Industrial Change Since 1956

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INDUSTRIAL CHANGE SINCE 1956

INDUSTRIAL CHANGE SINCE 1956 When India achieved independence in 1947, the national consensus was in favor of rapid industrialization, which was seen not only as the key to economic development but also to economic sovereignty. In the subsequent years, India's industrial policy evolved through successive industrial policy resolutions and industrial policy statements. Specific priorities for industrial development were also set forth in the successive Five-Year Plans.

Early Industrial Development

Building on the so-called Bombay Plan prepared by leading Indian industrialists in 1944–1945, the first Industrial Policy Resolution in 1948 laid down the broad contours of the strategy of industrial development. At that time the Constitution of India had not taken final shape, nor had the Planning Commission been constituted. Moreover, the necessary legal framework had not yet been put in place. Not surprisingly, therefore, the resolution was somewhat broad in its scope and direction. Yet, an important distinction was made between industries to be kept under the exclusive ownership of government (public sector) and those reserved for the private sector. Subsequently, the Constitution of India was adopted in January 1950, the Planning Commission was constituted in March 1950, and the Industrial (Department and Regulation) Act (IDR Act) was enacted in 1951, with the objective of empowering the government to take the necessary steps to regulate the pattern of industrial development through licensing. This paved the way for the Industrial Policy Resolution of 1956, which was the first comprehensive statement on the strategy for industrial development in India.

Industrial Policy Resolution of 1956

The Industrial Policy Resolution of 1956 was shaped by the Mahalanobis model of growth, which suggested that an emphasis on heavy industries would create long-term higher growth. The resolution widened the scope of the public sector. Its objective, following socialist theory, was to accelerate economic growth and boost the process of industrialization to achieve social benefits. Given the scarce capital and inadequate entrepreneurial base, the resolution accorded the state a predominant role in industrial development. All industries of basic and strategic importance and those in public utility services, as well as those requiring large-scale investment, were reserved for the public sector.

The Industrial Policy Resolution of 1956 classified industries into three categories. The first category comprised seventeen industries (included in Schedule A of the resolution) exclusively under the domain of the government, including, among others, railways, air transportation, arms and ammunition, iron and steel, and atomic energy. The second category comprised twelve industries (included in Schedule B of the resolution), which were envisaged to be progressively state owned, with the private sector supplementing the efforts of the state. The third category contained all the remaining industries, and it was expected that the private sector would initiate development of these industries, though they would remain open to the state as well. The government was to facilitate and encourage development of these industries in the private sector, in accordance with the programs formulated under the Five-Year Plans, by appropriate fiscal measures and by ensuring adequate infrastructure. Despite the demarcation of industries into separate categories, the resolution was flexible enough to allow adjustments and modifications in the national interest.

Another objective specified in the Industrial Policy Resolution of 1956 was the removal of regional disparities through the development of regions with a low industrial base. Accordingly, adequate infrastructure for industrial development of such regions was duly emphasized. Given the potential to provide large-scale employment, the resolution reiterated the government's determination to provide various forms of assistance to small and cottage industries for a wider dispersal of the industrial base and a more equitable distribution of income. The resolution, in fact, reflected the prevalent value system of India in the early 1950s, which was centered around self-sufficiency in industrial production. The Industrial Policy Resolution of 1956 was a landmark policy statement, and it formed the basis of subsequent policy announcements.

Industrial Policy Measures, 1964–1980

The Monopolies Inquiry Commission (MIC) was set up in 1964 to review various aspects pertaining to the concentration of economic power and the operation of industrial licensing under the IDR Act of 1951. While emphasizing that the planned economy contributed to the growth of industry, the report by the MIC concluded that the industrial licensing system enabled large business firms to obtain a disproportionately large share of licenses, which had led to preemption and foreclosure of capacity. Subsequently, the Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967, recommended that larger industrial firms be given licenses only for setting up industry in core and heavy investment sectors, thereby necessitating the reorientation of industrial licensing policy.

In 1969 the Monopolies and Restrictive Trade Practices (MRTP) Act was introduced to enable the government to effectively control the concentration of economic power. The Dutt Committee had defined large business firms as those with assets of more than 350 million rupees. The MRTP Act of 1969 defined large business firms as those with assets of 200 million rupees or more. Large industries were designated as MRTP companies and were eligible to participate in industries that were not reserved for the government or the small-scale sector.

