Industrial Policy and Small Scale

industries

Module 2
 Industrialization
The word industrialization is derived from a Latin word, “Industrial” which simply means
steady application of labor to business.
However, the actual definition of industrialization differs across countries.
In Japan industrialization, means transformation of manufacturing goods.
In German industrialization are referred as a processing of large, with the use of
machinery and modern methods of working.
Consequently, industrialization is basis of economic development for every nation and no
advanced nations have reached to developed stage without having strong and vibrant
industrial sector in their economy.
Industrialization is seen as an absolute channel of attaining desirable and conception
goals of economic development.
It is mainly, because industrial development involves extensive production of
manufacturing goods, which is based on the effective productive system of the country.
In other words industrialization, involves deliberate and sustained applications,
combination of suitable technology, management techniques and other resources to move
the traditional economy from low level of production to modern economy with more
mechanized and efficient system of mass production of goods and services.
The initial models of economic development were formulated after World War II. These
models have paid much importance on the utility of massive capital and investments to
achieve a rapid growth in the countries like, the Harrod-Domar model of economic growth
have laid much emphasis on the role of physical capital and savings for creating effective
demand as well as productive capacity in explaining the growth process of the country.
While Solow (1956), model of economic growth recognized the role of productivity in the
growth process of the country.
But later growth models have given much emphasis to industrialization and have
considered industrialization as a foremost component of economic development.
Nonetheless, John Maynard Keynes (1936) has laid a greater importance for
industrialization. He published a book in 1936, which is entitled as “General Theory of
Employment Interest and Money” in which Keynes recognized the importance of
industrial development for nations. According to him, industrialization could lead to
increasing returns of scale and also increases labor productivity as compared to
agriculture sector.
Moreover, Keynes was of the opinion that an entrepreneur offers an amount of
employment which maximizes their output and profit
Later, Gunnar Myrdal, (1956) presumed industrialization as a component of
economic development. He brought out relationship between industrialization and
economic development as an answer for economic problems of every country.
According to him, manufacturing industries leads to a higher stage of
production in the economy, which provides employment to a large chunk of
population. Therefore, industrialization has a direct relationship with the economic
development of every country.
However, Bryce (1960) presumes that industrialization is indispensable for every
country, as it has greatest crusades for economic development.
According to Bryce industrialization places an important role for developing
countries, because it is a major hope for finding solutions to the problems of
developing countries, such as the problem of poverty, backwardness, per-
capita income, low level of capital, poor investment and low level of national
income.
Kaldor observed a strong positive correlation between the growth of
manufacturing output & the growth of gross domestic product (GDP).
Kaldor also found a positive correlation between growth of manufacturing
output and growth of productivity in manufacturing sector in both developed
and developing countries.
However, after Kaldor, the Chenery and Tailor (1968) also observed statistically
significant relationship between per capita income and the degree of
industrialization.
Similarly, Sutcliffe (1971) has defined industrialization as a process which is
accompanied with the economic development of the country.
According to Sutcliffe, industrialization is a set of policies which is more
important than any other policies and these policies leads towards economic
development of a country. Therefore, for him the economic development of any
country is directly associated with the industrial development, whether it is a
developing or a developed country.
 Structural Transformation and Economic Development
Therefore, later economic growth models paid much emphasis to structural transformation
in the process of economic growth. Structural transformation is defined as the transition of
an economy from low productivity i.e. agricultural sector economic activities to higher
productivity i.e. modern industrial or manufacturing sector.
Therefore, the driving force behind structural transformation is the change of productivity
in the modern sector, which is dominated by manufacturing and service sector. Various
economists laid much importance on structural transformation to bring out the rapid
economic growth in developing economies of the world.
In this regard, Kuznet (1966) in his reputed work on modern economic growth has
identified high rate of structural transformation in favor of industrial sector, in terms
of its share to national income and work force as one of major key to economic
development process. Kuznets presumed a positive association between
industrialization, urbanization and per capita income at international level.
