UNIT-3

INDUSTRIAL POLICIES OF THE GOVT:

Industrial policy is a document that sets the tone in implementing, promoting the regulatory roles of
the government. It was an effort to expand the industrialization and uplift the economy to its
deserved heights. It signified the involvement of Indian government in the development of industrial
sector.
With the introduction of new economic policies, the main aim of the government was to free the
Indian industry from the chains of licensing. The regulatory roles of the Indian government refer to
the policies towards industries, their establishments, their functioning, their expansion, their growth
as well as their management.
Industrial growth of a country is guided and regulated through its industrial policies. Let‟s
understand the journey of various industrial policies
I. Industrial Policy of 1948
The first industrial policy after independence was announced on 6th April 1948. It was presented by
Dr Shyama Prasad Mukherjee then Industry Minister. The main goal of this policy was to accelerate
the industrial development by introducing a mixed economy where the private and public sector was
accepted as important in the development of the economy. It saw Indian economy in socialistic
patterns. The large industries were classified into four categories:
 Industries with exclusive State Monopoly/Strategic industries: It included industries
engaged in the activity of atomic energy, railways and arms and ammunition.
 Industries with Government control: This category included industries of national
importance. 18 such categories were mentioned in this category such as fertilizers, heavy
machinery, defence equipment, heavy chemicals, etc.
 Industries with Mixed sector: This category included industries that were allowed to
operate independently in private or public sector. The government was allowed to review the
situation to acquire any existing private undertaking.
 Industry in the Private sector: Industries which were not mentioned in the above
categories fall into this category. High importance was granted to small businesses and small
industries, leading to the utilization of local resources and creating employment.
II. Industrial Policy Resolution, 1956
This second industrial policy was announced on April 20, 1956, which replaced the policy of 1948.
The features of this policy were:
 A new classification of Industries.
 Non-discriminatory and fair treatment for the private sector.
Promotion of village and small-scale industries.
 To achieve development by removing regional disparity.
 Labour welfare.
The IRDA divided industries into three categories:
 Schedule A industries: The industries that were under the monopoly of the state or
government. It included 7 industries. The private sector was also introduced in this
industries if national interest required.
 Schedule B industries: In this category of industries, the 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, aluminium etc.
  Schedule C industries: So the industries that were not a part of the above-mentioned
industries then it formed a part of Schedule C industries.
To summarize, the policy of 1956 in which the state was given a primary role for industrial
development as capital was scarce and business was not strong.
III. Indian Policy Statement, 1973
Indian Policy Statement of 1973 identified high priority industries with investment from large
industrial houses and foreign companies were permitted. 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. And so the basic features of Indian Policy Statement were:
 The policy was directed towards removing the distortions, it provided for closer interaction
between agriculture and industrial sector.
 Priority was given towards generation and transmission of power.
 The list of industries reserved for the small-scale sector was expanded.
 Special legislation was made to protect cottage and household industries were introduced.
III. Indian Policy Statement 1977
Indian Policy Statement was announced by George Fernandes then union industry minister of the
parliament. The highlights of this policy are:
A] Target on the development of small-scale and cottage industries.
 Household and cottage industries for self-employment.
 Tiny sector investment up to 1 lakhs.
 Smallscale industries for investment up to 1-15 lakhs.
B] Large-scale sector
 Basic industries: infrastructure and development of small-scale and village industries.
 Capital goods industries: meeting the requirement of cottage industries.
 High technological industries: development of agriculture and smallscale industries such as
petrochemicals, fertilizers and pesticides.
C] Restrict the control of big business houses.
D] Role of the public sector:
 Development of ancillary industries.
 To make available expertise in technology and management in small and cottage industries.
E] Revival and rehabilitation of sick units.
V. Industrial Policy, 1980
The Congress government announced this policy on July 23rd, 1980. The features of this policy are:
 Promotion of balanced growth.
 Extension and simplification of automatic expansion.
 Taking over industrial sick units.
 Regulation and control of unauthorized excess production capabilities installed for industrial
houses.
 Redefining the role of small-scale units.
 Improving the performance of the public sector.
VI. New Industrial Policy, 1991
The features of NIP, 1991 are as follows:
 Public sector de-reservation and privatization of public sector through disinvestment.
 Industrial licensing.
 Amendments to Monopolies and Restrictive Trade Practices (MRTP) Act, 1969.
 Liberalised Foreign Investment Policy.
  Foreign Technology Agreements (FTA).
 Dilution of protection to SSI and emphasis on competitiveness enhancement.
The all-around 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 percent 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.

