New Industrial Policy | Economics Optional Notes for UPSC PDF Download

Introduction

Government intervention aimed at shaping the ownership, structure, and performance of the industry. This intervention may take the form of providing subsidies, financial support, or implementing regulations. It encompasses various aspects such as procedures, principles reflecting the economic philosophy, policies, rules and regulations, incentives and penalties, tariff policy, labor policy, and the government's stance on foreign capital.

Industrial Policies in India since Independence

Industrial Policy Resolution of 1948 outlined the overarching framework of the policy, defining the State's dual role as both an entrepreneur and an authority in industrial development. It explicitly established India's adoption of a Mixed Economic Model and categorized industries into four main sectors:

• Strategic Industries (Public Sector): This category, under the exclusive control of the Central Government, comprised three industries: Arms and ammunition, Atomic energy, and Rail transport, establishing a government monopoly.
• Basic/Key Industries (Public-cum-Private Sector): Six industries, including coal, iron & steel, aircraft manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and mineral oil, were designated as "Key Industries" or "Basic Industries." The Central Government was responsible for establishing these industries, while existing private sector enterprises were permitted to continue.
• Important Industries (Controlled Private Sector): Eighteen industries, such as heavy chemicals, sugar, cotton textile & woollen industry, cement, paper, salt, machine tools, fertiliser, rubber, air and sea transport, motor, tractor, electricity, etc., remained under private sector control. However, the central government, in consultation with the state government, maintained general control over them.
• Other Industries (Private and Cooperative Sector): All industries not falling into the above three categories were left open for the private sector.

To implement the Industrial Policy Resolution of 1948, the Industries (Development and Regulation) Act was enacted in 1951.

• The Industrial Policy Statement of 1956 marked a revision of the 1948 policy and was considered the "Economic Constitution of India" or "The Bible of State Capitalism." It emphasized the expansion of the public sector, growth of the cooperative sector, separation of ownership and management in private industries, and prevention of private monopolies.

The 1956 policy categorized industries into three schedules:

• Schedule A: Consisting of 17 industries, it was the exclusive responsibility of the State, with Central Government monopolies in certain industries.
• Schedule B: Comprising 12 industries, it was open to both private and public sectors, progressively becoming state-owned.
• Schedule C: Encompassing all other industries, it was left open to the private sector, but the State retained the right to undertake any industrial production.

The 1956 resolution emphasized the significance of cottage and small-scale industries for expanding employment opportunities and decentralizing economic power. It also called for efforts to maintain industrial peace and ensure a fair share of production proceeds for the working masses, aligning with the principles of democratic socialism. Despite these objectives, the Industrial Policy Resolution of 1956 faced criticism from the private sector, primarily due to the significant reduction in its expansion scope and the implementation of a licensing system under state control.

Licenses for Industrial Operations

• Securing a government license was mandatory for initiating a new industry or expanding production.
• To encourage the establishment of new industries in economically underdeveloped regions, the government facilitated the process through simplified licensing procedures and the provision of subsidies for essential inputs such as electricity and water. This initiative aimed to address the prevailing regional imbalances within the country.
• Approval for increasing production was granted solely based on the government's assessment that a higher demand for the goods was warranted in the economy.

Industrial Policy Statement, 1977: In December 1977, the Janata Government unveiled its New Industrial Policy through a parliamentary statement. The primary focus of this policy was the effective promotion of cottage and small industries distributed widely in rural areas and small towns. The small sector was categorized into three groups—cottage and household sector, tiny sector, and small-scale industries.

• The 1977 Industrial Policy delineated specific domains for the large-scale industrial sector, including Basic industries, Capital goods industries, High technology industries, and Other industries outside the list of reserved items for the small-scale sector. It aimed to curtail the influence of large business houses, preventing any unit within the same business group from attaining a dominant and monopolistic position in the market.
• Emphasizing the reduction of labor unrest, the policy encouraged worker participation in management from the shop floor level to the board level. However, it faced criticism for not implementing effective measures to counter the dominant position of large-scale units and lacking a comprehensive plan for socio-economic transformation to diminish the role of major business houses and multinationals.
• Industrial Policy of 1980 aimed to promote the concept of economic federation, enhance the efficiency of the public sector, and reverse the trend of industrial production observed in the previous three years. It reaffirmed commitment to the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).

New Industrial Policy During Economic Reforms of 1991: The eagerly awaited liberalized industrial policy was declared by the Government of India in 1991 amid significant economic instability. The policy's objective was to boost efficiency and expedite economic growth.

Limitations of Industrial Policies in India

• Manufacturing Sector Stagnation: Despite industrial policies, the contribution of the manufacturing sector to GDP has remained stagnant at around 16% since 1991.
• Distortions in Industrial Pattern: Selective investments following liberalization have resulted in distortions in the industrial pattern. While certain industries attract substantial investments, there is concern over the slow pace of investment in vital sectors such as engineering, power, and machine tools.
• Labor Displacement: The restructuring and modernization of industries following the new industrial policy have led to the displacement of labor.
• Lack of Incentives for Efficiency: The focus on internal liberalization without adequate emphasis on trade policy reforms has resulted in 'consumption-led growth' rather than 'investment' or 'export-led growth.'
• Vaguely Defined Industrial Location Policy: While the new industrial policy acknowledged the detrimental effects of environmental damage, it failed to define a proper industrial location policy to ensure pollution-free industrial development.

Way Forward

• Shift in Industrial Policy: Industrial policies in India have transitioned from a predominantly socialistic pattern in 1956 to a more capitalistic approach since 1991.
• Liberalized Industrial Policy Regime: The current industrial policy in India is more liberalized, emphasizing increased foreign investment and reduced regulations.
• Improvements in Doing Business: India's ranking of 77th on the World Bank's Doing Business Report 2018 reflects positive reforms. Measures such as the Bankruptcy and Insolvency Act (2017) and Goods and Services Tax (GST) are expected to yield long-term benefits for the industrial sector.
• Government Initiatives: Campaigns like Make in India and Start-Up India have contributed to enhancing the business ecosystem in the country.
• Ongoing Challenges: Challenges such as electricity shortages, high prices, credit constraints, labor regulations leading to high unit labor costs, political interference, and regulatory burdens persist and hinder firm growth in the industrial sector.
• Need for a New Industrial Policy: Considering the challenges, there is a pressing need for a new industrial policy to boost the manufacturing sector in the country. The government recognized this need in December 2018 and expressed the intention to introduce a new industrial policy as a roadmap for all business enterprises in the country.