He found that all developed countries, which are industrially advanced, are having higher
degrees of urbanization and high per capita income and vice versa. It is mainly that
industrialization transforms backward rural based economy into modern economy and
leads to higher economic growth by improving the manufacturing outputs of the country.
Later Arthur Lewis (1954) developed a two-sector model which is also known as theory of surplus. Lewis
(1954) assumes that underdeveloped economies are having unlimited supply of labor force therefore,
transfer of this unlimited labor force, from agricultural sector to industrial sector will become a path way
for economic development.
Lewis presumes that this unlimited supply of labor in agricultural sector is continually received only
subsistence wages and transformation of labor supply to industrial sector will increase the real wages of the
labors. Moreover, investments in the modern sector will continue to expand and generate further economic
growth, on the assumption that all profits would be reinvested. Therefore, this structural transformation
will make a pace of economic development in under-developed economics.
However, Lewis model could not show the development of the agriculture sector therefore, in 1964 the
John C. H. Fei and Gustav Ranis (1964) have developed a model of economic growth for the under-
developed economies, this model is an extension of Lewis model.
It recognizes the presence of a dual economy comprising both modern and traditional sector. According to
this model, the traditional sector consist existing agricultural sector in the economy, and the modern sector
is industrialized economy.
Both sectors co-exist in the economy and development can be brought only by a complete shift in the
focal point of progress from agricultural to industrial sector, such that there is augmentation of industrial
output.
At the same time, growth in the agricultural sector must not be negligible and its output should be
sufficient to support the whole economy with food and raw materials. Fei and Ranis emphasized strongly
on the industry-agriculture interdependency and said that a robust connectivity between the two would
encourage and speed up development.
Later Jorgenson (1961) has presented a theory of development of a dual economy. He
divides economy into two sectors i.e. modern manufacturing sector (industrial) sector
and the traditional agriculture sector. According to him, agricultural output depends
on labor and a fixed amount of land. Industrial output depends on labor and capital.
Therefore, the labor available for employment in manufacturing sector grows at the rate
which is equal to the growth rate of agricultural surplus. Therefore, he assumes that
agriculture surplus gives rise to manufacturing sector which leads to economic
development of the economy.
The classical economists also believed that a shift of labor from traditional sector i.e.
primary sector to „modern industrial sector‟ is a major key to raising saving and
investment rates in the economy and a process of fostering economic growth in the
country. C.P. Kindleberger (1970) postulated that investment should take place
simultaneously in all sectors or on industries at once.
It means balanced development of manufacturing industries in the economy, so that there
will be an economic development in the country, which will reduce the economic
disparities, poverty and will enhance employment opportunities in the country.
Structural change theories focused on the changing economic structures of developing
countries, from being composed primarily of subsistence agricultural practices to being a
"more modern, more urbanized, and more industrially diverse manufacturing and service
economy”
Industrial Location Theories
Various economists and geographers have put forwarded their theories based on industrial locational analysis, which
determines various factors that influences the establishment of industries. However, their approaches were different with
each other, but their contribution for industrialization was much significant and has gained much popularities. The
geographers by and large adopted some instinctive conceptual base and case study approaches to arrive at some
generalization about industrial location patterns. On the other hand the economists had followed a deductive approach for
industrial locational analysis. An amalgamation of these two diversified approaches has led to develop some operational
models for industrial location studies
Waiter Christaller (1933) was the first geographer, who put forward a theory of geographical industrial location
theory which is known as the Central Place Theory.
Waiter Christaller focus was mainly to determine the number, size and distribution of towns and cities. A central
place theory may be defined as “a place whose prime function is the provision of wide range of goods and services to
a dispersed population around it.” The central places at different levels provide a varying range of goods and
services. The provision of goods and services in a particular centre is determined by two considerations i.e. the
threshold population and market range for different goods and services.
