Introduction to Industrial Economics

Unit-II

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Department of Business Economics
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Theory of Industrial Location

 Weber’s Theory of Industrial Location:

• Alfered Weber a German economist was the first economist who gave scientific
exposition to the theory of location and thus filled a theoretical gap created by classical
economists. He gave his ideas in his Theory of Location of Industries’ which was first
published in German language in 1909 and translated into English in 1929. His theory, which
is also known as ‘Pure Theory’ has analytical approach to the problem. The basis of his
theory is the study of general factors which pull an industry towards different geographical
regions. It is thus deductive in approach. In his theory he has taken into consideration factors
that decide the actual setting up of an industry in a particular area.

• Weber’s Problems:
• Weber was faced with many serious problems. He wanted to find out why did
industry moved from one place to another and what factors determined the movement. After
considerable thinking he came to the conclusion that causes be responsible for this migration
could be Regional Factors Primary Causes and Agglomerative and deglomerative factors
(Secondary Factors). In so far as regional factors were concerned these, among other things,
included cost of the ground, buildings, machines, material, power, fuel, labour, transportation
charges and amount of interest that the capital would have earned.

1. Regional Factors (Primary Causes):

• According to Weber transportation costs play a vital role in the location of an
industry.
Each industry will try to find location at a place where transportation charges are minimum,
both in terms of availability of resources and place of consumption. According to him
transportation costs are determined by the weight to be transported on the one hand and
distance to be covered on the other. Then the cost will also depend on the type of
transportation system available and the extent to which it is in use. The nature of the region
i.e. whether rocky, plain, connected or unconnected with roads etc. the kinds of the roads in
the area where the goods are to be transposed; nature of facilities required i.e. whether the
goods are to be taken with great care, less care or even without any special care.

1. Regional Factors (Primary Causes):

• According to Weber transportation costs play a vital role in the location of an
industry. Each industry will try to find location at a place where transportation charges are
minimum, both in terms of availability of resources and place of consumption. According to
him transportation costs are determined by the weight to be transported on the one hand and

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distance to be covered on the other. Then the cost will also depend on the type of
transportation system available and the extent to which it is in use. The nature of the region
i.e. whether rocky, plain, connected or unconnected with roads etc. the kinds of the roads in
the area where the goods are to be transposed; nature of facilities required i.e. whether the
goods are to be taken with great care, less care or even without any special care.

• Classification of Material:
• Weber, before proceeding further, has classified raw material into different categories
e.g.: Ubiquities material; which is suitable everywhere e.g. bricks, clay etc., and
Localised material e.g., iron ore, mineral etc. which is available in certain regions and not
everywhere. Obviously the later play a bigger and important role than the former. He has also
categorized raw material as ‘Pure’ and ‘Weight Losing’ raw material is one which impart its
whole weight to the products e.g. cotton, wool etc. and weight losing materials are those in
which only a part of the material enters into the weight.

 Laws of Transportation:
• Weber, while discussing the theory of location, has also discussed laws of
transportation. According to him material index measures the total weight to be moved. From
material index he understood the portion of the weight of localized material to the weight of
the product. According to him, “All industries whose material index is not greater than one
and whose locational weight therefore, are not greater than two lie at the place of
consumption.”

• Causes of Deviation of Location:

• Weber was faced with a serious problem namely why the industries deviate from the
centre of least transport costs. One such reason could be differences in the labour costs. This
labour cost can be cheap either because of differing levels of efficiency and of wages of
labour or because of differing levels of efficiency in the organization and the technical
equipment which the labour is required to use. Labour cost can go up and come down due to
distribution of population as well. But whatsoever might be the reason for the low labour
cost, According to Prof Kuchhal, deviation “will be possible only when the additional cost of
transportation at the new centre is more than compensated by a saving in labour costs…
When the labour costs are varied, an industry deviates from its transport locations in
proportion to the size of its labour co-efficient”. Weber himself has said that, with a high
index of labour costs, a large quantity of labour costs will be available for comparison with
correspondingly high critical isodapanes, and therefore we shall find a high potential
attracting powers of the labour locations and vice versa. According to Weber’s theory if the
behaviour of each industry in respect of labour cost is to be measured than it is necessary to
calculate the proportion of labour costs per ton of weight to be moved.
•
2. Agglomerative and Deglomerative Factory (Secondary Causes):
• We have so far been discussing primary causes of industrial location. Weber has also
discussed secondary causes responsible for industrial location. He has taken into account
agglomerative and deglomerative factors. An agglomerative factor, according to him is a
factor which provides an advantage in production or marketing a commodity simply because
industry is located at one place. On the other hand deglomerative factor is one which gives
such advantage because of decentralization of production. Agglomerative factors include gas,
water etc. and are conducive for concentration of industry and deglomerative factors include
land values and taxes and lead to decentralization.

