Review of industrial policy developments and pattern of industrial growth since 1991
Any government action aimed at affecting industry may be considered to be part of industrial policy, which makes it a limitless field.
It usually means government action to influence the ownership and structure of industry and its performance and it takes the form of paying subsidies or providing finance in other ways, or of regulation.
It excludes macroeconomic policies affecting industry, but it may be viewed as supporting macroeconomic policy by improving the performance of an important part of the supply side of the economy as a whole. The concept is, thus, a comprehensive one. It includes procedures, principles (i.e., the philosophy of a given economy), policies, rules and regulations, incentives and punishments, the tariff policy, the labour policy, government’s attitude towards foreign capital, etc.
A country must formulate industrial policy as an instrument of industrialisation. The public sector may be invited to implement industrial policy. In a country like India, where private sector is allowed to coexist in business, its control and regulation is necessary. Industrial policy is a necessary step in this direction.
In the immediate post-independence period, inflation appeared, production declined, and economic security dwindled. Labour leaders demanded total nationalisation while the industrialists wanted free enterprise. “In view of the various cross-currents that confused the industrial climate, a statement of industrial policy was necessary to clear the foggy atmosphere.”
In the following few pages, an attempt is made to describe and analyse the various policy statements and proposals which have relevance for the current economic environment of the country.
Industrial Policy Resolution of 1948:
In a mixed economy of our sort, the government should declare its industrial policy clearly indicating what should be the sphere of the State and of the private enterprise. A mixed economy means co-existence of the two sectors public and private. This the Government of India did by a policy resolution on 30 April 1948 called the first Industrial Policy Resolution of 1948, which made it clear that India was going to have a mixed economy.
The Industrial Policy Resolution, 1948, drawn in the context of our objectives of Democratic Socialism through mixed economic structure, divided the industrial structure into four groups:
- Basic and strategic industries such as arms and ammunition, atomic energy, railways, etc., shall be the exclusive monopoly of the State.
- The second group consisted of key industries like coal, iron and steel, ship-building, manufacture of telegraph, telephone, wireless apparatus, mineral oils, etc. In such cases the State took over the exclusive responsibility of all future development and the existing industries were allowed to function for ten years after which the State would review the situation and explore the necessity of nationalisation.
- In the third group, 18 industries including automobiles, tractors, machine tools, etc., were allowed to be in the private sector subject to government regulation and supervision.
- All other industries were left open to the private sector. However, the State might participate and/or intervene if circumstances so demanded.
To ensure the supply of capital goods and modern technology, the 1PR1948, encouraged the free flow of foreign capital. The Government ensured that there would be no discrimination between Indian and foreign undertakings; facilities would be given for remittance of profit and due compensation would be paid in case a foreign undertaking was nationalised. The IPR also emphasised the importance of small-scale and cottage industries in the Indian economy.
The Industries (Development and Regulation) Act was passed in 1951 to implement the Industrial Policy Resolution, 1948.
Industrial Policy Statement of 1956:
On 30 April 1956, the Government revised its first Industrial Policy (i.e., the policy of 1948), and announced the Industrial Policy of 1956. The reasons for the revision were: (i) introduction of the Constitution of India, (ii) adoption of a planned economy, and (iii) declaration by the Parliament that India was going to have a socialist pattern of society.
All these principles were incorporated in the revised industrial policy as its most avowed objectives. And this revised policy provided the basic framework for the government’s policy in regard to industries till June 1991.
The 1956 Policy emphasises, inter alia, the need to expand the public sector, to build up a large and growing cooperative sector and to encourage the separation of ownership and management in private industries and, above all, prevent the rise of private monopolies. “The IPR 1956 has been known as the Economic Constitution of India” or “The Bible of State Capitalism”.
The Resolution classified industries into three categories having regard to the role which the State would play in each of them:
- Schedule A consisting of 17 industries would be the exclusive responsibility of the State.
- Out of these 17 industries, four industries, namely arms and ammunition, atomic energy, railways and air transport would be Central Government monopolies; new units in the remaining industries would be developed by the State Governments.
