order to
moderate the impact of current slowdown of agriculture sector on industrial sector a more broad
based industrial growth is required. Secondly there is a need to absorb the vast surplus labor in
the farm sector by the industry by developing labor-intensive and efficient activities. Thirdly, the
skill up gradation is required to be emphasized and fourthly, efforts are required to effectively
manage the cost structure and thereby the price of industrial products.
Exercises
2.1. Discuss the main trends of industrial growth in India since 1991.
2.2. Explain the progress made in the industrial development of the country since Independence.
What are constraints facing Indian Industries in India?
2.3 Explain the principal features of new industrial policy of India.
2.4. Discuss the major flaws in the Industrial licensing policy. How did it hamper the industrial
growth in India?
Glossary
Fiscal Expansion:
Fiscal policy means the use of government spending and taxation to influence the economy.
Fiscal policy is said to be expansionary when Government increase its spending generally to
provide boost to the economy.
Globalization refers to the integration of national economies with the international economy
through trade, foreign direct investment, capital flows, migration and the spread of technology.
Import-Substitution Policy: A national economic strategy that emphasizes the replacement

of imports by domestically produced goods.
Industrial Delicensing means removal of licensing for the industries
Index of Industrial Production (IIP) is an abstract number, the magnitude of which represents
the status of production in the industrial sector for a given period of time as compared to a
reference period of time It is a statistical device which enables us to arrive at a single
representative figure to measure the general level of industrial activity in the economy. Strictly
speaking the IIP is a short term indicator measuring industrial growth till the actual result of
detailed industrial surveys become available. This indicator is of paramount importance and is
being used by various organisations including Ministries/Departments of Government of India,
Industrial Associations, Research Institutes and Academicians.

35
Monopolistic and Restrictive Trade Practices Act (MRTP Act):The Monopolistic and
Restrictive Trade Practices Act was enacted in 1969 to ensure that the operation of the economic
system does not result in the concentration of economic power in hands of few; to provide for the
control of monopolies, and to prohibit monopolistic and restrictive trade practices. The
Competition Act 2002 has now repealed the Monopolies and Restrictive Trade Practices Act
(MRTP Act).
Value Added: Value of production less the value of used-up raw materials and
other single-use inputs.
References
Works Cited
 Acharya.S. I.J.Ahluwalia, K.L.Krishna and ILa Patnaik( 2006), “Economic Growth in

India” in K.L.Krishna and Uma Kapila (2009), Readings in Indian Agriculture and
Industry,2009 (Academic Foundation, New Delhi
 Ahluwalia, Isher (1992). Productivity and Growth in Indian Manufacturing, Delhi,
(Oxford University Press)
 Government of India: Economic Survey of different years, Ministry of Finance,
Government of India at www.mof.gov.in
 Government of India (2006): Reports of Ministry of Statistics and Programme
Implementation on Industry at www.mospi.gov.in
 Government of India, Annual Reports of Ministry of Industry and Commerce at

www.mof.gov.in
 Handbook of Statistics of Indian Economy, 1960-61 to 2009-10 Issues,
www.rbi.org.in
 Kapila Uma, Indian Economy performance and policies 2009-10 ,(Academic
Foundation, New Delhi)
 Krishna, K.L. (2008), Industrial Growth and Diversification” in U.Kapila(ed) Indian

Economy Since Independence, 19 Edition 2008-09 New Delhi, Academic Foundationth
 K.L.Krishna and Uma Kapila (2009), “Readings in Indian Agriculture and
Industry,2009 (Academic Foundation, New Delhi)
 National Accounts Statistics of India 1950-51 to 2008-09 , www.mospi.gov.in

 R. Nagaraj: “Industrial Policy and Performane since 1980”, Reading in Indian
Agruculture and Industry, 2009 ((Academic Foundation, New Delhi)

36

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Industrial Growth and Policy

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Chapter - Industrial Growth and Policy

Fellow:Dr.Kawal Gill, Associate Professor

Author: Dr. Anupma Rajput

Reviewer: Dr. Uma Kapila (Retd.)

Institute of lifelong learning, University of Delhi

o 2.1 Industrial Policy Framework in India

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Chapter : Industrial Growth and Policy

2.1 Industrial Policy Framework in India

2.1.1 Industrial Policies Prior to 1991

2.1.1.1 Industrial Policy Resolution, 1948:

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2.1.1.2 Industries (Development and Regulation) Act (IDRA), 1951:

The main provisions of the IDRA, 1951 were:

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c) Such a license or permission prescribed a variety of conditions, such as, location,

2.1.1.3 Industrial Policy Resolution, 1956 (IPR, 1956):

Value addition: Historical Context

2.1.1.4 Monopolies Commission:

In April 1964, the Government of India appointed a Monopolies Inquiry Commission

2.1.1.5 Industrial Policy Statement, 1973:

The Policy Statement of 1973 drew up a list of industries to be started by large

i) Development of Small-Scale Sector:

ii) Restrictive Approach towards Large Business Houses:

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iii) Expanding Role of Public sector:

2.1.1.7 Industrial Policy, 1980:

i) Effective Management of Public Sector:

The policy emphasized the revival of efficiency of public sector undertaking.

ii) Liberalization of Industrial licensing:

The policy statement provided liberalized measures in licensing in terms of automatic

iii) Redefinition of Small-Scale Industries:

2.1.1.8. Era of Liberalization after 80’s:

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ii) Liberalization of 1990: The measures were as follows:

a) Exemption from licensing for specific new units.

b) Investment of foreign equity up to 40 percent was freely allowed.

c) Location restrictions were removed.

2.1.2 Major Features of Pre-1991 Industrial Policy

2.1.2.1. Protection to Indian Industries:

Local industries were given shelter from international competition by introducing

2.1.2.2. Import-Substitution Policy:

2.1.2.3. Financial Infrastructure:

In order to provide the financial infrastructure necessary for industry, the

2.1.2.4. Control over Indian Industries:

 Industrial licensing: It entailed that any enterprise which wished to manufacture a

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2.1.2.5. Regulations on Foreign Capital under the Foreign Exchange and

Regulation Act (FERA):

FERA restricted foreign investment in a company to 40percent. This ensured that

2.1.2.6. Encouragement to Small Industries:

Government encouraged small-scale industries (SSIs) by providing a number of

2.1.2.7. Emphasis on Public Sector:

2.1.3. Review of Pre-1991 Industrial Policy

However, the implementation of industrial policy suffered from shortcomings. It is

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2.1.4. New Industrial Policy, 1991

Distinctive Objectives of New Industrial Policy

NIP had two distinctive objectives compared to

i) Redefinition of Concept of Self-Reliance:

NIP redefined the concept of economic self-

ii) International Competitiveness:

NIP emphasized the need to develop indigenous

The liberalized Industrial Policy aimed at rapid and substantial economic