The new Industrial Licensing Policy of 1970 classified industries into four categories. The first category, termed "Core Sector," consisted of basic, critical, and strategic industries. The second category, termed "Heavy Investment Sector," comprised projects involving an investment of more than 50 million rupees. The third category, the "Middle Sector," consisted of projects with investment in the range of 10 million to 50 million rupees. The fourth category, the "De-licensed Sector," in which investment was less than 10 million rupees, was exempted from licensing requirements. The Industrial Licensing Policy of 1970 confined the role of large business firms and foreign companies to the core, heavy, and export-oriented sectors.

The Industrial Policy Statement of 1973

With a view to prevent the excessive concentration of industrial activity in the large industrial firms, this statement gave preference to small and medium entrepreneurs over the large firms and foreign companies in the setting up of new industrial enterprises, particularly for the production of mass-consumption goods. New undertakings of up to 10 million rupees in terms of fixed assets were exempted from licensing requirements for the substantial expansion of assets. This exemption was not allowed to MRTP companies, foreign companies, and existing licensed or registered undertakings having fixed assets of 50 million rupees or more.

The Industrial Policy Statement of 1977

This statement emphasized the decentralization of the industrial sector, with an increased role for small-scale, "tiny," and cottage industries. It also provided for close interaction between industrial and agricultural sectors. The highest priority was accorded to power generation and transmission. It expanded the list of items reserved for exclusive production in the small-scale sector from 180 to more than 500. For the first time, within the small-scale sector, a "tiny" unit was defined as a unit with investment in machinery and equipment up to 0.1 million rupees and situated in towns or villages with a population of less than 50,000 (as per 1971 census). Basic goods, capital goods, and high technology industries important for the development of small-scale and agriculture sectors were clearly delineated for the large-scale sector. It was also stated that foreign companies that diluted their foreign equity up to 40 percent under the Foreign Exchange Regulation Act of 1973 were to be treated on par with Indian companies. The Policy Statement of 1977 also issued a list of industries in which no foreign collaboration of a financial or technical nature was allowed, as indigenous technology was already available. Fully owned foreign companies were allowed only in highly export-oriented sectors or sophisticated technology areas. For all approved foreign investments, companies were completely free to repatriate capital and remit profits, dividends, and royalties. Further, in order to ensure balanced regional development, it was decided not to issue new licenses for setting up new industrial units within certain limits of large metropolitan cities (population of more than 1 million) and urban areas (population of more than 0.5 million).

The Industrial Policy Statement of 1980

The Industrial Policy Statement of 1980 placed emphasis on the promotion of competition in the domestic market, technological upgrade, and the modernization of industries. Some of the socioeconomic objectives defined in the statement were: optimum utilization of installed capacity, higher productivity, higher employment levels, removal of regional disparities, strengthening of the agricultural base, promotion of export oriented industries, and consumer protection against high prices and poor quality.

Policy measures were announced to revive the efficiency of public sector units by developing the management cadres in functional fields such as operations, finance, marketing, and information systems. An automatic expansion of capacity up to 5 percent per annum was allowed, particularly in the core sector and in industries with long-term export potential. Special incentives were granted to industrial units that were engaged in industrial processes and technologies aiming at optimum utilization of energy and the exploitation of alternative sources of energy. In order to boost the development of small-scale industries, the investment limit was raised to 2 million rupees in small-scale units and 2.5 million rupees in ancillary units. In the case of "tiny" units, the investment limit was raised to 0.2 million rupees.

Industrial Policy Measures, 1985–1991

Policy measures initiated in the first three decades following independence facilitated the establishment of basic industries and the growth of a broad-based infrastructure in the country. The Seventh Five-Year Plan (1985–1900) recognized the need for consolidation of these strengths and the initiation of policy measures to prepare Indian industry to respond effectively to emerging challenges. A number of measures were initiated toward technological and managerial modernization to improve productivity and quality, and to reduce costs of production. The public sector was freed from a number of constraints and was provided with greater autonomy. There was some progress in the process of deregulation during the 1980s. In 1988 all industries, except twenty-six industries specified in the negative list, were exempted from licensing. The exemption was, however, subject to investment and locational limitations. The automotive industry, cement, cotton spinning, food processing, and polyester filament yarn industries witnessed modernization and expanded scales of production during the 1980s.

With a view to promote industrialization of the underdeveloped areas of the country, the government of India announced in June 1988 the Growth Centre Scheme, under which seventy-one growth centers were proposed to be created throughout the country. Growth centers were to be endowed with basic infrastructure facilities such as power, water, telecommunications, and banking to enable them to attract industries.

