Indias Industrial Policy And Performance Since Independence

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India's Industrial Policy and Performance since Independence Article · October 2016

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India’s Industrial Policy and Performance since Independence Vineet Singh Senior Student Tata Institute of Social Sciences, Tuljapur (Maharashtra), India

Background: Industrial Sector in India India before colonial rule was a self-sustained economy, primarily based on primary sector. It was a major trading hub of many articles like – cotton and silk products, artistic ware, mineral products, silk and woolen clothes, etc. India was not an only trading center for south Asian countries, but it was also one of the crucial golden markets in that contemporary decades, accounting for a major portion of the total global trade. According to a British economist, Angus Maddison, India’s share of the world income was 27% in 1700 while Europe’s share was 23% only comparatively. Indian handicrafts and artifacts also had valued reputation in the global market owing to its quality and traditional bases. Since the era of colonial rule, Indian industrial sector went into the stagnant stage. There was a continuous decline in per capita income of India. In 1757, when East India Company holistically acquired the rights over trade and administration of Bengal region, a sharp decline in average income of the country could be seen. The average income declination of the country under their reign (1757-1857) was 17%. After the Sepoy Mutiny of 1857 (First war of independence), British government directly started governing India. Because of investments in physical and human capital, there was an increase of 10% in per capita income. But, considering all facts in mind, during this colonial era, the average income of India had decreased by 8% in approximately two centuries (1757-1947). Clearly, this period was a remarkable stagnation period in the economic growth of the country. Thus, whether the reason for stagnation in the industrial development of India was exploitative policies of the British government? To look deep into these reasons, the crucial points of the policies implemented by British government have to be analyzed. The important points of industrial development during these periods are mentioned below – 

The declination in traditional handicrafts constructed the path for the transformation of Indian economy.

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The system of the joint-stock enterprise was introduced but the growth was slow.

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Some light and consumer goods industries were developed and no attention was put toward the establishment of machine-manufacturing, heavy engineering, and heavy chemical industries.

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The lack of proper planning facilitated the development of only some potential industrial areas while other localities having the same or more potential were not developed. It led to unbalanced regional growth.

British colonialism can be looked as a responsible factor in the underdevelopment of India. It led to the transfer of resources from India to Britain, which negatively impacted industrial development in India, also negatively impacted the emergence of a capitalist class and which further led to poverty. The era of 1757-1813 which can be termed as Mercantilist Exploitation Era showed the exploitative trade practices followed by East India Company which had the monopoly over trading in India, the major points of exploitation are mentioned under – 

High cash rents



Low prices for Indian agricultural commodities

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Trade restrictions in many sectors

After the introduction of Charter on free trade in 1813, other European business firms entered into the Indian market, more restrictions were put on Indian manufacturers and traders and forced production of indigo, raw silk, and opium was introduced. British impact on economic and social development was, therefore, limited. Total output and population increased substantially but the gain in per capita output was small or negligible (Maddison, 1971). These all illustrations clearly depict the reason for stagnation in the industrial and economic development of India during colonial rule of Britain in India.

Industrial Landscape on eve of Independence The sole objective of British colonial rule in India was to exploit the available resources for fulfilling the rising demand for raw materials in the wake of Industrial revolution in Britain. The British government did not ever focus on the development of either agriculture sector or industrial sector to boost up the economy of India, they always exploited in a severe way

possible to increase the income of their native land. There may be arguments that they developed railway system and quite successful irrigational canal system which are landmarks in the development of India, but we have to understand that they did it only for the convenience of better exploitation of Indian resources. The imperative characteristics of the industrial scenario on the eve of independence have been illustrated in below mentioned points – 

The industrial scenario was depicting lopsided industrial development. The industries were mostly concentrated in consumer goods over producer goods sector.



The ratio of consumer goods to producing goods was 62:38 in 1953 (Kapila, 2011).



The

industrial

sector

possessed

very weak

infrastructures

and

was

highly

underdeveloped. 

The ownership of existing industries was concentrated to a minimal population.



The human resources possessing technical and managerial skills were scarce.



There was a lack of intervention from the side of government.

