Changes in Industrial Policy and its effect on growth.
Introduction
Policies are framed to achieve an end. Indian industrial polices framed to obtain faster economic growth through rapid industrialization and making economy self reliant as an end. Industrial sector of the country was in doldrums at the time of independence as it was not promoted but neglected during the two centuries of British Raj. Their exploitative policies framed to serve the interests of their motherland were the major cause of lack of industrialization in India. India was the supplier of raw material and consumer of the British goods. The desire of Indians to industrialize can be viewed from the perspective of the formation of Bombay Plan which was the first effort by prominent industrialists of the country to shape the industrial policy of the country through emphasis on heavy industries.
The beginning
Building on the Bombay plan, first concrete step towards industrialization was taken in for of Industrial policy Resolution 1948. It laid broad contours for the strategy of industrialization. The basic thrust was to lay the foundation of Mixed Economy whereby both the public as well as private sector would plan an important role in Industrial development. But in order to ensure the development according to the plan and PanditNehrus inclination towards Fabian Socialism government imposed heavy regulations on private sector in the form of licensing. Hence giving a larger role to public sector. Industrial(Development and Regulation) Act 1951 provided necessary teeth to the government to impose such restrictions. This paved the way for Industrial Policy Resolution 1956 which introduced the Patent licensing and in true terms was the first comprehensive statement on the strategy for industrial development in India.
Industrial Policy Resolution 1956 was shaped by Mahalanobis model of growth which emphasized on role of heavy industries for long term higher growth path. The resolutions widened the scope of public sector with the basic objective of accelerating economic growth and boost the process of industrialization. Policy also aimed at decreasing regional disparities through development of low industrial base and by giving impetus to small scale industries and cottage industries as they had a huge potential to provide mass employment. The policy stuck in line with the prevalent beliefs of the times i.e attaining self sufficiency. But the policy faced many implementation failures and as a result achieved exactly reverse of what it intended i.e regional disparities and concentration of economic power. Hence Monopolies Inquiry commission(MIC) was setup in 1964 to review various aspects pertaining to concentration of economic power and operation of industrial licensing under Industrial (Development and Regulation) Act 1951. The report while emphasizing that planned economy contributed to growth of industry blamed the licensing system which enabled the big business houses to obtain disproportionately large share of licenses which had led to pre-emptive and foreclosure of capacity. Subsequently, Dutt committee or Industrial licensing inquiry committee 1956 advised that big industrial houses must be given licenses only for setting up industries in core and heavy investment sectors.
Further in order to control the concentration of economic power Monopolistic and restrictive Trade Practices Act (MRTP) was introduced. Large industries were designated as MRTP companies and were eligible to participate in industries that were not reserved for government or small scale industries. Industrial licensing policy as well as Industrial policy 1973 both emphasized on the need for controlling the concentration of wealth and gave importance to small and medium scale industries. Continuing the favoritism to small scale industries the Industrial policy 1977 went a step ahead by introducing District industrial centers to provide support to SSI. It also introduces the new category called TINY SECTOR and considerably expanded the reserve list of small scale industries. But due to exogenic shocks (wars) as well as internal disturbances (emergency) and implementation problems the policy failed to have a significant effect. The soaring economic situation led to formulation of Industrial Policy1980 which sowed the seeds of liberalization.
The Industrial Policy1980 laid emphasis on promotion of competition in the domestic market, technical up gradation and modernization of industries along with the focus on optimum utilization of installed capacity for ensuring higher productivity, higher employment levels, removal of regional disparities etc. Policy measures were announced to revive the efficiency of PSU’s along with provisions of automatic expansion. The PSU’s were freed from a number of restrictions and was provided with greater autonomy. Major steps were taken by deregulating all industries except fot those specified in the negative list. The ‘limited liberalization’ initiated in 1980’s reached its summit with a landmark policy change in 1991.
Industrial policy 1991 slated a paradigm shift in the evaluation of industrial policy and development. Increase in Fiscal deficit and monetized deficit along with the global financial crises (Gulf war, oil crises0 played a major hand in beginning of the new chapter in the history of industrial policy and economic growth. The objective of the policy ‘was to maintain sustained growth in productivity, enhance gainful employment and achieve optimal utilization of human resources , to attain international competitiveness and transform India into a major player in global arena’. Clearly focus of the policy was to unshackle the industry from bureaucratic control. Important reforms brought about by the policy were:-
• Abolition of industrial licensing for most industries barring few which were important because of strategic and security concerns and social environmental issues.
• Significant role accorded to FDI. 51% FDI allowed in heavy industries and technologically important industries.