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• Pulls of agglomerative factors are index of manufacture and locational weight.
According to Weber ratio of manufacturing cost of locational weight is co-efficient of
manufacture. According to Weber Agglomeration is encouraged with high co-efficient and
deglomeration with low. According to him, We shall do well to bear in mind that labour
orientation is one form of deviation from the minimum point; agglomeration to another.
When agglomerative forces appear in an industry oriented towards labour, there takes place a
competition between the agglomerative deviation and the labour deviation, a struggle to
create, locations for agglomeration, as compared with labour locations, both bearing upon the
foundations of the transportational ground work.
•
 Split in Location:
• Weber has considered the possibility of location of an industry at more than open one,
particularly when production in an industry can be carried independently at more than one
place. According to him in fact single location is an exception and split a rule. It is essential,
according to him that all productive processes must go on at one and the same place and it is
better that these be carried out at different stages and at number of places. Split is to occur in
two stages. In the first stage it is elimination of waste and in the second working up of pure
material.

 Locational Coupling:
• Weber along with split in location has also given the idea of locational coupling,
meaning thereby that different types of industries can be coupled in one and the same
locality. According to him it is just possible to combine production of different articles in one
plant because of the availability of several raw materials from the same source. This coupling
can be possible either due to economic or technical reasons. It is also possible due to
connection through material e.g., if the byproduct of one industry happens to be raw material
for another then the two industries may select a single place of location. Locational coupling
can also be due to market connection between two industries. In such a case product of one
industry may enter into another industry without being used as material or half finished
product.

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 Criticism of Weber’s Theory:
1. Unrealistic Assumptions:
• According to critics of this theory, Weber has unrealistically over-simplified the
theory of industrial location. Many assumptions in the theory are unrealistic. According to
them Weber has taken only two elements for determining the cost of transportation namely
weight and distance. He has not given due to place to the type of transport, quality of goods
to be transported, topography, character of region etc.
2. Labour Centres Notion Defective:
• Weber’s ideas about labour centres have also not been accepted. He has started with
the presumption that there are fixed labour centres with unlimited supplies of labour in each
of them. Obviously both these assumptions are not correct. There cannot be fixed labour
centres, because each industry creates new labour centres. Similarly there can never be
unlimited supplies of labour in any centre.

3. Ideas about Fixed Points of Consumption:

• It is argued that Weber’s this idea does not work well with the market conditions in a
competitive structure. Consumers are always scattered all over the country and thus consumer
centres always shift with a shift in industrial population. There can therefore be no fixed point
of consumption.
4. Vague Generalizations:
• Weber, while expounding his theory of industrial location, has introduced, it is
believed, certain vague generalizations. He has given no due place to non-economic factors
of industrial location, which play a big role in this regard. Who can deny that there are certain
historical and social forces which go a long way while deciding industrial location of an
industry, but he has completely ignored them, which has made his theory very unrealistic.

5. Not a Deductive Theory:

• Andreas Predohl is of the view that Weber’s Theory is only selective and not
deductive. According to him he has made an artificial distinction between general and special
factors which influence location of an industry. Such a distinction, in fact, has no logical
significance. According to Weber transport costs and labour costs are only general costs. He
has failed to explain why capital costs and management costs cannot be included or covered
under it.
6. Defective Method of Analysis:
• Weber has tried to classify material into ubiquities and fixed material. Again the
division is arbitrary. According to Robinson who does not know that in actual practice
materials are drawn from a large number of alternative fixed points.
7. Overburdened with Technical Considerations:
• Dennison is of the view that Weber’s theory is heavily over burdened with technical
considerations. It has not laid due stress on costs and prices and has over stressed technical
coefficients. According to him, “The most important criticism about Weber’s analysis is that
it is lamentably removed from all considerations of costs and prices and it is formulated
mainly in terms of technical coefficients.”