PROVISIONDS OF 1956 INDUSTRIAL POLICY RESOLUTION:

In a short period of operation of the 1948 Industrial Policy, some significant changes took place
in the economic and political spheres that called for changes in industrial policy as well. The
country hand launched a programme of planned economic development with the first five-year
plan.
The second five- year plan gave high priority to industrial development aimed at setting up a
number of heavy industries such as steel plants, capital goods industries, etc., for which direct
government participation and state involvement was needed.
Further in December 1954, the Parliament adopted the „Socialistic Pattern of Society‟ as the goal
of economic policy which called for the state or the public sector to increase its sphere of activity
in industrial sector and thus prevent concentration of economic power in private hands. In view
of ail these developments, a new industrial policy was announced in April 1956. The main
features of this Industrial Policy Resolution of 1956 were as follows:
New Classification of industries:
The Industrial Policy of 1956 adopted the classification of industries into three categories viz.,
(i) Schedule A industries, (ii) Schedule В industries, and (iii) Schedule С industries according to
the degree of state ownership and participation in their development:
(i) Schedule A, which contained 17 Industries. All new units in these industries, such where their
establishment in the private sector has ready been approved, would be set up only be the state.
(ii) Schedule В which contained 12 industries, such industries would be progressively state
owned, but private enterprise is expected to supplement the efforts of the state in these fields.
(iii) Schedule C. All remaining industries fell in this category; the future development of these
industries had been left to the initiative and enterprise of the private sector.
Assistance to Private Sector:
While the Industrial Policy of 1956 sought to give a dominant role to public sector, at the same
time it assured a fair treatment to the private sector. The „policy‟ said that the state would
continue to strengthen and expand financial institutions that extend financial assistance to private
industry and cooperative enterprises. The state would also strengthen infrastructure (power,
transport etc.) to help private sector.
Expanded role of Cottage and Small-Scale Industries:
The Industrial Policy of 1956 laid stress on the role of cottage and small scale industries for
generating larger employment opportunities, making use of local manpower and resources and
reducing- regional inequalities in industrial development. It stated that the Government would
continue pursuing a policy of supporting such industries through tax concessions and subsidies.
Balanced Industrial Growth among Various Regions:
The Industrial Policy, 1956 helped to reduce regional disparities in industrial development. The
policy stated that facilities for development will be made available to industrially backward
areas. The state, apart from setting up more public sector industries in these backward areas, will
provide incentives such as tax concessions, subsidized loans etc., to the private sector to start
industries in these backward regions.
Role of Foreign Capital:
The industrial Policy 1956 recognised the important role of foreign capital in country‟s
development. The foreign capital supplements domestic savings. Provides more resources for
investment and relieves pressure on Balance of payments.
The country therefore welcomed inflow of foreign capital. But the „Policy‟ made it clear that
inflow of foreign capital will be permitted subject to the condition that major share in
management, ownership and control should be in the hands of Indians.
Development of managerial and Technical Cadres:
The Industrial Policy, 1956 notes that the programme of rapid industrialisation in India will
create large demand for managerial and technical personnel. Therefore, the policy emphasised
the setting up and strengthening of institutions that Trans and provide such personnel. It was also
announced that proper technical and managerial cadres in the public services are also being
established.
Incentives to labour:
The Industrial Policy, 1956 recognised the important role of labour as a partner in the task of
development. The „policy‟ therefore put emphasis on the provision of adequate incentives to
workers and improvement in their working and service conditions. It laid down that wherever
possible the workers should be progressively associated with that management so that they are
enthusiastically involved in the development process.

MONETARY POLICY:
Monetary policy is the process by which themonetary authority of a country, typically the
central bank or currency board, controls either the cost of very short-term borrowing or
the monetary base, often targeting an inflation rate or interest rate to ensure price stability and
general trust in the currency.
Objectives of Monetary Policy
The monetary policy in developed economies has to serve the function of stabilization and
maintaining proper equilibrium in the economic system. But in case of underdeveloped
countries, the monetary policy has to be more dynamic so as to meet the requirements of an
expanding economy by creating suitable conditions for economic progress. It is now widely
recognized that monetary policy can be a powerful tool of economic transformation.

