Industrial Policies of India

Industrial Policies of India

This article deals with ‘Industrial Policies of India.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.


Introduction 

‘Industrialise or perish!’ – M. Visvesvaraya

Statistics about the Manufacturing Sector

With the development of the economy, the percentage of people engaged in industry is increasing, and its contribution to the net GDP of India is increasing as well.

a . Percentage of Indians employed in Manufacturing Sector

  • In 2018, 24% of Indians were employed in the Industrial sector.

b . Contribution of Manufacturing in India’s GDP

  • Its contribution to India’s total GDP is 29% (in 2018).
Industrial Policies of India

c . Indian companies in Fortune-500

  • There are 7 Indian companies on the Fortune-500 list. These are 
Reliance Industries 155
State Bank of India 205
Indian Oil 212
ONGC 243
Rajesh Exports 348
Tata Motors 357
Bharat Petroleum 394

Indian Industrial Policies – History

  • Industrialization is sine quo none for the economic development of any country. At Independence, India inherited a weak and shallow industrial base. Therefore, during the post–Independence period, the Government of India emphasized the development of a solid industrial base.
  • The Government of India has declared its Industrial policies at various times, which has changed the trajectory of the Indian economy.


Industrial Policy Resolution, 1948

It was announced in 1948.

It was decided that model of the economy would be ‘Mixed Economy’. It divided the economy into the following three lists 

Central List Important industries were here like coal, power, railways, civil aviation, ammunition, defence etc.
State List Industries of medium importance were put here – medicine, textile, cycles, 2 wheelers.
Rest industries All rest industries were left open for all private sector investment, with many having compulsory licensing provisions. 

The policy was to be reviewed after 10 years. 


Industrial Policy Resolution,1956

The government was encouraged by previous success & announced it after 8 years only. This policy structured the nature of the economy till 1991.

Main provisions of Policy

1 . Reservation of Industries

A clear-cut classification was made into three schedules

Schedule A It contains 17 areas in which the centre enjoyed a monopoly.
Industries set up under this provision were called Public Sector Undertakings (PSUs).
PSU included those industries as well, which were taken over between 1960 and 1980 under the nationalization drive.
Schedule B Schedule B consists of 12 areas where the state was supposed to take up the initiative with more expansive follow-up by the private sector.
It also included the provisions of Compulsory licensing.
Neither state nor private sector had a monopoly in these industries.
Schedule C Schedule C consists of all the areas not covered in Schedule A & B.
The private sector has provisions to set up industries.
– Many of them had provision of licensing.

2 . Provision of Licensing

  • All Schedule B & several Schedule C industries came under this.
  • This provision is also called LICENSE- QUOTA -PERMIT RAJ.

3 . Expansion of Public Sector

  • The policy announced to expand the public sector for accelerated industrialization & growth of the economy.
  • Emphasis was on heavy industry. 

4 . Regional Disparity

  • Upcoming PSUs were set up more in backward areas (although it was entirely against the ‘Theory of Industrial Location’). 

5 . Emphasis on Small Industry

  • The policy was committed to promoting small-scale industries and the Khadi & Village industry.

6 . Agriculture Sector

  • The agriculture sector was pledged as a priority. 

Industrial Policy of 1969

  • It was aimed at solving the shortcomings of the Industrial Policy of 1956.
  • Experts & industrialists believed that licensing was serving the opposite purpose than it was mooted. The main aim behind the ‘Licensing policy’ was socialist & nationalist feeling so that 
    1. The exploitation of resources could be done for the development of all.
    2. Price-control of goods purchased from licensed industries.
    3. Checking concentration of economic power.  
    1. Channelizing investment into the desired direction. 
  • But licensing policy wasn’t serving this purpose as  
    1. Influential industrial houses were able to procure new licenses at the expense of budding entrepreneurs. 
    2. Older & well-established business houses were capable of creating hurdles for new ones with the help of different kinds of trade practices & forcing the latter to agree to sell out & takeovers.
  • Industrial Policy of 1969 introduced the Monopolistic & Restrictive Trade Practices(MRTP) Act. The main features of the MRTP act were 
    1. It was aimed at checking & regulating trade & commercial practices of the firms and checking the monopoly & concentration of economic power.
    2. Firms with assets worth ₹ 25 crores (which was later increased to ₹50 crores in 1980 and ₹100 crores in 1985) or more were obligated to take permission from the Indian government before expansion, greenfield venture & takeover of other firms.
    3. For redressal of prohibited & restricted practices of trade, the government set up the MRTP Commission.

