A strategic state attempt to promote economic transformation, or the transition from lower to higher productivity activity, within or within sectors, is known as industrial policy. Industrial policy is any form of selective government action or policy that seeks to alter the structure of production to favor industries that are expected to provide better economic growth opportunities in a manner that would not be possible without the intervention in the equilibrium of the market (Webster’s New World Encyclopedia, 2010).
Industrial policy is a group of measures used by the government to affect the ownership, organization, and performance of an industry. It manifests as legislation, the disbursement of subsidies, or other forms of monetary assistance. It consists of protocols, guiding concepts (i.e., the economic philosophy), policies, rules and regulations, rewards and penalties, the tariff policy, the labor policy, the government’s stance on foreign investment, etc.
Objectives
The government of India’s industrial policy has the following primary goals:
- to maintain consistent productivity growth;
- to enhance gainful employment;
- to maximize the utilization of human resources;
- to attain international competitiveness; and
- to make India a significant player and partner in the international arena.
Industrial Policies in India since Independence
Industrial Policy Resolution of 1948: The policy’s general outlines were outlined, outlining the State’s role in industrial growth as an entrepreneur and an authority. That India will have a mixed economic model was made quite obvious. It categorized businesses into four categories:
- Strategic Industries (Public Sector): It contained three fields where the Central Government held a monopoly. They included rail transportation, atomic energy, and weapons and ammunition.
- Basic/Key Industries (Public-cum-Private Sector): Six industries were identified as “Key Industries” or “Basic Industries,” including coal, iron and steel, aviation and shipbuilding, manufacture of telephone, telegraph, and wireless apparatus, and mineral oil. The Central Government was to establish these industries. The current private sector businesses, however, were permitted to continue.
- Important Industries (Controlled Private Sector): There were 18 different industries represented, such as heavy chemicals, sugar, cotton textile and woollen industry, cement, paper, salt, machine tools, fertilizer, rubber, air and sea transport, motor, tractor, and electricity, among others. Although these industries are still in the private sector, the federal government has overall control over them after consulting with the state governments.
- Other Industries (Private and Cooperative Sector): The private sector was allowed to operate in all other industries that weren’t part of the aforementioned three groups.
The Industrial Policy Resolution, 1948, was put into effect in 1951 with the passage of the Industries (Development and Regulation) Act.
Industrial Policy Statement of 1956: Through the Industrial Policy of 1956, the government updated its initial Industrial Policy (i.e., the 1948 policy). It was referred to as the “Bible of State Capitalism” or the “Economic Constitution of India.” The 1956 Policy placed a strong emphasis on the need to develop a sizable and expanding cooperative sector, increase the public sector, support the separation of ownership and management in private industries, and, most importantly, avert the emergence of private monopolies. Until June 1991, it was the cornerstone of the government’s industrial policy. The IPR of 1956 divided industries into three groups:
- Schedule A: The State alone was in charge of the 17 industries that made up Schedule A. Arms and ammunition, nuclear energy, railroads, and air transportation were the four of these 17 sectors with Central Government monopolies. State governments formed new units in the remaining industries.
- Schedule B: Twelve industries made up of Schedule B were accessible to both the public and private sectors, but they were progressively taken over by the State.
- Schedule C: The third category, which was available to the private sector, consisted of all the other industries that weren’t covered by these two Schedules. Yet, the State retains the ability to engage in any type of industrial production.
The IPR of 1956 emphasized the value of cottage and small-scale businesses for increasing employment possibilities and for further decentralizing economic activity and authority. The Resolution also urged efforts to maintain industrial harmony and the equitable distribution of production profits to the laboring masses in accordance with the stated goals of democratic socialism.
The private sector was quite critical of the IPR 1956 because it greatly limited the potential for private sector expansion. To maintain state control over the industry, a licensing system was used.
Industrial Policy Statement, 1977: The Janata Government declared its New Industrial Strategy in a statement to the House in December 1977. This program’s primary goal was to effectively promote small, widely distributed industries in rural and small-town settings. This policy divided the small sector into three categories: cottage and household, micro, and small-scale industries. Basic industries, capital goods industries, high technology industries, and other sectors outside the list of designated products for the small-scale sector were among the areas for the large-scale industrial sector that were defined by the 1977 Industrial Policy. The reach of huge company houses was constrained by the Industrial Policy of 1977, preventing any unit of the same business group from acquiring a dominant and monopolistic position in the market. It placed a strong emphasis on reducing the possibility of labor disruption. The government encouraged employee participation in management at all levels, from the shop floor to the board.