As the objective of monetary policy varies from country to country and from time to time,
a brief description of the same has been as following:
(i) Neutrality of money

(ii) Stability of exchange rates

(iii) Price stability

(iv) Full Employment

(v) Economic Growth

(vi) Equilibrium in the Balance of Payments.

1. Neutrality of Money:
Economists like Wicksteed, Hayek and Robertson are the chief exponents of neutral money.
They hold the view that monetary authority should aim at neutrality of money in the economy.
Any monetary change is the root cause of all economic fluctuations. According to neutralists, the
monetary change causes distortion and disturbances in the proper operation of the economic
system of the country.

2. Exchange Stability:
Exchange stability was the traditional objective of monetary authority. This was the main
objective under Gold Standard among different countries. When there was disequilibrium in the
balance of payments of the country, it was automatically corrected by movements. It was
popularly known, “Expand Currency and Credit when gold is coming in; contract currency and
credit when gold is going out.” This system will correct the disequilibrium in the balance of
payments and exchange stability will be maintained.

(i) It leads to violent fluctuations resulting in encouragement to speculative activities in the

market.

(ii) Heavy fluctuations lead to loss of confidence on the part of domestic and foreign capitalists
resulting in adverse impact in capital outflow which may also result in capital formation and
growth.

(iii) Fluctuations in exchange rates bring repercussions in the internal price level.

3. Price Stability:
The objective of price stability has been highlighted during the twenties and thirties of the
present century. In fact, economists like Crustar Cassels and Keynes suggested price stabilization
as a main objective of monetary policy. Price stability is considered the most genuine objective
of monetary policy. Stable prices repose public confidence because cyclical fluctuations are
totally eliminated.

It promotes business activity and ensures equitable distribution of income and wealth. As a
consequence, there is general wave of prosperity and welfare in the community. Price stability
also impedes economic progress as there is no incentive left with the business community to
increase production of qualitative goods.

It discourages exports and encourages imports. But it is admitted that price stability does not
mean „price rigidity‟ or price stagnation‟. A mild increase in the price level provides a tonic for
economic growth. It keeps all virtues of a stable price.

4. Full Employment:
During world depression, the problem of unemployment had increased rapidly. It was regarded
as socially dangerous, economically wasteful and morally deplorable. Thus, full employment
assumed as the main goal of monetary policy. In recent times, it is argued that the achievement
of full employment automatically includes prices and exchange stability.

Keynes equation of income, Y = C + I throws light as to how full employment can be secured
with monetary policy. He argues that to increase income, output and employment, it is necessary
to increase consumption expenditure and investment expenditure simultaneously. This indirectly
solves the problem of unemployment in the economy. Since the consumption function is more or
less stable in the short period, the monetary policy should aim at raising investment expenditure.

As monetary policy is the government policy regarding currency and credit, in this way,
government measures of currency and credit can easily overcome the problem of trade
fluctuations in the economy. On the other side, when the economy is facing the problem of
depression and unemployment, private investment can be stimulated by adopting „cheap money
policy‟ by the monetary authority.

After achieving the objective of full-employment, monetary policy should aim at exchange and
price stability. In short, the policy of full employment has the far-reaching beneficial effects.

(a) Keeping in view the present situation of unemployment and disguised unemployment
particularly in more growing populated countries, the said objective of monetary policy is most
suitable.

(b) On humanitarian grounds, the policy can go a long way to solve the acute problem of
unemployment.

(c) It is useful tool to provide economic and social welfare of the community.

(d) To a greater extent, this policy solves the problem of business fluctuations.

5. Economic Growth:
In recent years, economic growth is the basic issue to be discussed among economists and
statesmen throughout the world. Prof. Meier defined “Economic growth as the process whereby
the real per capita income of a country increases over a long period of time.” It implies an
increase in the total physical or real output, production of goods for the satisfaction of human
wants.