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Regional Backwardness
• What is Region?
• A territorial component of a country's national economy. When certain industries
develop in one region, they frequently decline in another. ... Under socialism, the
territorial division of labor develops, and economic regions form in a planned fashion
based on the economic laws of socialism.
• What is Regional Backwardness?
• It refers to difference in economic development and uneven economic achievement in
different geographical regions. It is reflected by the indicators like per capita income,
the proportion of population living below the poverty line, the percentage of urban
population, percentage of population engaged in agriculture vis-à-vis engaged in
industries, infrastructural development of different states.

Types of Disparity/Backwardness
1. Global Disparity
2. Interstate Disparity(Disparity Between the states)
3. Intrastate Disparity(Disparity Within the states)
4. Rural-Urban Disparity

Indicators of Regional Imbalances:

1. Per Capita Income
2. Interstate/Intrastate Disparity in Agricultural and Industrial Development
3. Intrastate/Interstate Imbalances
4. Spatial/Regional Distribution of Industries
5. Population Below Poverty Line
6. Degree of Urbanization
7. Per Capita Consumption of Electricity
8. Pattern of Employment
9. Human Development Index

• Causes of Regional Backwardness:

1. Historical Factor
2. Geographical Factors
3. Locational Advantages
4. Inadequacy of Economic Overheads
5. Failure of Planning Mechanism
6. Marginalisation of the Impact of Green Revolution to Certain Regions
7. Lack of Growth of Ancillary Industries in Backward States/Area
8. Lack of Motivation on the part of Backward States/Area
9. Political Instability/Lack Of Political Will
Disparities in Socio Economic Development

Consequences of Regional Imbalances:

1 Inter state and Intra state Agitation
2 Migration
3 Social unrest
4 Pollution
5 Housing and Water Problems
6 Frustration among Rural Youth

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7 Under Developed Infrastructure

Identification of Backward Regions:

1. Planning Commission Study Group (1969)-classified backward areas into five
categories
a) Desert areas
b) Chronically drought affected areas
c) Hill area including border areas
d) Areas with concentration of Tribal Population
e) Areas with high density of population with low level of income, employment and
living.
• This group suggested 15 indicators for the identification of Backward areas

2. Pandey committee (1968):

This committee also suggested following Five criteria for identifying backward areas:
a) Total per capita income
b) Per capita income from industry and mining
c) Numbers of workers in registered factories
d) Per capita annual consumption of electricity
e) Length of surfaced road

3. Wanchoo Working group (1969):

This committee has recommended set of Fiscal incentives
a) To grant higher developmental rebate
b) Exemption from income tax, corporate tax for 5 years
c) Exempt import duty for industries in backward areas
d) Exemption of excise duty for 5 years
e) Transport subsidy
f) Sales tax exemption for the 5 years

4. Prof Chakravarty Committee (1972): This committee could not submit their report.
They used 14 indicators:
a) Density of population per square km of areas
b) Percentage of agricultural workers to working force
c) value of output to food grains per head of population
d) Gross value of output of non food grains per head of rural population
e) Gross value of output of all crops per head of rural population
f) Percentage Of household using electricity
g) Percentage of household(manufacturing-repairing) using electricity
h) Number of workers in registered factories per lakh of population
i) Length of surfaced roads per 100sq km of area
j) Length of surfaced roads per lakh of population
k) Percentage of male literates to total male population
l) Percentage of female literates to total female population
m) Percentage of total literates to total population
n) Percentage of non household using electricity

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5. The National Committee on Development of Backward Areas(1978)
The committee (B. Sivaraman) suggested 6 types of fundamental backwardness
a) Tribal Areas
b) Hill areas including Hill station
c) Drought prone Areas
d) Chronically flood affected areas
e) Coastal areas affected by salinity
f) Desert areas