Later, Renner (1947) put his theory of industrial location and his concern for industrial location theory was to
develop some general principles, which determine the industrial establishment. Renner classified industry into four
categories such as extractive, reproductive, fabricate and facilitative, for these four ingredients raw material,
market, labor and management, power, capital and transportation are required.
So keeping in mind these ingredients, the Ranner postulated the law of location for fabricative (Manufacturing) industry
according to which any manufacturing industry tends to locate at a point which provides optimum access to its ingredients.
Therefore, from Renner the industry can be setup where the supply of these ingredients are easy available which can leads
to profits of the industries otherwise, the industrial unit can cost higher for the owner.
• Rawstron (1958) came with a new theory which is known as Rawstron‟s principles. He
developed his theory of industrial location in terms of three restrictions which are the
„principles‟ of location in his model.
• These are physical restriction, economic restriction and technical restriction, which
impedes the choice of location of factory Rawstron‟s contribution to the geographical
studies on industrial location, has been a pioneering one. He does not make
transportation cost as a separate cost but he included the choice of techniques in his
theory i.e. the effect of technology for setting up a plant.
• Later Alfred Weber (1909), a German economist, has developed a theory of industrial
location which is based on the transportation cost. In his theory the Weber has taken
account the factors which are relevant for all industries and he has divided these factors
into two categories i.e. one which influences the inter-regional location of the industries
and other which influences intra-regional location of the industries. The approach
followed by Weber was to explain industrial location in term of transport cost first and
then to examine the effects of changes in labor cost and agglomerative factor. He
assumed that the location of raw material including fuel are fixed situation and size of
consuming centers are given.
• The theory of growth poles propounded by F. Perroux "Economic Space 1950, Theory
and Applications 1950” has received wide recognition in the studies of regionalists, thus
allowing us to draw a conclusion about the importance of sectorial structure of regional
economy and also the recognition of leading role of industries in creating new
manufacturing goods and services. Countries that host the operations of leading
industries become the poles of attraction of production factors, as they provide most
effective utilization of resources in their economies. That is what leads to the
concentration of enterprises and to the formation of economic growth poles. The growth
poles enable to develop natural resources comprehensively, creating a technological
chain of production together with modern infrastructure facilities (J.R. Lasuen 1969).
However, during 1960s, the practical strategies based on growth pole concepts, named
"growth pole strategies", had been deeply implemented in developed and developing
countries. Growth pole theory coined that the growth pole can be represented by an
integrated group of regional enterprises, which are connected not only with the leading
sector of the economy, but also with the exports of the region. Later in 1970‟s, the
growth pole strategies had been implemented in at least 28 developed and developing
countries. They were Australia, Chile, Colombia, Cuba, France, Ghana, Great Britain,
Belgium, Bolivia, Brazil, Bulgaria, Canada, India, Ireland, Italy, Kenya, Libya,
Malaysia, Nigeria, Peru, Poland, Russia, Spain, Sweden, Tanzania, the United States,
Venezuela, and Yugoslavia. In all these countries, the small industrial business units
were termed as the growth poles, because these small business units channelize all the
unexploited economic resources from capital to consumer goods.
 What is an Industrial Policy?
• Industrial Policy is a formal declaration undertaken by the Government that outlines the
government’s general policies for industries.
• It is characterized by actions and policies of the government which impact the industrial
development of a country.
• The Industrial Policy Resolution of 1948 outlined the broad policy roles of the state
in industrial development both as an entrepreneur and authority.
• Need For Industrial Policies
• It is commonly accepted that government intervention is critical in the event of market failures,
which might include - inadequacies in capital markets, which are
• typically caused by information asymmetries.
• absence of necessary investments hindering exploitation of scale economies
• With regard to firm-level spending in learning and training, there is a lack of data.
• a lack of coordination and knowledge across technologically interconnected investments
• Given India's current economic predicament, these are compelling grounds for establishing an
economy-wide planning body.