6. Equilibrium in the Balance of Payments:

Equilibrium in the balance of payments is another objective of monetary policy which emerged
significant in the post war years. This is simply due to the problem of international liquidity on
account of the growth of world trade at a more faster speed than the world liquidity.

FISCAL POLICY:
In economics and political science, fiscal policy is the use of government revenue collection
(mainly taxes) and expenditure (spending) to influence the economy. According to Keynesian
economics, when the government changes the levels of taxation and government spending, it
influences aggregate demand and the level of economic activity. Fiscal policy is often used to
stabilize the economy over the course of the business cycle.
Changes in the level and composition of taxation and government spending can affect the
following macroeconomic variables, amongst others:

 Aggregate demand and the level of economic activity;

 Saving and investment;
 Income distribution.
Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation
and government spending and is often administered by an executive under laws of a legislature,
whereas monetary policy deals with the money supply and interest rates and is often
administered by a central bank.

OBJECTIVES OF FISCAL POLICY:

Fiscal policy must be designed to be performed in two ways-by expanding investment in public
and private enterprises and by diverting resources from socially less desirable to more desirable
investment channels.
The objective of fiscal policy is to maintain the condition of full employment, economic stability
and to stabilize the rate of growth.
Generally following are the objectives of a fiscal policy in a developing economy:
1. Full employment
2. Price stability
3. Accelerating the rate of economic development
4. Optimum allocation of resources
5. Equitable distribution of income and wealth
6. Economic stability
7. Capital formation and growth
8. Encouraging investment
1. Full Employment:
The first and foremost objective of fiscal policy in a developing economy is to achieve and
maintain full employment in an economy. In such countries, even if full employment is not
achieved, the main motto is to avoid unemployment and to achieve a state of near full
employment. Therefore, to reduce unemployment and under-employment, the state should spend
sufficiently on social and economic overheads. These expenditures would help to create more
employment opportunities and increase the productive efficiency of the economy.
2. Price Stability:
There is a general agreement that economic growth and stability are joint objectives for
underdeveloped countries. In a developing country, economic instability is manifested in the
form of inflation. Prof. Nurkse believed that “inflationary pressures are inherent in the process of
investment but the way to stop them is not to stop investment. They can be controlled by various
other ways of which the chief is the powerful method of fiscal policy.”
In short, fiscal policy should try to remove the bottlenecks and structural rigidities which cause
imbalance in various sectors of the economy. Moreover, it should strengthen physical controls of
essential commodities, granting of concessions, subsidies and protection in the economy. In
short, fiscal measures as well as monetary measures go side by side to achieve the objectives of
economic growth and stability.
3. To Accelerate the Rate of Economic Growth:
Primarily, fiscal policy in a developing economy, should aim at achieving an accelerated rate of
economic growth. But a high rate of economic growth cannot be achieved and maintained
without stability in the economy. Therefore, fiscal measures such as taxation, public borrowing
and deficit financing etc. should be used properly so that production, consumption and
distribution may not adversely affect. It should promote the economy as a whole which in turn
helps to raise national income and per capita income.
4. Optimum Allocation of Resources:
Fiscal measures like taxation and public expenditure programmes, can greatly affect the
allocation of resources in various occupations and sectors. As it is true, the national income and
per capita income of underdeveloped countries is very low. In order to gear the economy, the
government can push the growth of social infrastructure through fiscal measures. Public
expenditure, subsidies and incentives can favorably influence the allocation of resources in the
desired channels.
Tax exemptions and tax concessions may help a lot in attracting resources towards the favored
industries. On the contrary, high taxation may draw away resources in a specific sector. Above
all, direct curtailment of consumption and socially unproductive investment may be helpful in
mobilization of resources and the further check of the inflationary trends in the economy.
Sometimes, the policy of protection is a useful tool for the growth of some socially desired
industries in an under-developed country.
Prof. R.N. Tripathi suggests the following steps to raise the saving ratio which provides the
required finance for developmental schemes:
(i) Direct physical control.
(ii) Increasing the rate of existing taxes.
(iii) Introduction of new taxes,
(iv) Public borrowing of non-inflationary nature,
(v) Deficit financing.
5. Equitable Distribution of Income and Wealth:
It is needless to emphasize the significance of equitable distribution of income and wealth in a
growing economy. Generally, inequality in wealth persists in such countries as in the early stages
of growth, it concentrates in few hands. It is also because private ownership dominates the entire
structure of the economy. Besides, extreme inequalities create political and social discontentment
which further generate economic instability. For this, suitable fiscal policy of the government
can be devised to bridge the gap between the incomes of the different sections of the society.
6. Economic Stability:
Fiscal measures, to a larger extent, promote economic stability in the face of short-run
international cyclical fluctuations. These fluctuations cause variations in terms of trade, making
the most favourable to the developed and unfavorable to the developing economies. So, for the
purpose of bringing economic stability, fiscal methods should incorporate built-in-flexibility in
the budgetary system so that income and expenditure of the government may automatically
provide compensatory effect on the rise or fall of the nation‟s income.
7. Capital Formation and Growth:
Capital assumes a central place in any development activity in a country and fiscal policy can be
adopted as a crucial tool for the promotion of the highest possible rate of capital formation. A
newly developing economy is encompassed by a „vicious circle of poverty‟. Therefore, a
balanced growth is needed to breakdown the vicious circle which is only feasible with higher
rate of capital formation. Once a country comes out of the clutches of backwardness, it
stimulates investment and encourage capital formation.
8. To Encourage Investment:
Fiscal policy aims at the acceleration of the rate of investment in the public as well as in private
sectors of the economy. Fiscal policy, in the first instance, should encourage investment in public
sector which in turn effect to increase the volume of investment in private sector. In other words,
fiscal policy should aim at rapid economic development and must encourage investment in those
channels which are considered most desirable from the point of view of society.

