Changes in Industrial Policy and their effects on industrial growth

What are the changes in industrial policy and their effects on industrial growth? What are their outcomes?  Read further to know more.

Soon after independence in 1947, the pursuit of industrial development began. The Industrial Policy Resolution of 1948 outlined the general framework of the policy for the growth of the industry.

Changes in India’s industrial policies have significantly influenced industrial growth over the years. While liberalization and globalization have opened up opportunities and expanded India’s industrial base, other policies like “Make in India” and “Atmanirbhar Bharat” reflect India’s ongoing efforts to shape its industrial future in a changing global landscape.

The effectiveness of these policies in promoting sustainable and inclusive industrial growth will depend on their implementation and adaptation to evolving economic challenges.

What are Industrial Policies?

Industrial policy refers to the principles, rules, policies, and procedures established by the government to guide, develop, and oversee the nation’s industrial enterprises. 

• It outlines the specific functions that the public, private, joint, and cooperative sectors should play in the growth of industries. Additionally, it describes the function of the big, medium, and small-scale sectors.
• It includes monetary and fiscal policies, trade and labor laws, the government’s stance on foreign investment, and the role that multinational firms will play in the growth of the industrial sector. 

A mixed economy typically has an Industrial Policy. It is a sector-specific government intervention program designed to give one sector preferential treatment over others.

Policymakers identify sectors that merit support from the government and establish goals for them. Government support for the production of renewable energy, organic farming, food processing, and product export promotion has already been observed. These all fall under the industrial policy.

Instruments of Industrial Policy 

• Tariffs, non-tariff barriers, and subsidies are used.
• Tariffs are customs duty barriers used to shield a nation’s domestic sector from outside competition. It unfairly inflates the price of imported goods while favoring domestic producers.
• Similar to tariff barriers, quantitative restrictions (also known as non-tariff barriers) place limits on the number of imports by setting quotas. These two limits were rather tight before 1990. 

Need For an Industrial Policy

• Industry knowledge spillover impacts the economy to a certain extent. Sector-to-sector differences in this effect’s strength. A new industry will draw people with the necessary talent, skill, and competence, which will grow over time. In other words, concentrating on one particular industry over time might lead to a whole industrial complex that benefits from mutual synergies and economies. 
•  When India gained its independence, the majority of its industries were nonexistent or in their infancy. They were unable to effectively utilize economies of scale or adopt new technologies. In this situation, early government protection is preferred so that a competitive industry can emerge afterward. 
• An industry cannot exist or endure by itself. It needs other industries that supply it with raw materials at fair prices and levels of quality. The survival of this industry also depends on the existence of numerous other industries that will serve as consumers. 
•  A certain level of assurance in the future of the entire economy and that industry, in particular, is necessary for setting up an industry. Investors are reluctant since there is a legitimate risk involved. In the case of being the “first mover” in a recently opened sector, this risk and uncertainty are substantial. 

 Contrarian arguments

• Special interests influence them in some way. In every economy, pressure organizations are vying for the government’s resources. They attempt to persuade decision-makers to seize a larger than justifiable portion of natural and economic resources. 
• Uncertainty exists in this regard. Any industrial policy needs to anticipate future economic developments. Our experience has shown us that the economy is the hardest to anticipate, making planning and policymaking efforts frequently ineffective. 
• Government support affects pricing by distorting markets and production patterns. Prices serve as signals for both customers and producers, informing them of what to buy and make. Therefore, because of government protection and assistance, producers are unable to adopt new markets or technologies. This makes them uncompetitive. 
• Another viewpoint, held by some notable economists, advocated for aiding India’s traditionally labor-intensive handicraft industry and agro-economy (based on the Gandhian model). In this scenario, markets would handle heavy industries. However, the Mahalanobis model was chosen by the Congress government, and the discussion of this decision is still ongoing. 
• Instead, the Nehru Mahanaboli model required a lot of capital. At that period, there was a great attraction for heavy industry. Investment in heavy industry was encouraged by the development and high standard of living experienced by developed nations. 