Because of various structural and economic inadequacies on the eve of independence, the policy makers took the charge and considered industrialization as a tool to fasten and sustain the economy of the country. The industrial development of the country can be looked at the different policies framed by contemporary policy makers, those are – 

Statement of Industrial Policy, 1945 This policy issued in April 1945, was an important economic policy document. It ensured the greater role of the state in the process of industrialization by bringing control of more than 20 industries under it for purpose of common policy and goal.



Industrial Policy Resolution (IPR), 1948 It was presented in the parliament by then Industry Minister Shyama Prasad Mukherjee. The sole element of this resolution was that it introduced India into a system of Mixed Economy.

This policy categorized industry into four folds – Strategic Industries (Public Sector), Basic/Key Industries (Public-cum-Private Sector), Important Industries (Controlled Private Sector), and Other Industries (Private and Cooperative Sector). This policy recognized some industries to be reserved for the production by the public sector as – arms and ammunition, production and control of atomic energy, and ownership and management of railway. 

Industries Development and Regulation Act, 1951 This act was passed to implement the IPR of 1948. This act ensured and powered the government to direct, regulate and control industrial investment, location, expansion, management, growth, etc. This act empowered the government to –





Make rules for registration of existing industries



License all new undertakings

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Make rules for regulating production and development of industries



Consult state governments on these related matters



Constitute Central Advisory Council and Development Councils.

First and Second Five Year Plans The first five-year plan was based on Harrod-Damor model and aimed to acquire the growth rate of 2.1% (Actual growth – 3.6%). The government allocated Rs. 2069 crore as planned budget, and distributed among seven different broad sectors for its developments. The industrial sector was allotted 8.4% of the total planned budget. The second five-year plan was based on Mahalanobis Model, it is an economic development model developed by statistician Prasanta Chandra Mahalanobis in 1953. Many hydroelectric power projects and steel plants were installed in the country under this plan to enhance the industrial growth. Under this plan, the aim was to achieve the growth rate of 4.5% (Actual growth – 4.27%). These five-year plans stated that the objective of industrial planning was to make good the deficiencies in production of key industrial items and to initiate development which would enable the cumulative expansion of such basic production (Kapila, 2011).

Indian Industrial Licensing System and its Effects Once in his newspaper, C. Rajagopalachari wrote, “I want the corruptions of the Permit/License Raj to go. [...] I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party, and gradually restored back to the standards of fearless honesty which they once maintained. [...] I want real equal opportunities for all and no private monopolies created by the Permit/License Raj’. Before the recently introduced trade and industrial policy reforms, it was not an easy task to set up an industrial enterprise in the country. The central government possessed a tough control over giving the licenses to industrial units to start their productions and operations in the country. It was estimated that about 80 government agencies permit would have been required to start a private enterprise/industry in that time. This license system was the result of the decision of policy makers to have a sustainable economic growth of the country with ensuring tight control of the state in all aspects of the economy, in which licenses were provided to very few satisfying all pre-requisites set by the government earlier. This system of Licensing proved itself ineffective and inefficient in promising the industrial development of the country. This system emerged as a resistance in economic development as it led to spread the feeling of disinterest among entrepreneurs and investors.

Industrial Sector Performance Since 1980 The growth rate of the 1980s depicted a good picture of industrial growth in the country after 30 years of policy experiments. It has been better explained by Chandrasekhar (2003) as, the stable growth rates of the 1980s suggest that the factors that accounted for growth during that decade were operative right through those years. The performance of industrial sector since 1980 can be assessed through segmenting it into two broad timelines –

1. Limited Liberalization Period (1980-81 to 1991-92) 2. Post-Reform Period (1991-92 onwards) This division has been done into two time periods to better understand the performance of the industrial sector, on the basis of major industrial policy changes in these time-periods. The year of 1991 is well known for New Economic Policy introduced by state by taking stabilization measures and pertaining structural reforms to boost up and enhancing the growth of the economy. This process is better known through the term of Liberalization, Privatization, and Globalization. It advocated for free market economy. To understand the trends of growth in different periods of various sectors, the growth trends of sectors like – Total industrial sector, Manufacturing sector, Mining and quarrying sector, and Electricity, gas and water supply sector have been studied. The trends since independence to limited liberalization period and to post-reform period have been well illustrated below through graphical depictions in form of Compound Annual Growth Rate (CAGR).