EXPORT IMPORT POLICY:

Export Import Policy or better known as Exim Policyis a set of guidelines and instructions
related to the import and export of goods. The Government of India notifies the Exim Policy for
a period of five years (1997 2002) under Section 5 of the Foreign Trade (Development and
Regulation Act), 1992.
FEATURES OF THE NEW EXPORT & IMPORT POLICY:
Govt. of India introduced a series of trade reforms since July 1991 as part of economic
liberalization.

The aim of the new policy was to promote exports and to remove restrictions on imports.

The following are the salient features of the new export, import policy:
1. Increase in number of Export Items:
The Govt. has identified many new products for exports. They are fish and fish preparations,
agricultural products and marine products etc. These products are import-light and hence
pressure on foreign exchange was relieved.

2. Special Economic Zones:

For promotion of exports, special economic zones (SEZ) have been established. SEZ units are
deemed to be foreign territory for the purpose of trade operations and tariffs. The main objective
of the SEZ units is to provide a congenial atmosphere for exports. Indian banks were pre-mitted
to establish off share banking units in SEZ. These units will attract foreign direct investments
(FDI‟s) and would be free from cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

3. Role of Public Sector Agencies:

Certain exports are controlled by Public sector agencies like State Trading Corporations (STC),
Mineral and Metal Trading Corporation (MMTC). Now these are asked to compete with other
exporters. Foreigners have been permitted to set up trading houses for export purposes.

4. Restriction Free Export Policy:

Restrictions on exports have been reduced to minimum according to new policy. Export
restrictions have been imposed on a few sensitive commodities taking the domestic demand and
supply factors into consideration. Export duties are now not considered as source of revenue
generation but a means of increasing the competitiveness of domestic exporters in the
international market.
5. Liberalisation of Export-Oriented Import:
Import licenses were removed from most of the items. Provisions were made to levy low custom
duties an imports which were used as inputs for production of export goods. Imports were linked
to the availability of foreign exchange generated through exports.

Import duties were gradually reduced and the objective was to equal the same with other
countries of the world. The restrictions laid on import of all items were removed to conform to
the WTO norms and these were put under Open General License (OGL) list. This process
liberalized imports and simplified export-import procedures.

6. Convertibility of Rupee:
To increase exports, the rupee was made partly convertible on current account. In 1994-95
budget rupee was made fully convertible.

7. Devaluation of Rupee:
Generally speaking, devaluation of rupee means lowering the value of rupee in terms of foreign
currencies. Devaluation makes domestic goods cheaper in the foreign market. To cover the
balance of payment difficulty. Govt. of India devalued rupee in June 1991 by 23%. This helped
in encouraging exports.