Development of Backward Areas

• Regional disparities in development was/has been an important socioeconomic and
political issue in many countries. In some countries it has assumed such a sensitive
dimension as to cause social and political turmoil. It is no surprise that regional
disparities is an important multidimensional issue in a country like India,
characterized, as it is, by such geographical vastness, socio-cultural diversities and
development problems. The National Committee on the Development of Backward
Areas (Sivraman Committee) observes: "In a large country like India, disparities in
levels of development in different parts are inevitable.
• Regions differ in their history, their resource endowment and environment, the level
of infrastructural development and the attitude of the inhabitants to development
opportunities. However, with the growth of communications and the spread of
education, knowledge about what is happening in other parts of the country spread
and quite naturally the prevailing pattern of regional inequalities becomes
unacceptable. There is a demand to correct these inequalities which the political and
administrative system has to take note of. Because of this the problem of regional
development in general and of backward area development in particular has been
recognized in our plans."
• Indeed, the importance of balanced regional development was recognised even while
laying the foundation of the Indian democracy. The Directive Principles of State
Policy, embodied in the Constitution of India, proclaims, under Article 38(1), that the
State shall strive to minimise the inequalities in income, and endeavour to minimise
the inequalities in status, facilitics and opportunities, not only among individuals but
also amongst groups of people residing in different areas or engaged in different
vocations. It was, however, with the Third Five-Year Plan that the issue of balanced
regional development began to receive considerable attention.
• The Third Plan, which, for the first time, included a separate chapter on Balanced
Regional Development, observed: "A large country with extensive natural resources
viewing each phase of its development in the perspective of a long term plan, has the
means not only to realise a high and sustained rate of growth, but also to enable its
less developed regions to come upto the level of the rest." Development of backward
areas received more and more attention in the subsequent plans and a multi-pronged
approach has been evolved for the development of the backward areas.

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 Identification of Backward Areas*
• As the Chakravarthy Committee on Backward Areas observes, backwardness is a
relative concept, particularly in a developing country like India. However, within the
overall context of underdevelopment, observable patterns exist and areas with
different kinds and severities of backwardness can be identified. Assuming that the
total elimination of backwardness in the country is a long-term process, it is still
necessary to identify levels of development, the factors with which such levels are
associated and the features underlying structural backwardness. This necessity arises
for formulating strategies for long-term plans, immediate policy requirements and the
choice of the instruments.
• As the National Committee on the Development of Backward Areas (NCDBA)
remarks, an important point, however, is that the backward area must have a potential
for development and there must be some reason for supposing that by detailed
planning, administrative and financial support the productivity of the area can be
raised. Where there is no potential for growth, the answer lies in outmigration.
• Thus, for the purpose of planning, the areas identified as backward must have the
following three key characteristics:
1. They must have potential for development
2. There must be some inhibiting factor which prevents this potential from being
realised.
3. There must be a need for special programmes to remove or mitigate the inhibiting
factor and realise the full potential for development.
• In other words, the concept of backwardness that is relevant for planned development
is that an area is backward if it is in need of special measures in order to utilise its
development potential to the full. In this context special measures are not merely a
question of finance but will involve directional departures or changes in the complex
of policies, programmes, technologies, and institutional arrangements in the various
sectors of development.
• There are broadly two bases for identifying backward areas, viz ., index based
approach and problem area approach.

• Index Based Approach: The index based approach relies on some overall index for
ranking areas and treat all areas below some cut-off point as backward.
• Since no single indicator available at the district or block level is considered adequate
by itself, for this purpose, the statistical measure is built from a multiplicity of
indicators. Since a number of indicators are used there has to be a procedure for
weighting the separate indicators to aggregate them into a single measure. Thus, the
index based approach requires specification of the following:
1. A set of basic indicators.
2. A procedure for weighting or aggregating so that these indicators can be reduced to a
single measure.
3. A cut-off point below which areas are to be considered back ward.
• The principal problem with the index based approach is that there is a great deal of
arbitrariness at each one of the three stages listed above. This arbitrariness leaves
much scope for disputation. An excluded area can argue for a different set of basic
indicators or weighting systems or cut-off points which would be favourable from its
point of view. The index-based method was used for identifying the industrially
backward areas in India. The indicators used by the Pandry Committee and the
Planning Commission for identifying industrially backward areas.