Industrial Policy Statement, 1973

1 . Core Industries

  • The policy introduced a new classification of ‘Core Industries’. 
  • It included six industries that were of fundamental importance for developing other industries –  Iron & Steel, Cement, Coal, Crude Oil, Oil Refining & electricity. 
  • Note: At that time, there was 6 Core Industries. Now there are 8
    1. Coal  
    2. Crude Oil  
    3. Cement  
    4. Fertilizer  
    5. Electricity  
    6. Refinery Products  
    7. Natural Gas  
    8. Steel  

2. Private Companies

  • Private Companies may apply for licenses under Core industries if they aren’t covered under Schedule A.
  • They were eligible only if their total assets were above ₹20 crores.

3. Reserved List

  • Some industries were put under a reserved list in which only MSME could set up industry. 

4. Joint Sector

  • It allowed partnership between centre, states & private sector for setting up some industries.
  • The government had discretionary power to exit such ventures in future.
  • The intention was to promote the private sector with government support.

5. FERA

  • Foreign Exchange Regulation Act was introduced to regulate foreign exchange in India.
  • According to experts, it was draconian law that hampered the country’s growth.

6. Foreign Investment

  • Limited permission of foreign investment was given, with MNCs being allowed to set up subsidiaries in India.

Industrial Policy Statement, 1977

  • Political set up at the centre changed so did economic policy.
  • There was more inclination towards Gandhi -Socialistic view & anti-Indira stance.

Main Features

  • Foreign investment in unnecessary areas prohibited ( in practice, it was complete no). During this period, Coca-Cola, IBM and Chrysler were made to exit India.  
  • Emphasis was placed on village industry with a redefinition of small & cottage industry.
  • Decentralized industrialization was given attention to link masses to the process of industrialization.
  • Khadi & Village industry was to be reconstructed.
  • Serious attention was given to the level of production & prices of essential of everyday use.

Industrial Policy Resolution, 1980

The Congress party returned to power. As a result, Industrial Policy was revised in 1980. The main provisions of this policy were 

  • Foreign investment via technology transfer route was allowed.
  • MRTP limit was increased to ₹50 crores to promote the setting up of bigger industries.
  • Industrial licensing was justified.

Overall liberal attitude followed towards the expansion of private industries.


Industrial Policy Resolution of 1985 & 86

Industrial Policy Resolutions of 1985 & 86 were very similar in nature & latter tried to promote initiatives of the former. The main provisions of this policy were

  1. Foreign investment was further simplified & more areas were opened for foreign investment. The dominant method of foreign investment was still technology transfer, but foreign MNC can hold up to 49% in their subsidiary.
  2. MRTP limit was increased to ₹100 crores.
  3. Provision of industrial licensing was further simplified & remained for 64 industries only.
  4. A higher level of attention was given to sunrise industries such as telecommunication, computerization & electronics.
  5. The modernization & profitability aspects of PSU was emphasized.
  6. FERA regime was relaxed.
  7. Many technology missions were launched in the Agricultural sector.
  • It has to be noted that these policies were formulated when the developed world was going towards forming the World Trade Organization. 
  • These provisions were attempted at liberalizing the economy without any slogan of economic reform. The government wanted to go for the kind of economic reforms India pursued after 1991 but lacked political support. 
  • By the end of the 1980s, India was in the grip of a severe Balance of Payment crisis with higher inflation (over 17%) & a high fiscal deficit (8%). It was magnified by the Gulf war & the high prices of oil, ultimately leading to the Balance of Payment crisis, IMF bailout & 1991 LPG reforms.

New Industrial Policy (NIP) of 1991 – LPG Reforms

The situation of India leading to LPG reforms

  • India was in a severe Balance of Payment crisis in 1991. Reasons for this were several interconnected factors that were growing unfavourable for the Indian economy
    • Gulf war of 1990-91: Oil prices increased, leading to fast depletion of Indian Foreign currency reserves.
    • There was a sharp decline in private remittances from overseas Indian workers in the Middle East in the wake of the gulf war.
    • Inflation peaked at 17% & the central government’s fiscal deficit reached 8.4%.
    • By June 1991, Indian Forex declined to just 2 weeks of import coverage.
  • The financial support that India got from the IMF to fight out the Balance of Payment crisis of 1990-91 had a tag of structural readjustment as a condition to be fulfilled by the Government of India.
  • With this policy, the government kickstarted the very process of reform in the economy. That is why the policy is taken more as a process than a policy.

New Industrial Policy of 1991

Triple pillars of New Economic Policy were Liberalization, Privatization and Globalization (LPG)

LPG Reforms

1. Liberalisation

1.1 De Licensing of Industries

The number of industries put under the compulsory licensing provision (Schedule B & C) was cut down to 18 in 1991. Now only 5 industries require a license, and these are 

  1. Alcoholic Drinks
  2. Tobacco & cigar products
  3. Defence & electronics aerospace equipment
  4. Industrial Explosives including matchboxes
  5. Hazardous Chemicals* (Nitrocellulose, Hydrocyanic Acids, Phosgene & MIC)

1.2 De-reservation of Industries

Industries that were reserved for the Central government in the Industrial Policy of 1956 were cut down to 8 from 17 at that time. Presently only three sectors are reserved for central government.