Figure: Comparative Compound Annual Growth Rate of different sectors in different periods (%) Source: L. G. Burange (2011)

In limited liberalization period, the growth rate of industrial sector was quite sound. The industrial sector accounted for 5.75% of growth rate averagely in this period, whereas if we talk about the growth of manufacturing sector in this period it grew at the rate of 5%. According to L. G. Burange (2011), the reason for sound growth rate in this period were the fiscal stimulus provided by a rising fiscal deficit to GDP ratio in a still protected market and the greater access to international liquidity which allowed firms to modernize capacity and introduce some new product innovations based on imported capital goods, intermediates, and components. Joshi and Little (1994) attribute the high growth during this period to the fiscal expansion financed by external and internal borrowing. This view is also supported by Ahluwalia (2002) who states that the build-up of external debt culminated in the crisis of 1991. However, according to Nagaraj (1990), the improved rate of growth in the manufacturing sector in the eighties was possibly due to a spurt in the production of consumer durables secured largely by import liberalization giving rise to the term ‘import-led growth’.

In post-reform period, the new economic policy was introduced to accelerate the industrial growth in the country. It started in the year 1991-92 followed by Balance of Payment crisis. The aim to enhance the industrial growth was set by removing different related constraints. Chandrasekhar (2003) pointed out three principal supply-side mechanisms to boost up Indian industrial sector, these are – 

Breaking up of controls was expected to increase domestic competition



Trigger a process of industrial restructuring that would involve closure of uneconomic units of production



Improve capacity utilization and increase efficiency.

The LPG system attracted the investments from around the globe and diminished the role of the state in the industrial sector. Including these and all other reasons boosted the economy.

Sector Wise Industrial Performances To figure out the annual growth rate of the major industrial sectors, the period from 1951-52 to 2008-09 has been taken. However, the focus is being concentrated to limited liberalization period and post-reform period, thus from 1980-81 to 2008-09. The major industrial sectors included in this segment are – 

Total industrial sector



Manufacturing sector



Mining and quarrying sector



Electricity, gas and water supply sector.

1. Growth Trends in Industrial Sector

Figure: Trends of growth in industrial output (%) Source: L. G. Burange (2011)

The important points that can be drawn out of depicted graph of growth trends of industrial sector right from independence years (1951-52) to recent period (2008-09) are – 

Industrial sector experienced major growth after country’s independence.



There was a continuous increase in industrial growth rate from 1951-52 to till the year 1961-62.



After 1963-64 industrial output rate started falling and remained stagnant for next 12 years approximately.



In 1974-75, the growth rate slightly increased and remained visible till 1985-89, and after that stagnation in the growth started and remained at lower levels till 2000-01.

The average annual industrial growth rate for the whole period can be calculated as 5.81%. This whole industrial development period underwent two major booms – first, during initial years of

independence of the country (1951-52), and second, in 1974-75 during starting phase of limited liberalization period.

2. Growth Trends in Manufacturing Sector

Figure: Trends of growth in manufacturing output (%) Source: L. G. Burange (2011)

The manufacturing sector is one of the important sub-sectors in the industrial sector, contributing majorly in total industrial output. Therefore, the growth trend of manufacturing output could look similar to that of the total industrial output growth trend. The critical measures that can be drawn out of the graph of manufacturing sector showing the growth trend since initial years of independence (1951-52) to recent years (2008-09) are mentioned below –



The growth trend of manufacturing output has same determinant factors as the total industrial sector has.



Manufacturing sector showed a large growth in years just after independence.



The growth from initial years of independence was continuous till 1964-65 when it stagnated till 1971-72.



In initial years of limited liberalization period, it acquired momentum and showed positive growth till 1995-96.



Again, stagnancy at lower levels stroked and continued till 2000-01and after it, again a positive trend in growth could be seen.

3. Growth Trends in Mining and Quarrying Sector

Figure: Trends of growth in mining and quarrying output (%) Source: L. G. Burange (2011)

The graph of mining and quarrying output shows different trends in growth than before discussed growth trends of industrial and manufacturing sectors. It shows an average growth rate of 5.41 percent throughout. Since independence, the stagnation in the growth rate can be seen, and it decreased continuously since 1962-63 to the year 1970-71. But, a frequent growth from 1970-71 in initial years of limited liberalization period can be seen, which continuously went on increasing till 1988-89. But, from the post-reform period (1990-91), the stagnation stroked and the graph of growth started falling down. It signifies its poor performance after a post-reform period.