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• Problem Area Approach: This approach involves the identification of problem areas
in different categories by specifying the constraints on development that can only be
mitigated by special measures.
• The usefulness of the problem area approach lies not so much in any higher degree of
objectivity in the manner in which areas are identified. Its real usefulness for the
purpose of planning lies in the fact that it avoids aggregating very different types of
areas into one generalised category labelled 'backward'. Such aggregation can mislead
and inspire attempts at uniform remedies for separate problems. Unlike the index
based approach, the problem area approach is constructive in the sense that the
process of defining and identifying backward areas itself suggests the nature of the
remedies that have to be applied. For example, if an area is considered backward
because it faces the problem of chronic drought then the main remedy suggested is
drought proofing. The difficulty with the problem area approach lies in ensuring that
all problem areas are in fact taken into account.
• There is no sure way of ensuring that this has been done. The problem area approach
was used in India to identify problem areas for formulating programmes for their
development.

INDUSTRIAL DISPERSAL POLICY

• An industrial dispersal policy which encourages the growth of industries in the

backward areas and discourages or prevents industrialization of developed areas is an
important measure taken in many countries to achieve the objective of regional
balance. A discriminatory industrial licensing, fiscal, monetary, commercial and the
public sector investment policies are often deployed to help achieve the desired
pattern of industrial location and development. There are four common methods to
affect or influence the desired pattern of industrial location, viz ., direct regulation,
direct investment, incentives and disincentives.
• Direct Regulation
Under direct regulation, the Government may impose a ban on the location of
industries or certain industries in certain areas. For example, it may place a ban on the
location of new units within and near large cities with a view to preventing further
concentration. Industrial location policy in India is characterised by such a ban on
location of new industrial units in metropolitan cities. Such a regulation would
compel industrialists to look for alternate locations. Direct regulation may also take
the form of requiring the existing units to change their location, the establishment of
separate zones for different types of activities, etc.
• Direct Investment:
The state can also help achieve its locational objectives by a suitable public sector
investment policy. In the socialist countries, generally, the public sector occupies a
very important position. In some of the developing countries like India, the public
sector has been assigned a dominant role in the industrialization of the country. In
such countries, the public sector industrial investment policy can be attuned to help
achieve the locational objectives. In India, a number of large industrial projects, like
the Steel Mills at Bokaro, Bhilai and Rourkela, have been located in backward areas.
Public sector investment in economic infrastructure and social overheads in backward
areas is required to attract industries there.
• Incentives
The use of incentives to influence the location of private sector industries has become
quite common. For example, a number of fiscal, monetary, commercial and physical

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 incentives and subsidies are offered by the Central and State Governments in India to
industries in backward areas with a view to luring them to these areas.
• Disincentives
In contrast to the incentives which may be regarded as a positive approach, the
disincentives may be regarded as a negative approach. The disincentives are meant to
discourage industries in certain areas like large cities or areas which are,
comparatively, industrially well developed. Such disincentives may include a location
tax, higher tariff for power and other infrastructures, etc. Further, incentives for
industries in other areas also mean disincentives in the developed areas.
• Industrial Dispersal Policies and Measures
Industrializations has been looked upon as an important instrument that can accelerate
the growth of backward regions and help remove regional imbalances. Para 15 of the
Industrial Policy Resolution, 1956, states: In order that industrialization may benefit
the economy of the country as a whole, it is important that disparities in levels of
development between regions should be progressively reduced. The lack of industries
in different parts of the country is very often determined by factors such as the
availability of the necessary raw materials or other natural resources. A concentration
of industries in certain areas has also been due to the ready availability of power,
water supply and transport facilities. It is one of the aims of National Planning to
ensure that these facilities are steadily made available to areas which are at present
lagging behind industrially or where there is greater need for providing opportunities
for employment, provided the location is otherwise suitable. Only by securing a
balanced and co-ordinated development of industrial and agricultural economy in
each region can the entire country attain higher standards of living."
• The role assigned by the planning authorities to industrialization in the development
of backward areas is evident from the following observations in the Third Plan:
Large-scale industries, specially basic and heavy industries, frequently serve as a
spearhead of intensive and broad-based development. However, not all regions can
offer equally favourable conditions for the development of industry. It is also possible
to over-estimate the significance of the location of large industrial units in relation to
the living standards of the bulk of the population. There are many examples, both of
countries and of regions within a country, in which, with limited development in
industry, an appreciable rise in living standards has been achieved through the fuller
utilization of local natural and human resources.
• There are also instances of areas around massive projects where no great impact on
the levels of living of the people is to be observed. Apart from the basic and capital
goods industries and other large industries, there are other industries who possibilities
need to be fully exploited, such as labour intensive industries of the traditional type,
agricultural processing industries, forest industries, assembly operations and
recreational industries. Each region showed endeavour to identify, plan for and
promote industries which are specially suited to its conditions and for which it can
provide relatively greater facilities."
• The Industrial Policy Statement of 1977 states that, in order to check urban
congestion, the "Government have decided that no more licenses should be issued to
new industrial units within certain limits of large metropolitan cities having a
population of more than one million and urban areas with a population of more than 5
lakhs as per the 1971 census. State Governments and financial institutions will be
requested to deny support to new industries in these areas such as those which do not
require an industrial licence. The Government of India would also consider providing

