Changes in Industrial Policy and Their Effects on Industrial Growth

GS III – Changes in industrial policy and their effects on industrial growth

Industrial Policies – Meaning

Industrial policy means rules, regulations, principles, policies and procedures laid down by government for regulating, developing, and controlling industrial undertakings in the country.

It prescribes the respective roles of the public, private, joint, and co-operative sectors for the development of industries. It also indicates the role of the large, medium and small scale sector.

It incorporates fiscal and monetary policies, tariff policy, labour policy, and the government attitude towards foreign capital, and Role to be played by multinational corporations in the development of the industrial sector.

Industry

• The industry is a category of active enterprises and organizations which produce or sell products, services, or sources of revenue.
• Industry means not a factory, it refers to economic activities that are connected to the production of goods, extraction of minerals, and providing services.
• Industries are commonly categorized in economics as the primary industry, secondary industry, and tertiary industry.

Manufacturing

• Manufacturing means the transformation of natural material endowments into commodities of utility by processing, assembling, and repairing.
• Manufacturing acts as the engine of economic growth.

Introduction:

In pre depression era, there was faith in laissez Faire model of economy, which literally means – no intervention and let market forces of demand and supply have free hand. This is also known as capitalist mode of economy, where goods and services to be produced are decided by purchasing power of the people. In this model need of people is not deliberately considered, but it is believed that free markets will automatically take care of everyone’s need. If there are any mismatches in demand and supply, then price of the products will fluctuate in order to rope in or out suppliers and consumers and consequently there will be demand supply equilibrium. This kept government intervention away till the end of great depression of 1920’s.

Great depression brought spiraling hyperinflation which rendered wide range of commodities unaffordable to the masses. With this accompanied massive unemployment. It belied excessive faith placed in free markets and it demonstrated that markets are not sacrosanct as there was a big market failure. Famous economist John Keynes made out compelling case for government intervention, through incurring fiscal deficit to create demand. It was clear that government will have to manage production patterns of economy and promote production of specific goods in interest of consumers and employment. Roosevelt’s New Deal in US made it quite clear that now US government will intervene for promoting key industries.

Another major factor was of Russian Revolution. With establishment of socialist government in Russia, there was a sentimental wave against concept of free markets. Governments all over world extended franchise (voting rights) to working class in this period and limited the influence of capitalists. Henceforth it became easy and must for such governments to intervene in interest of all. This started era of planning to different degree in different countries. Socialist governments went for ‘imperative planning’ under which production was taken up by state and was distributed according to needs on proportional basis. For a socialist country this was quite natural, but surprisingly many erstwhile proponents of free market like France, USA also took up planning in milder form, which is called ‘indicative planning’. Under this, as already explained, government attempts to promote particular industries in interest of consumers and employment.

After Decolonization many countries along with India, had uphill task of socio economic development. Their economies were in past deliberately made heavily dependent on respective colonial ruling powers. Industries and markets were in infancy. New governments had to mark preferences for channelizing their scarce resources to achieve long term holistic development.

Due to all these factors, Industrial Policy was adopted by various countries and India was first noncommunist democratic country to have an official industrial policy.

India’s Industrial Policy Prior to 1991

• Industrial Policy Resolution, 1948.

The resolution was issued on April 6, 1948. The resolution accepted the importance of both private and public sectors for the development of the industrial sector.

The 1948 Resolution also accepted the importance of the small and cottage industries as they are suited for the utilisation of local resources and are highly labour intensive.

The 1948 Resolution divided the Industries into following four categories.

• Industrial Policy Resolution 1956.

The Policy Resolution of 1956, laid the following objectives for the growth of the Industrial sector:

1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To Prevent concentration of Business in few hands and Restriction in Creation of Monopolies.

The objectives were chosen carefully with the aim of creating employment and reducing poverty.

The 1956 Resolution further divided the Industries into three Categories.

To sum up, the 1956 Resolution, emphasised on the mutual dependence and existence of the public and private sectors. The only 4 industries in which private sector are not allowed were Arms & Ammunition, Railways, Air Transport and Atomic Energy. In all other sector, either private sector was allowed to operate freely or will provide help to the government sector as and when needed.

• Industries (Development & Regulation) Act, 1951.

The Industries Act was passed by the Parliament on October 1951 to control and regulate the process of Industrial development in the country. The Acts main task was to regulate the Industrial sector.

The specific objectives of the Act were:

1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.
4. Balanced Growth and Equitable development of all the regions.
5. It was also believed that the State is best suited to promote balanced growth by; channelizing investment in the most important sectors; Correlate supply and demand; eliminate competition; ensure optimum utilisation of social capital.

Major Provisions of the Act

Restrictive Provisions: It contains all measure provision to curb unfair trade practices.

Registration: The provisions make registration of industries mandatory irrespective of whether they are private or public in nature. The expansion of the existing business also required licencing and permission.