• Automatic approval to technological agreements for promotion of technology and hiring foreign technology expertise.
• Restructuring of PSU’s to increase productivity, prevent over staffing, technology up gradation and to increase rate of return.
• Disinvestment of PSU’s to increase resources and increase private participation.
• The policy realized that governmental intervention in investment decision of large companies through MRTP act has proved to be deterring for industrial growth. Hence thrust of the policy was more on controlling unfair and restrictive trade practices. Provisions restricting mergers, amalgamations and takeovers were replaced.
Since then the LPG reforms initiated in 1991 has been considerably expanded. Some of the measures are mentioned below.
• Competition commission of India was established in 2003 so as to prevent practices having adverse impact on competition in markets.
• A new North East Industrial Policy was introduced in 1997 for mitigating regional imbalances due to economic growth.
• Focus on disinvestment of PSU’s shifted from sale of minority stake to strategic stakes.
• Focus on PP with government playing a facilitative role rather than regulatory role.
• FDI limits increased in almost all the sectors including defense and telecommunications.
• Add all the new things that will happen till exam, :D
Conclusion
It is evident from the evolution of industrial policy that the governmental role in development has been extensive. The path to be pursued towards industrial development has evolved over time. In initial stages the government adopted an inward looking development policy which forced the Indian industry to have low and inferior technology and suffocated the growth of private sector. It prevented the domestic industries from rigorous competition and therefore resulted in low efficiency and limited its ability to expand employment opportunities. The focus on self reliance and lack of investment in R&D acted as barriers to technological development and hence led to the production of inferior quality of goods. The belief that foreign goods are superior to Indian goods is still prevalent today.
Having said that, the condition of the country after two centuries of exploitation and a traumatic separation must be kept in mind before evaluating the progress and approach of the successive industrial policy. Lack of entrepreneurial skills, low literacy levels, unskilled labour, absence of technology etc were significant features of Indian economy pre independence. In light of this, the plans and policies played an important role by cementing a solid base for the present industrial policies. As DrManmohan Singh puts it ‘on a long term view of Indian economic development over the last four decades, was far from being disastrous. The mediocrity of the outcome was mostly due to the extraordinary and far reaching economic shocks sustained by the economy during the decade of 1965-75’.
Inderjit Singh
Introduction
Policies are framed to achieve an end. Indian industrial polices framed to obtain faster economic growth through rapid industrialization and making economy self reliant as an end. Industrial sector of the country was in doldrums at the time of independence as it was not promoted but neglected during the two centuries of British Raj. Their exploitative policies framed to serve the interests of their motherland were the major cause of lack of industrialization in India. India was the supplier of raw material and consumer of the British goods. The desire of Indians to industrialize can be viewed from the perspective of the formation of Bombay Plan which was the first effort by prominent industrialists of the country to shape the industrial policy of the country through emphasis on heavy industries.
The beginning
Building on the Bombay plan, first concrete step towards industrialization was taken in for of Industrial policy Resolution 1948. It laid broad contours for the strategy of industrialization. The basic thrust was to lay the foundation of Mixed Economy whereby both the public as well as private sector would plan an important role in Industrial development. But in order to ensure the development according to the plan and PanditNehrus inclination towards Fabian Socialism government imposed heavy regulations on private sector in the form of licensing. Hence giving a larger role to public sector. Industrial(Development and Regulation) Act 1951 provided necessary teeth to the government to impose such restrictions. This paved the way for Industrial Policy Resolution 1956 which introduced the Patent licensing and in true terms was the first comprehensive statement on the strategy for industrial development in India.
Industrial Policy Resolution 1956 was shaped by Mahalanobis model of growth which emphasized on role of heavy industries for long term higher growth path. The resolutions widened the scope of public sector with the basic objective of accelerating economic growth and boost the process of industrialization. Policy also aimed at decreasing regional disparities through development of low industrial base and by giving impetus to small scale industries and cottage industries as they had a huge potential to provide mass employment. The policy stuck in line with the prevalent beliefs of the times i.e attaining self sufficiency. But the policy faced many implementation failures and as a result achieved exactly reverse of what it intended i.e regional disparities and concentration of economic power. Hence Monopolies Inquiry commission(MIC) was setup in 1964 to review various aspects pertaining to concentration of economic power and operation of industrial licensing under Industrial (Development and Regulation) Act 1951. The report while emphasizing that planned economy contributed to growth of industry blamed the licensing system which enabled the big business houses to obtain disproportionately large share of licenses which had led to pre-emptive and foreclosure of capacity. Subsequently, Dutt committee or Industrial licensing inquiry committee 1956 advised that big industrial houses must be given licenses only for setting up industries in core and heavy investment sectors.