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 assistance to large existing industries which want to shift from congested metropolitan
cities to approved locations in backward areas."
• The new Industrial Policy announced by the Government of India on July 23, 1980,
states that industrialization will play an important role in correcting the regional
imbalances and reviving the industrial growth to lead the economy once again to the
take-off stage. For the achievement of this goal, the Government has decided to
encourage the dispersal of industry and the setting up of units in industrially backward
areas. Special concessions and facilities will be offered for this purpose, and these
incentives will be growth and performance-oriented. It also proposes the setting up of
a few nucleus plants in each district identified as industrially backward to generate as
many ancillaries and small and cottage units as possible.
• A nucleus plant will concentrate on assembling the products of the ancillary units
falling with in its orbit, on producing the inputs needed by a large number of smaller
units and making adequate marketing arrangements for their sale. The nucleus will
also ensure a widely spread pattern of investment and employment and will distribute
the benefits of industrialization to the maximum possible."
• The role of industrial dispersal policy in accelerating the development of backward
areas and alleviating inter-regional development disparities has, thus, been well
recognised. However, no commendable achievement has so far been made in this
direction. In the early phase of development, the emphasis was on the location of
public sector enterprises in backward areas and on the development of industrial
infrastructure in these areas.
• Specific programmes for attracting private sector investment to the backward areas
began to be implemented only since the middle of the Fourth Plan. The task of
identifying the industrially backward areas was taken up by the Planning
Commission, for the first time, at the beginning of the Fourth. Plan by appointing a
Committee under the Chairmanship of Mr. B. D. Pandey for suggesting criteria for
identifying industrially back ward states and backward districts in such states and
another committee under the chairmanship of Mr. N. N. Wanchoo to suggest fiscal
and financial incentives for industrial development in the backward areas.
• The Pandey Committee, taking into account certain development indicators such as
per capita income, per capita consumption of electricity, road and railway mileage,
number of factory workers etc ., identified, in 1969, the states of Andhra Pradesh,
Assam, Bihar, Himachal Pradesh, Jammu and Kashmir, Madhya Pradesh, Nagaland,
Orissa, Rajasthan and Uttar Pradesh and all Union Territories except Chandigarh,
Delhi and Pondicherry as industrially backward (Pondicherry was also subsequently
declared as backward). Considering the criteria suggested by the Pandey Committee
and in consultation with the financial institutions, the Planning Commission finalised
the criteria for the identification of backward districts in all States/Union Territories,
whether identified as back ward or not by the Pandey Committee. Accordingly
districts where the composite index of per capita production of foodgrains/commercial
crops, per capita industrial output, factory employment, availability of infrastructural
facilities, per capita consumption of electricity etc. was well below the state index
were considered as backward.
• The Planning Commission in consultation with the National Development Council
decided that the incentives by the Central Government should be extended to only two
of the backward districts in each of the backward States/Union Territories and to only
one district in each of the other states.

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 Capital Subsidy
• The Central government's incentive, introduced in 1971, for industrial investment in
these districts was in the form of an outright grant/subsidy equivalent to 10 per cent of
the total fixed capital investment or Rs.10 lakhs whichever was less. All the districts
identified as backward including those eligible for the central subsidy, were eligible
for concessional finance from the all-India financial institutions. Most State
Governments introduced their own incentive schemes. The number of districts
eligible for the Central subsidy was later increased to 6 districts in each backward
state and 3 districts in each of the other states. For units established after 1-3-1973,
the rate of subsidy was enhanced to 15 per cent subject to a ceiling of Rs. 15 lakhs.
• Modified Scheme:
In April 1983, the backward area development scheme was revamped with-a-view to
providing further impetus to the industrialization of backward areas. The new policy
divided the backward areas into the following three categories:
1. Category A comprising of 42 no industry districts and 76 special region districts (118
districts in total).
2. Category B comprising of 55 districts (districts previously eligible for central subsidy
minus the districts included in category A).
3. Category C comprising of 113 districts (the 246 concessional finance districts minus
the districts included in categories A and B).

