Summary of India’s Industrial Policy

Meaning of Industrial Policy:

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:

1. Basic and strategic industries such as arms and ammunition, atomic energy, railways, etc., shall be the exclusive mo­nopoly of the State.

2. 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.

3. 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.

4. 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:

1. Schedule A consisting of 17 industries would be the exclusive responsibility of the State.

2. 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.

3. Schedule B, consisting of 12 industries, would be open to both the private and public sectors; however, such industries would be progressively State-owned.

4. 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.

Criticisms:

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:

1. 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.

2. The policy provides for automatic clear­ance for import of capital goods in cases where the foreign exchange availability is ensured through foreign equity.

3. 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.

5. The policy intends to scrap the asset limit of the MRTP companies.

6. 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.

7. 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.

8. 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.

Comments:

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.