• However, the Indian government should abandon the "command and control" strategy that
prevailed prior to 1991.
 Industrial Policy Resolution of 1948
• Industrial Policy Resolution of 1948 laid emphasis on a Mixed Economic Model
and defined the role of the State in industrial development both as an entrepreneur
and authority.
• It gave a four-fold classification of industries such as:
• Strategic Industries (Public Sector) consisted of industries where the Central
Government had a monopoly such as Arms and ammunition, Atomic energy, etc.
• Basic/Key Industries (Public-cum-Private Sector), was to be established by the Central
Government and private sector enterprises were allowed to participate. It included coal,
iron & steel, aircraft manufacturing, ship-building, manufacture, etc.
• Important Industries (Controlled Private Sector), were with the private sector but had
control of central and the state governments. It included heavy chemicals, sugar, cotton
textile, woolen, etc.
• Small scale and cottage industries were given the importance
• The government restricted foreign investments
 Industrial Policy Statement of 1956
• Industrial Policy Statement of 1956 laid down the foundation for policies to be followed in
regard to industrial development till 1991.
• It advocated increasing the participation of the public sector, building a strong cooperative
sector, and encouraging the separation of ownership and management in private industries.
• It divided industries into three categories:
• Schedule A: It consisted of industries under the state's responsibilities such as arms and
ammunition, atomic energy, railways, etc.
• Schedule B: It consisted of industries open to both the private and public sectors and were
progressively State-owned.
• Schedule C- All the other industries not included in these two Schedules constituted the
third category which was left open for the private sector.
This has provisions for Public Sector, Small Scale Industry, Foreign Investment.
To meet new challenges, from time to time, it was modified through statements in 1973, 1977,
and 1980.
 Industrial Policy Statement 1977
• Industrial Policy Statement 1977 focused on the effective promotion of cottage
and small industries that were mainly spread in rural areas and small towns.
• In this policy, the small sector was divided into three groups such as cottage
and household sector, tiny sector, and small scale industries.
• It advocated for decreasing the occurrence of labor unrest and encouraged the
worker’s participation in management from shop floor level to board level.
• This policy was an extension of the 1956 policy.
• The main was employment to the poor and reduction in the
concentration of wealth.
• This policy majorly focused on Decentralization
• It gave priority to small scale Industries
• It created a new unit called “Tiny Unit”
• This policy imposed restrictions on Multinational Companies (MNC).
 Industrial Policy of 1980
Industrial Policy of 1980 advocated for promoting the concept of economic federation,
increasing the efficiency of the public sector and reversing the trend of industrial
production of the past three years, and reaffirming its belief in the Monopolies and
Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act
(FERA)
• The Industrial Policy Statement of 1980 addressed the need for promoting competition
in the domestic market, modernization, selective Liberalization, and technological up-
gradation.
• It liberalised licensing and provided for the automatic expansion of capacity.
• Due to this policy, the MRTP Act (Monopolies Restrictive Trade Practices) and FERA
Act (Foreign Exchange Regulation Act, 1973) were introduced.
• The objective was to liberalize the industrial sector to increase industrial productivity
and competitiveness of the industrial sector.
• The policy laid the foundation for an increasingly competitive export-based and for
encouraging foreign investment in high-technology areas.
 Industrial Policy of 1991
• The New Industrial Policy, 1991 had the main objective of providing facilities to market forces and to increase
efficiency.
• Larger roles were provided by
• L – Liberalization (Reduction of government control)
• P – Privatization (Increasing the role & scope of the private sector)
• G – Globalisation (Integration of the Indian economy with the world economy)
• Because of LPG, old domestic firms have to compete with New Domestic firms, MNC’s and imported items
• The government allowed Domestic firms to import better technology to improve efficiency and to have access to
better technology. The Foreign Direct Investment ceiling was increased from 40% to 51% in selected sectors.