4. Growth Trends in Electricity, Gas and Water Supply Sector

Figure: Trends of growth in electricity, gas and water supply sector Source: L. G. Burange (2011)

The important illustrations that could be sketched out of this graph are –



The electricity, gas and water supply sector saw immense growth after independence owing to large investments from the side of government.



Soon, a slowdown in the growth started in the late 1960s. The slowdown remained active till 1983-84.



From 1984-85 and onwards, it recovered and dipped down again in the late 1990s.

The average sectoral growth for the whole period has been calculated to 8.23%. After Liberalization, Privatization, and Globalization (LPG) era, the growth of this sector affected very negatively. These all explains in a better way about the current situation of the country in the power sector.

Summary It is found that when the policy of India’s industries is reviewed there have three regimes which were followed after independence. These are the planned and controlled period till the end of the 1970s, the liberalization period of 1980s and the post-reform period of 1990.It is clearly seen that there was substantial growth in the industrial sector during the 1980s but however the growth was stagnant in the 1990s.The mining and quarrying, as well as electricity, gas and water supply sectors of the industry, were decelerated in the post-reform period. The growth of industrial output has improved if we compared the last two decades with the previous period of ‘relative stagnation’. During the mid-1980s there was the approach of relaxation and de-licensing to foster the industrial technology. The growth of industrial output also improved as the restrictions on the import was moved from quotas to tariffs. India achieved the growth rate of 6.8 percent per year during the 1980-2000 and this led to liberalization, public sector improvement and investment. But in the 1990s compared with the previous decade a little change has been shown in the growth rate of industrial output, moreover, in the mid-1990s there were clear signs of a slowdown in growth for seven years now. The trade policy reforms and industry were accelerated in 1990 due to orthodox initiatives since1991 .Industrial markets produced a quality product, become more competitive and improvement in varieties. The cheapening of machinery and construction become more

productive due to fixed investment. The share of construction sector doubled in the total workforce because of improvement in the supply of cement and steel which led to increasing in industrial sector share of the total workforce. The industrial sector share in GDP in 1990 remained the same in India where industrial sector share of America in GDP declined. The share of India in manufacturing sector in 1980 was 13.8%, in 1990 16.6% and in 2000 17.2%.The share of manufacturing sector in workforce remained constant around 12%. The growth rate of capital goods has not declined during 1992-1998 from that in 1981-1991.The share of capital goods was constant during the mid-1980s but in 1990 the share was increased by 1% showing the negative effect of reforms. The question arises that there was no acceleration in industrial and export growth in the 1990s,unregistered manufacturing suffered in the 1990s and the growth rates of the output for total and registered manufacturing were lower in the 1990s.The reason for this question which led to industrial deceleration was ‘stalled’ reforms. There needs a removal of bottlenecks and to operationalize the reforms which can lead to sustainable growth. In1991,when there were huge gains in the economy because of foreign direct investment, trade barriers the economy started to boom 7 to 8%.There were cyclical fluctuations in the 1980s but then also employment has not shown up to the mark even the economy was growing. Therefore, it may be concluded that there is the growth of small scale industries and industrial sector, but the rate is below expectations, especially after liberalization. According to Panagariya (2001),if India grows at the rate of 6% per annum in a sustainable manner, it will take 14 years to reach the current level of per capita income of China,36 years to reach Thailand’s and 104 years to reach that of the United states. Thus, there is a need for accelerated growth.

References Kapila, Uma (2010-11): Indian Economy (Tenth Edition), Academic Foundation, New Delhi

Kapila, Uma (2010-11): Indian Economy since Independence (Twenty First Edition), Academic Foundation, Delhi Burange, L. G., and Yamini, Shruti (2011): A Review of India’s Industrial Policy and Performance, Department of Economics, University of Mumbai

Nagaraj, R (2003): Industrial Policy and Performance since 1980: Which Way Now?, Economic and Political Weekly, Vol. 38, No. 35 (Aug. 30 – Sep. 5, 2003), pp. 3707 3715

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