Examination and Monitoring of the Industries: After granting of license, it is the responsibility of the state to monitor the performance of the industries. If at any point in time, the industrial unit was found not up to the mark, underutilising its resources or charging excessive prices, the government could set up an enquiry against the unit.

Cancellation of the Licence: The government has the power to cancel the licence granted to the industrial unit if found, engaging in wrongful behaviour.

• Reformative Provisions:

The category involved following provisions.

Direct Control by the Government: Under this provision, the government could set up an enquiry against the industrial unit and can order reform process, if it was not being run properly.

Control on Price, Distribution and Supply: The Government was empowered by the act to control and regulate the prices, supply and distribution of the goods produced.

Problems of the Excessive Restrictions imposed by the Government.

• Liberalisation measures adopted in the 1980s

1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who successfully achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into broad categories. For example; cars, jeeps, tractors, light and heavy commercial vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.
9. Promotion of Small Scale Industries by increasing their Investment limits.
10. New Industrial Policy, 1991.

New Industrial Policy, 1991

The New Industrial Policy, 1991 had the main objective of providing facilities to market forces and to increase efficiency.

Larger roles were provided by

• L – Liberalization (Reduction of government control)
• P – Privatization (Increasing the role & scope of the private sector)
• G – Globalisation (Integration of the Indian economy with the world economy)

Because of LPG, old domestic firms have to compete with New Domestic firms, MNC’s and imported items

The government allowed Domestic firms to import better technology to improve efficiency and to have access to better technology. The Foreign Direct Investment ceiling was increased from 40% to 51% in selected sectors.

The maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion board was established. It is a single-window FDI clearance agency. The technology transfer agreement was allowed under the automatic route.

Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and use domestic inputs, it was abolished in 1991.

Under the Mandatory convertibility clause, while giving loans to firms, part of the loan will/can be converted to equity of the company if the banks want the loan in a specified time. This was also abolished.

Industrial licensing was abolished except for 18 industries.

Monopolies and Restrictive Trade Practices Act – Under his MRTP commission was established. MRTP Act was introduced to check monopolies. The MRTP Act was relaxed in 1991.

On the recommendation of the SVS Raghavan committee, Competition Act 2000 was passed. Its objectives were to promote competition by creating an enabling environment.

To know more about the Competition Commission of India, check the linked article.

Review of the Public sector under this New Industrial Policy, 1991 are:

• Public sector investments (Disinvestment of Public sector)
• De-reservations –Industries reserved exclusively for the public sector were reduced
• Professionalization of Management of PSUs
• Sick PSUs to be referred to the Board for Industrial and financial restructuring (BIFR).
• The scope of MoUs was strengthened (MoU is an agreement between a PSU and concerned ministry).

Ø  Industrial Policy in India: Post 1991 Reforms, Period

New Industrial Policy, 1991

The long-awaited liberalised industrial policy was announced by the Government of India in 1991 in the midst of severe economic instability in the country. The objective of the policy was to raise efficiency and accelerate economic growth.

Features of New Industrial Policy

• De-reservation of Public sector: Sectors that were earlier exclusively reserved for public sector were reduced. However, pre-eminent place of public sec­tor in 5 core areas like arms and ammu­nition, atomic energy, mineral oils, rail transport and mining was continued.
  • Presently, only two sectors- Atomic Energy and Railway operations- are reserved exclusively for the public sector.
• De-licensing: Abolition of Industrial Licensing for all projects except for a short list of indus­tries.
  • There are only 4 industries at present related to security, strategic and environmental concerns, where an industrial license is currently required-
    • Electronic aerospace and defence equipment
    • Specified hazardous chemicals
    • Industrial explosives
    • Cigars and cigarettes of tobacco and manufactured tobacco substitutes
• Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were reduced to enhance their efficiency and competitiveness.
• Liberalisation of Foreign Investment: This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed.
  • Today, there are numerous sectors in the economy where government allows 100% FDI.
• Foreign Technology Agreement: Automatic approvals for technology related agreements.
• MRTP Act was amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. MRTP Act was replaced by the Competition Act 2002.

Outcomes of New Industrial Policies

• The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the past. It attempted to liberalise the economy by removing bureaucratic hurdles in industrial growth.
• Limited role of Public sector reduced the burden of the Government.
• The policy provided easier entry of multinational companies, privatisation, removal of asset limit on MRTP companies, liberal licensing.
  • All this resulted in increased competition, that led to lower prices in many goods such as electronics prices. This brought domestic as well as foreign investment in almost every sector opened to private sector.
• The policy was followed by special efforts to increase exports. Concepts like Export Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones and lately National Investment and Manufacturing Zones emerged. All these have benefitted the export sector of the country.