Changes in Industrial Policy

Before independence, India had no developed industrial sector. It was an agricultural nation where handicrafts gained an unparalleled level of supremacy. There are very few economic sectors that have grown into traditions that can be classified as having items made using the factory system in the 19th and 20th centuries.

In Independent India, the Parliament occasionally enacted different resolutions. Still, a historic change occurred in 1991 when India was obliged to open its economy to international competition and the government was forced to deregulate sectors to make room for private industry.

Here are a few significant changes to the Indian industrial strategy.

Industrial Policy  1948

Both the public and commercial sectors were involved in industrial growth in the 1948 Industrial Policy Resolution. As a result, the industries were split into four major groups:

(a) Exclusive governmental monopoly – This pertains to the production of weapons and ammunition, the creation and management of atomic energy, as well as the ownership and operation of railway transportation.

(b) Government Monopoly for New Units – This category includes coal, iron, and steel, shipbuilding, aircraft manufacturing, telegraph manufacturing, wireless device manufacturing (except radio receiving sets), mineral oils, and shipbuilding.

(c) Regulation – This grouping includes sectors with such fundamental importance that the central government would consider it necessary to plan and regulate them.

(d) Unregulated private enterprise: The private sector, both individual and cooperative, was allowed to operate in the industries in this category.

Resolution on Industrial Policy from 1956

This was done to give the mixed economy model and the socialist socialism doctrine a more tangible form. The entire industrial sector was divided into three Schedules by the Industrial Policy Resolution of 1956:

• Schedule A: The first category featured industries whose future development was solely the State’s responsibility.
• Schedule B: Industries that were becoming increasingly state-owned and in which private firms were solely expected to support government initiatives were included in this category.
• Schedule C: The third group includes all industries that weren’t listed in schedules A or B.
• Small-Scale Sector: Several initiatives were suggested in the policy resolution to support the small sector.
• Investment from abroad is permitted.

The 1969 Act Against Monopolistic and Restrictive Trade Practices

The controversial “license quota permit” system was typified by this action. Before expanding or starting operations, companies with assets worth more than a certain amount were required to obtain approval or a license.

Its goals were to:

• to forbid monopolistic and limiting business practices (except by the government)
• to avoid the monopolization of economic power by a select few
• to manage monopolies

Resolution on Industrial Policy from 1977

This resolution was the outcome of the center-level government shift. As a result, it placed more emphasis on cottage, small-scale, and village industries. This marked a shift in ideology from the Nehruvian-Mahalanobis school to the Gandhian school of economic growth.

This divided the tiny sector into the following three groups:-

• a) Home and cottage enterprises, which offer several opportunities for independent work.
• b) A small industry with investments in industrial units with machinery and equipment up to Rs. 1 lakh that is located in towns with less than 50,000 residents
• c) Small-scale enterprises, which include industrial units with an investment of up to Rs. 10 lakh, and ancillaries with an investment of up to Rs. 15 lahks in fixed capital.

Resolution on Industrial Policy, 1980

After making a comeback, Congress quickly reinstated its industrial strategy.

The main changes were:

• Certain goods designated for small-scale industries were taken from the reserve list.
• Many businesses and units were using more capacity than was permitted by law. These overflowing capacities were made regular.
• It was possible to invest abroad with technology transfer.
• Regulations, licensing, and limits were loosened slightly, indicating a preference for the private sector.

1991’s New Industrial Policy

The industrial policy that has guided the nation’s industrial growth since independence underwent a significant adjustment in 1991. The nation decided to adopt capitalism. According to the new system, planning shifted from “imperative” to “indicative.”