- Schedule B, consisting of 12 industries, would be open to both the private and public sectors; however, such industries would be progressively State-owned.
- All the other industries not included in these two Schedules constituted the third category which was left open to the private sector. However, the State reserved the right to undertake any type of industrial production.
The classification of industries into three categories did not mean that they were being placed in water-tight compartments. In appropriate cases, the private sector might be allowed to produce an item falling within Schedule A for meeting its own requirements. Further, heavy industries in the public sector might obtain their requirements from the private sector while the private sector, in turn, would rely on the public sector for many of its requirements.
The IPR 1956, stressed the importance of cottage and small scale industries for expanding employment opportunities and for wider decentralisation of economic power and activity. The Resolution also called for efforts to maintain industrial peace; a fair share of the proceeds of production should be given to the toiling mass in keeping with the avowed objectives of democratic socialism. Regional disparities in industrialisation should be reduced. The Government’s attitude to foreign capital would remain unchanged.
The features of the new policy that distinguishes it from the previous one are:
1. Expansion of the role of the State:
This was in keeping with the Mahalanobis Strategy of large-scale industrialisation embodied in the Second Five Year Plan.
2. Reduced threat of nationalisation:
The apprehensions of nationalisation contained in the previous policy were reduced to the bare minimum.
3. More meaningful approach to our concept of a ‘mixed economy’:
Various complementaries of the public and private sectors were made clear.
The 1956IPR came in for sharp criticisms from the private sector since this Resolution reduced the scope for the expansion of the private sector significantly. Private sector apprehended that the expansion of public sector meant swallowing of the private sector. But this criticism was unfounded.
No doubt, public sector had been given an adequate role to play, but, in a mixed economy the public sector must assume the role of a senior partner in the acceleration of economic development. In fact, the Resolution gave ample scope for expansion of the private sector. Even in Schedule A, the private sector had been allowed to operate in appropriate cases, though the development of industries mentioned in Schedule A was the exclusive responsibility of the State.
Industrial Policy of 1991:
The long-awaited liberalised industrial policy was announced by the Government of India on 24 July 1991. There are several important departures in the latest policy. The New Industrial Policy has scrapped the asset limit for MRTP companies and abolished industrial licensing of all projects, except for 18 (now 5) specific groups. It has raised the limit for foreign participation of foreign capital in the country’s industrial landscape.
The new policy has dismantled all needless irksome bureaucratic controls on industrial growth. The new policy has re-defined the role of the public sector and has asked the private sector to operate even in those areas which were hitherto reserved for the public sector.
Thus, the new policy considers that big and monopoly business houses and foreign capital and multinational corporations (MNCs) are no longer “fearsome” and, in fact, they are benign to the country’s industrial growth. Anyway, the new policy has decided to take a series of initiatives in respect of the policies relating to the following areas: (a) industrial licensing, (b) MRTP Act, (c) public sector policy, (d) foreign investment, and (e) foreign technology agreements.
The highlights of the new policy are:
- Industrial licensing will be abolished for all projects except for a short list of industries (18 selected sectors mentioned in Annexure II). The exemption from licensing will apply to all substantial expansion of existing units. The existing and new industrial units will be provided with a broad banding facility to enable them to produce any article so long as no additional investment in plant and machinery is involved.
However, the small-scale industries taking up manufacture of those products reserved for small sector will not be subjected to compulsory licensing procedures. As a result, all existing registration schemes (like delicensed registration, exempted industries registration, DGTD registration) will be abolished. Now, entrepreneurs are required to fill an information memorandum of new projects and substantial expansion.
- The policy provides for automatic clearance for import of capital goods in cases where the foreign exchange availability is ensured through foreign equity.
- As for the MRTP Act, the policy states that the pre-entry scrutiny of investment decisions by the so-called MRTP companies will no longer be required.
- The policy intends to scrap the asset limit of the MRTP companies.