• The maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion
board was established. It is a single-window FDI clearance agency. The technology transfer agreement was
allowed under the automatic route.
• Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and use domestic
inputs, it was abolished in 1991.
• Under the Mandatory convertibility clause, while giving loans to firms, part of the loan will/can be converted to
equity of the company if the banks want the loan in a specified time. This was also abolished.
• Industrial licensing was abolished except for 18 industries.
• Monopolies and Restrictive Trade Practices Act – Under his MRTP commission was established. MRTP Act was
introduced to check monopolies. The MRTP Act was relaxed in 1991.
• On the recommendation of the SVS Raghavan committee, Competition Act 2000 was passed. Its objectives were
to promote competition by creating an enabling environment.
• Defining small-scale industries is a difficult task, because the actual definition of small-scale industries
varies across countries from time to time.
• The definition of small scale industries mainly depends upon the pattern and stage of development,
government policies and administrative set up in that particular country.
• Nevertheless, every country has its own parameters for defining small scale industries in their
respective countries.
• At present, most of the countries in the world defines small-scale industries in terms of monetary value
i.e. investment ceilings on plant and machinery.
• But, in earlier times, the definition of small scale industries were based on employment i.e. the number
of persons hired by industrial enterprises. Nonetheless, in context of India its definition has changed
from time to time in the country and the current definition is based on investment in plant and
machinery.
• The Bolton Committee (1971) was the first who formulated an “economic” and “statistical” definition of a small scale industry or
small firm. Under their “economic” definition, a firm is said to be small if it meets these three criteria:
• 1) It has a relatively small share of their market place in the country
• 2) If it is managed by owners or a part owners in a personalized way, and not through the medium of a formalized management
structure
• 3) It is independent, in the sense of not forming part of a large enterprise.
• Under the “statistical” definition, the Committee proposed the following criteria
• 1) A firm is known as small scale industry when it contributes to GDP, employment, exports, etc.
• 2) The extent to which the small scale firm economic contribution has changed over time.

• The United Nations Industrial Development Organization (UNIDO 2004) defines

• small scale industrial sector in-terms of employing the number of employees, by giving different classifications for developed and
developing countries. The definition for developed countries is as followed
• 1. Large scale industries are those which are employing 500 or more workers.
• 2. Medium scale industries are those which are employing 100-499 workers
• 3. Small scale industries are those which are employing 99 or less workers.
• In case of developing countries it definition are
• 1. Large scale industries are those which are employing 100 or more workers
• 2. Medium scale industries are those which are employing 20-99 workers
• 3. Small scale industries are those which are employing 5-19 workers
• 4. Micro scale industries are those which are employing less than 5 workers
• The Working Group of the Economic Commission for Asia and the Far East (ECAFE 1952)
defined small scale industries, as any establishment which are
• employing not more than 20 persons when using power and 50 persons when they are not using power
(Barot, 2014)
• USA: In USA, manufacturing firm is small scale industrial firm, if it is not dominant in its field of
operations and if it is employing less than 500 employees, or if it is certified as small by Small Business
Administration (SBA) of a country.
• China: In China, the definition of small scale industries varies with the product and for china the small
scale industries are designed to mobilize the local raw materials, local skills, local finance and the local
markets in which investment ceiling is 30 Million Yuan
• Egypt, Israel and Turkey: The United Nations Report (1958) on the development of the small scale industry in Israel Egypt,
and Turkey, refers to all manufacturing establishments, which employs less than 10 persons as small-scale industries (Ibid)
• Thailand: In Thailand, a small and medium enterprise are defined as an enterprise, in which the fixed deposit does not exceed
2 million (approximately Rs. 12 lakhs), (Ibid)
• Germany, Sweden, Norway and Denmark: in these countries the industrial units, which are employing up to 300 workers are
considered as small scale industries
The MSME sector of India contributes around 33% of the country's total GDP and is predicted to contribute worth
US$ 1 trillion to India's total exports by 2028.