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)

The New Industrial Policy

• Industrial licensing policy – The New Industrial Policy abolished all industrial licensing, regardless of investment level, except a select group of 18 industries related to security and strategic concerns, social concerns, the use of hazardous chemicals, overriding environmental concerns, and luxury goods.
• Public Sector Policy – The 1956 Resolution designated 17 industries as part of the public sector. This number decreased to 8 under the Industrial Policy of 1991. Currently, the government solely controls three sectors: 1) Atomic Energy 2) Atomic mineral mining 3) Rail Transportation
• Reconstruction (BIFR), or other such high-level organizations developed for the purpose, of a social security mechanism will be established to safeguard the interests of workers who are likely to be impacted by such rehabilitation measures.
• Privatization/disinvestment: The government declared its plan to offer mutual funds, financial institutions, the general public, and employees a portion of its ownership stake in public sector firms.
• Limitations on Monopolistic and Restrictive Trade Practices: All businesses categorized as MRTP firms under the Monopolistic and Restrictive Trade Practice Act have assets exceeding a particular threshold (Rs. 100 crores since 1985). Only certain industries were open to such firms, and even then, case-by-case clearance was required.
• Policy on Technology Agreements and Foreign Investment: To automatically grant authorization for direct foreign investment up to 51 percent foreign equity, the New Industrial Policy identified a list of high technology and high investment priority industries.
• Abolishing Phased Manufacturing Programs for New Projects – These programs were designed to help develop indigenous technology.
• Removal of Mandatory Convertible Provision – Before financial liberalization, the loan agreement with the borrower contained a mandatory convertible clause (industries in this case). This clause gave banks the freedom to turn any amount of their loans into equity at any time. This will change their status in that business from “lender” to “owner.” The government utilized this clause as a tool to nationalize private businesses.

Repercussions of New Policies

• “License, Permit and Quota Raj” was abolished in 1991 according to a new policy. Lowering administrative barriers to industrial expansion aimed to liberalize the economy.
• The public sector’s limited engagement lessened the burden on the government.
• The policy included flexible licensing, the lifting of the asset cap on MRTP enterprises, easier access for foreign corporations, and privatization.
• All of this led to more competition, which in turn led to decreased pricing for numerous things, including electronics. This led to both domestic and foreign investment in practically every industry that was made available to the private sector.
• Special export-boosting measures were made in the wake of the strategy. Export Export-oriented units, Export Processing Zones, Agri-Export Zones, Special Economic Zones, and most recently National Investment and Manufacturing Zones are ideas that have been used in the past. All these have benefitted the export sector of the country.

 Limitations of  India’s industrial policies

• Manufacturing Sector Stagnation: India’s industrial policies haven’t been able to boost the manufacturing sector, whose share of GDP has been hovering around 16% since 1991.
• Industrial pattern distortions brought on by selective investment inflow: The slow pace of investment in many basic and strategic industries, such as engineering, power, machine tools, etc., is of concern.
• Employment displacement Worker displacement resulted from the restructuring and modernization of industry as a result of the new industrial policy.
• Lack of incentives to increase efficiency: Internal liberalization received more attention than trade policy reforms, which led to “consumption-led growth” rather than “investment- or export-led growth.”
• Vaguely defined industrial location policy: The New Industrial Strategy highlighted the negative impacts of environmental harm but failed to specify an industrial location policy that could guarantee the establishment of an industrial climate free from pollution.

Way ahead

Since 1991, industrial policies in India have shifted from being primarily socialist in 1956 to becoming capitalistic.

• India today has an industrial policy system that is much more liberalized, focusing on boosting foreign investment and reducing regulations.
• In the 2018 World Bank Report on Doing Business, India was rated 77th. The Bankruptcy and Insolvency Act of 2017 and the Goods and Services Tax (GST) reforms are noteworthy and will benefit the manufacturing sector in the long run.
• Make in India and Startup India campaigns have improved the business environment in the nation.
• However, difficulties with lending, labor rules that result in high unit labor costs, political involvement, and other regulatory burdens remain obstacles to business expansion.
• A new Industrial Policy is required to strengthen the nation’s manufacturing sector. The government should feel the necessity to unveil a new Industrial Policy that would serve as a guide for all commercial firms in the nation.

Article Written By: Atheena Fathima Riyas