Nuclear Energy The present government is seriously considering allowing the private sector to enter the management of nuclear power plants.
Nuclear research Consist of mining, use, management, fuel fabrication, export-import, waste management of radioactive material & no country allows private industry in this.
Railways Many of the functions related to railways have been allowed private entry, but still, the private sector can’t enter as a full-fledged railway service provider.

1.3 Location of industries

Industries were categorized into polluting & non-polluting & highly simple provision deciding their location was announced

Non-Polluting Such industries can be set up anywhere.
Polluting Such industries can be set up at least 25 km away from million cities.

1.4 Abolition of phased production

  • The compulsion of phased production was abolished. 
  • Now private firms can go for production of as many goods & models simultaneously as they want.

1.5 Abolition of MRTP

  • The MRTP limit of ₹ 100 cr was abolished.
  • MRTP Act was replaced by Competition Act & MRTP commission was replaced by Competition Commission of India (CCI).

2 . Privatisation

2.1 Privatising PSUs

  • It was decided to convert the public sector companies to private sector companies by reducing Government shareholding to below 50%. E.g., Hindustan Zinc Limited.

2.2 Stopped Nationalisation

  • The policy stopped the practice of nationalization. It means that the way Tata Airlines was nationalized to Indian Airlines or Banks were nationalized will not be used by the government in the future.  

2.3 More sectors opened

  • Private sector companies were allowed to operate in banking, insurance, aviation, telecom and other sectors.

3 . Globalisation

3.1 Joined WTO

  • India joined the WTO regime & gradually relaxed the tariff and non-tariff barriers on the imported goods and services.

3.2 Promotion of Foreign Investment

  • Promotion of foreign investment was encouraged through both routes, i.e. Foreign Direct Investment & Foreign Portfolio Investment. 

3.3 FERA by FEMA

  • Draconian FERA was replaced with the Foreign Exchange Management Act (FEMA), which came into effect in 2000-01 with a sunset clause of two years. 

Need of New Industrial Policy

Why we need a new Industrial Policy?

  1. Technological changes like the 4th Industrial Revolution, Artificial Intelligence & Automation have changed the nature of industries.
  2. Systemic issues in the economy: Indian economy faces a large number of systemic issues such as outdated labour laws, infrastructural bottlenecks, logistic weakness etc.
  3. Changes in Demographic conditions: With an increasing number of old age people, the government needs to focus on Longevity Dividend and the Demographic Dividend.
  4. Global Changes: The world has changed, and China is losing Demographic Dividends. India needs to take drastic steps to fill the vacuum. 
  5. The Indian economy has changed drastically since 1991. The service sector is contributing the highest share to Indian GDP.  
  6. The rise of Multilateral Trade Agreements poses a threat to the Indian economy.
  7. India needs to formulate a new Industrial Policy to deal with the problem of Climate Change and comply with Paris deal obligations.

What should New Industrial Policy focus on?

  1. Technology & Innovation: Government should provide incentives for artificial intelligence, the internet of things, and robotics. 
  2. The Ease of Doing Business should be emphasized to attract MNCs in India.
  3. Infrastructure should be made world-class to end the logistic problems of the Indian economy.
  4. More focus on the skills & employability of new workers.  
  5. The focus should be on labour-intensive sectors such as textiles, leather and footwear industries etc.
  6. Sustainable and responsible industrialization to reduce carbon emissions should be emphasized.
  7. Provide easy access to capital to the MSMEs.
  8. Create global brands out of India. 
  9. Promote Innovation and R&D via Academia- industry linkages, transparent IPR regime and encouragement to Startups.

Side Topic: National Manufacturing Policy, 2011 & NMIZ

Aim

  1. Increasing the manufacturing sector’s share in Indian GDP to 25% by 2022.
  2. Target is to create 100 million jobs.  
  3. Create National Manufacturing & Investment Zone (NMIZ)(NMIZ is an essential component of NMP, 2011).

NMIZ/National Manufacturing & Investment Zone

  • NMIZ is an ‘industrial township’ containing Special Economic Zones, Industrial Parks etc.   
  • NMIZ are given additional support by the government in the form of 
    1. Tax incentives
    2. Relaxed norms for FDI approval  
    3. Providing Rail, Road, energy etc.
    4. Relaxations in the labour laws, e.g. easier hiring-firing norms.
  • NIMZ is treated as a self-governing body under Article 243(Q-c) of the Constitution. 
  • India has 15 NMIZ like Manesar-Bawal Investment Region in Haryana etc.