Further in order to control the concentration of economic power Monopolistic and restrictive Trade Practices Act (MRTP) was introduced. Large industries were designated as MRTP companies and were eligible to participate in industries that were not reserved for government or small scale industries. Industrial licensing policy as well as Industrial policy 1973 both emphasized on the need for controlling the concentration of wealth and gave importance to small and medium scale industries. Continuing the favoritism to small scale industries the Industrial policy 1977 went a step ahead by introducing District industrial centers to provide support to SSI. It also introduces the new category called TINY SECTOR and considerably expanded the reserve list of small scale industries. But due to exogenic shocks (wars) as well as internal disturbances (emergency) and implementation problems the policy failed to have a significant effect. The soaring economic situation led to formulation of Industrial Policy1980 which sowed the seeds of liberalization.
The Industrial Policy1980 laid emphasis on promotion of competition in the domestic market, technical up gradation and modernization of industries along with the focus on optimum utilization of installed capacity for ensuring higher productivity, higher employment levels, removal of regional disparities etc. Policy measures were announced to revive the efficiency of PSU’s along with provisions of automatic expansion. The PSU’s were freed from a number of restrictions and was provided with greater autonomy. Major steps were taken by deregulating all industries except fot those specified in the negative list. The ‘limited liberalization’ initiated in 1980’s reached its summit with a landmark policy change in 1991.
Industrial policy 1991 slated a paradigm shift in the evaluation of industrial policy and development. Increase in Fiscal deficit and monetized deficit along with the global financial crises (Gulf war, oil crises0 played a major hand in beginning of the new chapter in the history of industrial policy and economic growth. The objective of the policy ‘was to maintain sustained growth in productivity, enhance gainful employment and achieve optimal utilization of human resources , to attain international competitiveness and transform India into a major player in global arena’. Clearly focus of the policy was to unshackle the industry from bureaucratic control. Important reforms brought about by the policy were:-
• Abolition of industrial licensing for most industries barring few which were important because of strategic and security concerns and social environmental issues.
• Significant role accorded to FDI. 51% FDI allowed in heavy industries and technologically important industries.
• Automatic approval to technological agreements for promotion of technology and hiring foreign technology expertise.
• Restructuring of PSU’s to increase productivity, prevent over staffing, technology up gradation and to increase rate of return.
• Disinvestment of PSU’s to increase resources and increase private participation.
• The policy realized that governmental intervention in investment decision of large companies through MRTP act has proved to be deterring for industrial growth. Hence thrust of the policy was more on controlling unfair and restrictive trade practices. Provisions restricting mergers, amalgamations and takeovers were replaced.
Since then the LPG reforms initiated in 1991 has been considerably expanded. Some of the measures are mentioned below.
• Competition commission of India was established in 2003 so as to prevent practices having adverse impact on competition in markets.
• A new North East Industrial Policy was introduced in 1997 for mitigating regional imbalances due to economic growth.
• Focus on disinvestment of PSU’s shifted from sale of minority stake to strategic stakes.
• Focus on PP with government playing a facilitative role rather than regulatory role.
• FDI limits increased in almost all the sectors including defense and telecommunications.
• Add all the new things that will happen till exam, :D
Conclusion
It is evident from the evolution of industrial policy that the governmental role in development has been extensive. The path to be pursued towards industrial development has evolved over time. In initial stages the government adopted an inward looking development policy which forced the Indian industry to have low and inferior technology and suffocated the growth of private sector. It prevented the domestic industries from rigorous competition and therefore resulted in low efficiency and limited its ability to expand employment opportunities. The focus on self reliance and lack of investment in R&D acted as barriers to technological development and hence led to the production of inferior quality of goods. The belief that foreign goods are superior to Indian goods is still prevalent today.
Having said that, the condition of the country after two centuries of exploitation and a traumatic separation must be kept in mind before evaluating the progress and approach of the successive industrial policy. Lack of entrepreneurial skills, low literacy levels, unskilled labour, absence of technology etc were significant features of Indian economy pre independence. In light of this, the plans and policies played an important role by cementing a solid base for the present industrial policies. As DrManmohan Singh puts it ‘on a long term view of Indian economic development over the last four decades, was far from being disastrous. The mediocrity of the outcome was mostly due to the extraordinary and far reaching economic shocks sustained by the economy during the decade of 1965-75’.
Inderjit Singh
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