• New industrial investments in these categories of districts were offered central

subsidy at the following rates:
1. Category A - 25% subject to a maximum of Rs.25 lakhs
2. Category B - 15% subject to a maximum of Rs.15 lakhs
3. Category C - 10% subject to a maximum of Rs. 10 lakhs
• With this policy, districts in category C which were hitherto eligible for only
concessional finance, also became eligible for the central subsidy. All the three
categories continue to enjoy the benefit of the concessional finance, in addition to the
investment subsidy. With effect from 1st April, 1985, the ceiling on the subsidy was
raised from Rs.25 lakhs to Rs.50 lakhs in case of electronics industries set up in Hill
districts.

 New Policy:
• With a view to accelerating the industrial growth and giving a strong impetus to the
industrialization of backward areas, Government announced in June 1988 a package
of delicensing and incentives. The salient features of it are given below:
• Delicensing: With a view to encouraging investment in the backward areas, projects
of non-MRTP/non-FERA companies have been exempted from industrial licensing if
the investment in fixed assets does not exceed Rs.50 crores as against Rs. 15 crores in
non-backward areas, subject to certain conditions.
• Development of Growth Centres: It may be noted that, for accelerating the
development of backward areas, the idea of development of growth centres has been
mooted for quite some time now.
• The new policy has stated that, for promoting industrialization of backward areas in
an effective manner, the focus would henceforth be on the development of growth
centres, that would act as the magnet for attracting industries to backward areas. Such
growth centres would be endowed with infrastructural facilities on par with the best

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 available in the country, particularly in respect of power, water, telecommunication
and banking.
• To begin with, at least 100 such growth centres would be selected and developed over
a period of about five years. Thereafter, the development of growth centres would be
further expanded so that over 10 to 15 years since the introduction of this scheme
most of the backward areas of the country would be covered. The ultimate objective
will be to develop one growth centre in each of the 430 and odd districts in the
country. The growth centres are to be located within a reasonable proximity of district
headquarters or tehsil headquarters in backward areas at such places that have a good
potential for attracting industries. The scheme envisages to provide each growth
centre with Rs.25 to Rs.30 crores in order to create infrastructural facilities of high
order. Development of 100 growth centres over the period of 5 years will, thus,
involve an investment of Rs.2,500 to 3,000 crores. This will be funded by the Centre,
the States and the all-India financial institutions acting together.

• It may be noted that the development of the growth centres is in addition to the
existing backward area development scheme (i.e., the scheme of incentives for
industrial location in category A, category B and category C areas described earlier)
and is not in substituion of it. However, the backward area scheme would be reviewed
periodically with the progress in the establishment of the growth centres and such
modifications will be made in it as are necessary.
• Financial and Monetary Incentives: The backward areas continue to receive financial
and monetary incentives. Any new industrial undertaking established in a centrally
declared backward district is eligible to income-tax relief under Section 80HH of the
Income Tax Act by way of deduction of 20 per cent of the profits for a period of 10
years.
• Furthermore, under Section 80(1) of the Income-Tax Act, all new; industrial
undertakings are entitled to an income-tax relief by way of deduction of 25 per cent of
the profits for a period of 8 years.
• The benefits of both these sections are available cumulatively to industrial
undertakings established in notified backward areas. They will also be eligible to
claim the investment allowance scheme. All these benefits will be available both to
the industrial units established in the growth centres as well as those located in other
centrally declared backward areas. It has also been stated that the norms for working
capital funds required by industrial units established in backward areas would be
reviewed and they will be accorded more liberal treatment.
• The Government announcement states that the ultimate objective will be to develop
one growth centre in each of the districts in the country. When a number of districts
like those districts with metropolitan and other very large cities and industrial
agglomerations are already facing problems of concentration and congestion it is
rather ironic to state that we should aim at developing growth centres in all the
districts of the country. It is quite obvious that many districts shall have to be
excluded from it.

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