The Industrial Policy Statement of 1991

The Industrial Policy Statement of 1991 stated that "the Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and increased competitiveness for the benefit of common man." It further added that "the spread of industrialization to backward areas of the country will be actively promoted through appropriate incentives, institutions and infrastructure investments."

The objectives of the Industrial Policy Statement of 1991 were to maintain sustained growth in productivity, to enhance gainful employment and achieve optimal utilization of human resources, to attain international competitiveness, and to transform India into a major player in the global economy. Quite clearly, the focus of the policy was to unshackle the Indian industry from bureaucratic controls. This called for a number of far-reaching reforms.

A substantial modification of industrial licensing policy was deemed necessary, with a view to ease restraints on capacity creation and to respond to emerging domestic and global opportunities by improving productivity. Accordingly, the policy statement included the abolition of industrial licensing for most industries, barring a handful of industries for reasons of security and strategic concerns, or social and environmental issues. Compulsory licensing was required in only eighteen industries. These included coal and lignite, distillation and brewing of alcoholic drinks, cigars and cigarettes, drugs and pharmaceuticals, household appliances, and hazardous chemicals. The small-scale sector continued to be reserved. Norms for setting up industries (except for industries subject to compulsory licensing) in cities with a population of more than 1 million were further liberalized.

Recognizing the complementarily of domestic and foreign investment, foreign direct investment (FDI) was accorded a significant role in policy announcements of 1991. FDI up to 51 percent foreign equity in high priority industries that required large investments and advanced technology was permitted. Foreign equity up to 51 percent was also allowed in trading companies primarily engaged in export activities. These important initiatives were expected to provide a boost to investment as well as enabling access to the high technology and marketing expertise of foreign companies. To spur the growth of technology in Indian industry, the government provided automatic approval for technological agreements related to high-priority industries and eased procedures for the hiring of foreign technical expertise.

Major initiatives toward the restructuring of public sector units (PSUs) were initiated, to remedy their low productivity, overstaffing, lack of advanced technology, and low rate of return. In order to raise resources and ensure wider public participation in PSUs, it was decided to offer its shareholding stake to mutual funds, financial institutions, the general public, and employees. Similarly, in order to revive and rehabilitate chronically "sick" PSUs, it was decided to refer them to the Board for Industrial and Financial Reconstruction. The policy also called for greater managerial autonomy for the boards of PSUs.

The Industrial Policy Statement of 1991 recognized that the government's intervention in investment decisions of large companies through the MRTP Act had proved deleterious for industrial growth. Accordingly, preentry scrutiny of investment decisions of MRTP companies was abolished. The thrust of policy was more on controlling unfair and restrictive trade practices. The provisions restricting mergers, amalgamations, and takeovers were also repealed.

Industrial Policy Measures since 1991

Since 1991, industrial policy measures and procedural simplifications have been reviewed on an ongoing basis. Currently, there are only six industries that require compulsory licensing. Similarly, there are only three industries reserved for the public sector.

The promotion of FDI has been an integral part of India's economic policy since 1991. The government has ensured a liberal and transparent foreign investment regime in which most activities are opened to foreign investment, without any limit on the extent of foreign ownership. FDI up to 100 percent has also been allowed for most manufacturing activities in special economic zones. More recently, in 2004, the FDI limits were raised in the private banking sector (up to 74 percent), oil exploration (up to 100 percent), petroleum product marketing (up to 100 percent), petroleum product pipelines (up to 100 percent), natural gas and liquified natural gas pipelines (up to 100 percent) and the printing of scientific and technical magazines, periodicals, and journals (up to 100 percent). In February 2005 the FDI ceiling in the telecommunications sector in certain services was increased from 49 percent to 74 percent.

The reservation of items of manufacture exclusively in the small-scale sector has been an important tenet of industrial policy. Realizing the increased import competition with the removal of quantitative restrictions since April 2001, the government has adopted a policy of dereservation and has gradually pruned the list of items reserved for the small-scale industry sector from 821 items as in March 1999 to 506 items in April 2005. Further, the national budget of 2005–2006 has proposed to de-reserve 108 additional items that were identified by Ministry of Small Scale Industries. The investment limit in plant and machinery of small-scale units has been raised by the government from time to time. To enable some of the small-scale units to achieve required economies of scale, a differential investment limit has been adopted for them since October 2001. As of early 2005, there were 41 reserved items that were allowed an investment limit up to 50 million rupees instead of the limit of 10 million rupees applicable to other small-scale units.