The Industrial Strategy of 1977 received harsh criticism since it did not include any practical steps to reduce the dominance of large-scale units and because it did not plan any socioeconomic changes to the economy to reduce the influence of huge corporations and multinationals.
Industrial Policy of 1980: The Industrial Policy of 1980 reaffirmed its belief in the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act while promoting the idea of economic federation, increasing the effectiveness of the public sector, and reversing the trend of industrial production over the previous three years (FERA).
New Industrial Policy during Economic Reforms of 1991
The Government of India launched the long-awaited liberalized industrial strategy in 1991, amidst the country’s severe economic turmoil. The policy’s goal was to boost productivity and quicken economic expansion.
Features of New Industrial Policy
De-reservation of Public sector: Reduced were the previously entirely public sector-reserved sectors. Yet, the public sector maintained its dominant position in 5 key industries, including mining, mineral oils, atomic energy, mining, and rail transportation. Only two industries are currently governed by the public sector: train operations and nuclear energy.
De-licensing: Industrial licensing is eliminated with the exception of a small number of projects through de-licensing. Currently, an industrial license is only necessary for the following 4 sectors linked to security, strategy, and environmental concerns:
- Electronic aerospace and defense equipment
- Specified hazardous chemicals
- Industrial explosives
- tobacco cigarettes, cigars, and artificial tobacco alternatives
Disinvestment of Public Sector: To increase their effectiveness and competitiveness, the government lowered its ownership holdings in public sector enterprises.
Liberalization of Foreign Investment: It was under this Industrial Policy that foreign corporations were first permitted to own a majority stake in India. Up to 51% FDI was permitted in 47 industries with high priority. FDI up to 74% was permitted for export trading houses. Nowadays, the government permits 100% FDI in a wide range of economic sectors.
Foreign Technology Agreement: Automatic authorization for contracts involving technology.
MRTP Act: The threshold asset restrictions for MRTP businesses and dominant undertakings were removed as a result of an amendment to the MRTP Act.The MRTP Act was replaced by the Competition Act of 2002.
Outcomes of New Industrial Policies
With the 1991 policy, the “License, Permit, and Quota Raj” was ended. It attempted to liberalize the economy by removing regulatory obstacles to industrial growth. The Public Sector’s minimal involvement reduced the workload for the Government.
The plan made it simpler for global corporations to gain access while also allowing for more open licensing, privatization, and the lowering of the asset cap on MRTP businesses. All of this led to greater competition, which in turn led to decreased pricing for numerous commodities, including electronics. Both domestic and foreign investment was drawn as a result of the opening of nearly all sectors to private business.
Export Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones, and most recently National Investment and Manufacturing Zones are just a few of the ideas that have emerged as a result of the policy and have all helped the country’s export industry. Special efforts were made to increase exports.
Limitations of Industrial Policies in India
Stagnation of the Manufacturing Sector: India’s industrial policies have not been able to stimulate the manufacturing sector, whose share of the GDP has remained constant at 16% since 1991.
Distortions in industrial pattern owing to selective inflow of investments: While significant investments have been coming into a select few industries during the present period of investment after liberalization, the slow pace of investments in a number of essential and strategic industries, such as engineering, power, machine tools, etc., is of concern.
Displacement of labour: Worker displacement resulted from the restructuring and modernization of industry as a result of the new industrial policy.
Absence of incentives for raising 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: While highlighting the negative effects of environmental harm, the New Industrial Strategy did not specify an appropriate industrial site policy that could guarantee a pollution-free development of the industrial climate.
Since 1991, India’s industrial policy have shifted from being mostly socialistic in 1956 to becoming capitalistic. India now has a far more liberalized industrial policy framework that emphasizes lowering rules and increasing international investment. According to the World Bank’s 2018 Doing Business Report, India is placed 77th. The Goods and Services Tax (GST) reforms and the Bankruptcy and Insolvency Act of 2017 are important changes that will eventually help the manufacturing industry. Made in India and Start up India campaigns have improved the business environment in the nation. Nonetheless, issues with electricity availability and cost, credit restrictions, high unit labor costs as a result of labor laws, political intervention, and other regulatory burdens continue to be obstacles to the industrial sector’s steady expansion in India. A new Industrial Policy is required to strengthen the nation’s manufacturing sector. The government decided in December 2018 that a new Industrial Policy that would serve as a roadmap for all domestic businesses was necessary.