Limitations of Industrial Policies in India

• Stagnation of Manufacturing Sector: Industrial policies in India have failed to push manufacturing sector whose contribution to GDP is stagnated at about 16% since 1991.
• Distortions in industrial pattern owing to selective inflow of investments: In the current phase of investment following liberalisation, while substantial investments have been flowing into a few industries, there is concern over the slow pace of investments in many basic and strategic industries such as engineering, power, machine tools, etc.
• Displacement of labour: Restructuring and modernisation of industries as a sequel to the new industrial policy led to displacement of labour.
• Absence of incentives for raising efficiency: Focussing attention on internal liberalisation without adequate emphasis on trade policy reforms resulted in ‘consumption-led growth’ rather than ‘investment’ or ‘export-led growth’.
• Vaguely defined industrial location policy: The New Industrial Policy, while emphasised the detrimental effects of damage to the environment, failed to define a proper industrial location policy, which could ensure a pollution free development of industrial climate.

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Objectives of National Manufacturing Policy

The government of India decided to bring out the National Manufacturing Policy to bring about a quantitative and qualitative change with the following six objectives:

• Increase manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy. The 2 to 4 % differential over the medium-term growth rate of the overall economy will enable manufacturing to contribute at least 25% of the National GDP by 2022.
• Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2022. 
• Creation of appropriate skill sets among the rural migrant and urban poor to make growth inclusive. 
• Increase domestic value addition and technological ‘depth’ in manufacturing. 
• Enhance global competitiveness of Indian manufacturing through appropriate policy support. 
• Ensure sustainability of growth, particularly with regard to the environment including energy efficiency, optimal utilization of natural resources and restoration of damaged/ degraded eco-systems

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones(NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).
4. No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).
5. The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.
8. The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.
10. Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;
  • Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;
  • Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;
  • Strengthening IPR infrastructure to nurture innovation; and
  • Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

Why Industrial Policy is Desirable?

Knowledge Spillover – Industries have a certain degree of knowledge spillover effect on the economy. Degree of this effect varies from sector to sector. A new industry will attract requisite skill/talent/expertise which will multiply overtime. Further, there will be some ancillary industries which may come up to support such industries. In short, focusing on a certain industry can overtime result in to a whole industrial complex which derives synergies and economies from each other. For e.g. Defense Industry could be benefited immensely if aviation industry, Software, Higher educational, Space exploration capacities are fully developed. So India’s space program provides synergy to defense capacity.

Infant Industry – At time of Independence, India’s industry was nonexistent in most of the sectors and those existing were infant. They had low capacity to adapt new technologies or to exploit economies of scale. In this case government protection is desirable in initial stages, so that a competitive industry develops at latter stages. Without government support or protection many of the present competitive Industries, would never have come up. In short, these industries need protection from foreign competition.

Coordination Failure – An industry doesn’t exist or survive in isolation. It needs other industries which feed to it raw materials at reasonable costs and quality. Further, many other industries that will act as customer are needed for survival of this industry. For e.g. Iron & Steel Industry is most important sector of economy. It is must for a competitive automobile sector, construction sector, Infrastructure, Capital goods machinery sector, Defense sector. On the other hand, Iron and steel sector can perform only if there is availability of coal and power. A good transport sector facilitates interaction and movement of goods in entire economy. In initial stages of an economy there’s often a ‘coordination failure’, which government tries to address by industrial policy. In India this led to recognition of ‘core industries’ which have  multiplier effect on the economy, these are – Iron & steel, Cement, Crude Oil, Gas, Petro Refining, Mining, Power, Fertilizers.

Informational Externalities – Setting up an Industry requires certain degree of confidence in future of the whole economy and that industry in particular. There is reasonable risk which results in reluctance on part of investors. This risk and uncertainty is high in case of ‘first mover’ in a newly opened sector. This is because markets for new product are unchartered and untested, so there’s no reliable data or information on basis of which risk return calculus can be drawn. Consequently, governments hold hand of a few new units in that industry through industrial policy and then gradually leave them of their own. As we have seen in renewable energy sector.

Arguments against industrial policy

Influenced by Special Interests – There are always pressure groups in an economy that compete for resources of the government. They try to influence decisions of policy makers to corner a larger than deserved share of natural and economic resources. This way, often, personal interest prevails over national interest. This obviously creates avenues for corruption, rent seeking, patronage, ‘quid pro que’ as seen in elections.

Knowledge Deficit – Any industrial policy requires prediction of future trends in an economy. Our experience tells us that an economy is toughest to predict and efforts of planning and policy making often end up being futile. There are different think tanks at national and international level that come out with different economic forecasts. Hence, policy makers’ choice of forecast is a subjective one and success is only dependent upon other developments in economy.

Distortion of markets and production patterns – Government support distorts prices of products. Prices are signals which tell consumers and producers – what to consume and produce. So, due to government protection and support, producers fail to adopt latest technologies, new markets etc. This makes them uncompetitive.

Source: DPIIT

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