Equity participation up to 24 percent of the total shareholding in small scale units by other industrial undertakings has been allowed. The objective here has been to enable the small sector to access the capital market and to encourage modernization, technological advance, ancillarization, and subcontracting.

In an effort to mitigate regional imbalances, the government announced a new North-East Industrial Policy in December 1997 for promoting industrialization in the Northeastern region. This policy, applicable to the states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura, has provided various concessions to industrial units in the region, including the development of industrial infrastructure, subsidies under various schemes, and excise and income-tax exemption for a period of ten years. The North Eastern Development Finance Corporation has been designated as the primary disbursing agency under the program.

The focus of the disinvestment process of public sector units has shifted from the sale of minority stakes to strategic sales. Up to December 2004, PSUs had been divested to an extent of 478 billion rupees. Apart from general policy measures, some industry-specific measures have also been initiated. For instance, the Electricity Act of 2003 was designed to de-license power generation and to permit captive power plants. It was also intended to facilitate private-sector participation in the transmission sector and to provide open access to the grid sector. Various policy measures have facilitated an increase in private-sector participation in key infrastructure sectors such as telecommunication, roads, and ports. Foreign equity participation up to 100 percent has been allowed in the construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private-sector financing by large firms in the highway sector.

Evolution and Change

In the evolution of India's industrial policy, governmental intervention has been extensive. Unlike many East Asian countries, which used state intervention to build strong private sector industries, India opted for state control over key industries in its initial phase of development. In order to promote these industries, the government not only levied high tariffs and imposed import restrictions, but also subsidized the nationalized firms, directed investment funds to them, and controlled land use and many prices.

There has long been a consensus in India on the role of the government in providing infrastructure and maintaining stable macroeconomic policies. However, the path to be pursued toward industrial development has evolved over time. The form of government intervention in development strategy must be chosen from two alternatives: "outward-looking development policies" encourage not only free trade but also the free movement of capital, workers, and enterprises; "inward-looking development policies" stress the need for internal development. India initially adopted the latter strategy.

The advocates of import substitution in India believed that imports should be replaced with domestic production of both consumer goods and sophisticated manufactured items, while ensuring the imposition of high tariffs and quotas on imports. These advocates cited the benefits, in the long run, of greater domestic industrial diversification and the ultimate ability to export previously protected manufactured goods, as economies of scale, low labor costs, and the positive externalities of learning by doing would cause domestic prices to become more competitive than world prices. However, the pursuit of such a policy forced Indian industry to have low and inferior technology. It did not expose the industry to the rigors of competition and therefore resulted in low efficiency. Inferior technology and inefficient production practices, coupled with a focus on traditional sectors, choked further expansion of Indian industry and thereby limited its ability to improve employment opportunities. Considering these inadequacies, the reforms since 1991 have aimed at infusing state-of-the-art technology, increasing domestic and external competition, and diversifying the industrial base so that it can expand and create additional employment opportunities.

In retrospect, the Industrial Policy Resolutions of 1948 and 1956 reflected the desire of the Indian state to achieve self sufficiency in industrial production. Huge investments by the state in heavy industries were designed to put Indian industry on a higher long-term growth trajectory. With the limited availability of foreign exchange, the effort of the government was to encourage domestic production. This basic strategy guided industrialization until the mid-1980s. Until the onset of the reform process in 1991, industrial licensing played a crucial role in channeling investments and controlling entry and expansion of capacity in the Indian industrial sector. Industrialization thus occurred in a protected environment, which led to various distortions. Tariffs and quantitative controls largely kept foreign competition out of the domestic market, and most Indian manufacturers looked on exports only as a residual possibility. Little attention was paid to ensuring product quality, undertaking research and development for technological advancement, or achieving economies of scale. The industrial policy announced in 1991, however, substantially dispensed with industrial licensing and facilitated foreign investment and technology transfers, opening tareas hitherto reserved for the public sector. The policy focus in recent years has been on the deregulation of Indian industry, enabling industrial restructuring, and allowing industry the freedom and flexibility to respond to market forces and provide a business environment that facilitates and fosters overall industrial growth. The future growth of Indian industry, as widely believed, is crucially dependent upon improving the overall productivity of the manufacturing sector, rationalization of the duty structure, technological advancement, the search for export markets through promotional efforts and trade agreements, and the creation of an enabling legal environment.

Narendra Jadhav