- The policy envisages disinvestment of government equity in public sector to mutual funds, financial institutions, general public and workers. For the first time, sick public units has come under the purview of the Board of Industrial and Financial Reconstruction (BIFR) for their revival. A social security mechanism to protect workers’ interests in such affected public sectors has been proposed in this policy. Pre-eminent place of public sector in 5 core areas like arms and ammunition, atomic energy, mineral oils, rail transport and mining will, however, continue.
Reservation for the public sector, as on 2008, is very limited (just 2)—covering only manufacturing involving certain substances relevant for atomic energy (as well as production of atomic energy) and provision of railway transport.
- In order to invite foreign investment in high priority industries, requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment up to 51 p.c. foreign equity in such industries.
- In a departure from the present locational policy for industries, the policy provides that in locations other than cities of population of more than one million, there will be no requirement for obtaining industrial approvals except for industries subject to compulsory licensing.
The new Industrial Policy radically differs from the fundamental Industrial Policy of 1956. It is said that these policy decisions of the Government are “a series of measures to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic controls.” The new policy is a bolder step towards the process of deregulating the economy so that Indian industry becomes more competitive internally and internationally.
The delicensing of a large number of industries, scrapping the asset limit of the MRTP companies, and the abolition of registration schemes will free Indian entrepreneurs from needless controls.
This new policy has been hailed as a ‘landmark’ in the opening up of the Indian economy. This policy is a great leap towards privatisation. Under this new policy, like foreign capital and multinational corporations, large industrial houses have been respected by the Government.
However, in earlier policies, in the name of building up a socialistic pattern of society, the Government controlled and regulated private industrial houses through several important controlling devices. Thus, the Centre’s new Industrial Policy package will definitely strengthen the control of monopoly industrial houses in the country’s landscape, thereby overthrowing the cherished goals of building a socialistic pattern of society.
The current Industrial Policy says that private sector—rather than public sector—should be viewed as an ‘ideal’ institution for industrialisation. That is why the policy has scrapped the asset limit for the MRTP companies and abolished industrial licensing for all projects except for 18 (now 5) specific groups. But in India, private industrial houses are not deemed to be “ideal”.
These houses don’t have the minimum sense of social responsibility. Not only this, some of the private industrial houses, unlike public sector, also suffer from losses. It is alleged that these business houses often make their organisations ‘sick’ through ingenious means, just to win the financial doles from the government. Again, by building up large industrial houses under the umbrella of the current policy, it is feared that the interests of the consumers are unlikely to be served.
The other area in which the government has taken a giant leap is with respect to foreign participation in Indian companies and allowing access to foreign technology. But it is apprehended that most of the foreign investment would be channelised in the direction of non-priority sectors rather than priority sectors.
It is a strange phenomenon that despite curbs on the coming of foreign capital in the past, a huge amount of foreign investment was made in such industries as cars, soft drinks, potato chips, etc. Thus, there is a serious threat of distortion of our industrial structure through the current Industrial Policy. It tilts more in favour of industries producing luxury goods.
Finally, seeing the ills of the public sector for a couple of years, the Government, in its new Industrial Policy, went for privatisation of the public sector. Privatisation or the so- called part-privatisation is not the solution to the ills of the public sector. Without diagnosing the problems and curing those, the policy envisages disinvestment of government equity in the public sector.
Thus, the government’s statement of Industrial Policy has overnight altered the industrial scenario in India. The new policy is definitely a step towards privatisation of Indian industries. It is now up to the industry to show that it has the will and ability to respond.
But, if past experience is any guide we can say that private industrialists will not rise to the occasion since our industrialists, over time, have learnt the habit of growing under the protected environment. However, it is feared that foreign investment will trickle down to this country despite liberalisation.
In any case, the government thinks that the big bourgeoisie or private capital and foreign capital are no longer deadly in Indian business world. The somersault in Government’s policy merely speaks that “bad policy drives out good policy.”
Anyway, competition among firms is the essence of the new industrial policy. In order to improve competition, and thus contain the distortions caused by monopoly power, the Competition Act, 2002, was passed in December 2002. This Act aims at promoting competition through the prevention of anti-competitive practices, and abuse of dominance. This Act replaces the MRTP Act.