The Role of the Industrial Sector in India
The industrial sector plays a crucial role in the economic development of a country. It is generally observed that economically developed nations are also industrially advanced, with some exceptions in countries like Gulf nations, which rely on natural resources for their prosperity. The development of a country is often rooted in industrial progress. Here are several key reasons for the significance of industrialization in a nation’s growth:
- Meeting Increasing Demand: As per capita income rises, the demand for industrial products outpaces the demand for food. The growth in demand for industrial goods can only be met through increased industrial production.
- Raising People’s Income: Industrialization forms a solid foundation for continuous and rapid increases in people’s income. Industries rely on human labor and skills rather than the unpredictability of natural resources. By expanding the capital stock and enhancing human capabilities, both industrial production and productivity can be increased, leading to higher incomes for the population.
- High Growth Potential: It is argued that the industrial sector is key to achieving rapid economic growth. To foster growth, less developed economies should prioritize industrialization on a large scale.
- Key to Export Volume: Industrial products generally have more favorable international trade terms than agricultural products. Purposeful industrialization with an emphasis on export markets is essential for developing countries to achieve industrialization and enhance their export capabilities.
- Self-Sustaining Development: Industrialization promotes higher saving, investment, and capital formation, establishing a solid foundation for self-sustaining development.
- Promoting Regional Balance: Industries play a vital role in achieving social welfare, equality, justice, and balanced regional development. Regional imbalances can be mitigated through location policies that distribute industries more evenly.
- Job Creation: Industrialization goes hand in hand with the development of the service sector, including transportation, communication, banking, insurance, and more. It creates numerous job opportunities and supports the growth of the tertiary sector.
- Modernization: Industrialization is essential for the development of technical, scientific, and professional expertise in an economy, which brings modernization and dynamism. Industries also stimulate the growth of infrastructure.
- Modernizing Agriculture: Industries not only contribute to the economic development of a country but also impact the agricultural sector. They provide the agricultural sector with modern capital equipment, tools, machinery, and resources that enhance productivity and output. Industrialization has made irrigation, fertilizers, pesticides, and other agricultural advancements available, leading to rapid growth in the agricultural sector.
In summary, industrialization results in higher per capita productivity and income, making it a prerequisite for sustainable economic growth.
2.5.2 Pattern of Industrial Development since Independence
At the time of India’s independence, the country did not possess a well-balanced and developed industrial structure. India had to rely on other nations for importing capital goods. Since independence, several changes have occurred in the Indian economy, and the role of the industrial sector has evolved. Key changes in the pattern of industrialization include:
(a) Development of Infrastructure: After independence, significant efforts were made to develop critical infrastructure in industries, such as power generation, transportation, communication, and banking. Substantial expansion has taken place in infrastructural facilities, although there is room for further improvement.
(b) Research and Development (R&D): India has made substantial progress in the field of research and development, with the establishment of many research institutes in both the public and private sectors. This has led to the domestic production of a wide range of sophisticated machinery and products.
(c) Expansion of Public Sector: The public sector plays a pivotal role in industrial development, with public enterprises operating in both basic and strategic areas. They produce a wide variety of goods, ranging from electronics to mass-consumption products.
(d) Development of Capital Goods Industry: The Second Five-Year Plan emphasized the development of a robust capital base for the country. As a result, significant investments were made in capital goods industries.
(e) Growth of Non-Essential Consumer Goods Industries: India has witnessed remarkable growth in non-essential consumer goods industries catering to the affluent sections of society. This includes industries producing motor vehicles, air conditioners, refrigerators, fine textiles, computers, and more.
(f) Diversification of Private Sector: In 1991, greater emphasis was placed on the role of the private sector in industrialization. This led to policy changes, including liberalization, privatization, and globalization.
2.5.3 Problems of Industrial Development in India
India faces several challenges and problems in its industrial development, including:
(a) Sectoral Imbalances: There is a lack of coordinated development among various sectors of the economy. Agriculture and infrastructure have not provided the necessary support for the industrial sector. Additionally, there is often a lack of coordination among different industries.
(b) Regional Imbalance: Industrial development in India has primarily concentrated in a few states, leading to regional disparities. Developed states have better infrastructure and market access, making them more attractive to entrepreneurs.
(c) Industrial Sickness: The problem of industrial sickness is widespread in India, leading to unemployment and economic challenges. The Board of Industrial and Financial Reconstruction (BIFR) has received a large number of cases under the Sick Industrial Companies Act, indicating the extent of the problem.
(d) Growth of Large Industrial Houses: Despite policies like the Monopolies and Restrictive Trade Practices (MRTP) Act and licensing policies, large industrial houses have managed to grow in capital-intensive industries.
(e) High Cost of Industrial Products: Some industrial products in India have higher costs compared to international prices, mainly due to a lack of healthy competition.
(f) Inadequate Employment Generation: Industries have not generated enough employment opportunities, particularly for small-scale and cottage industries, due to a lack of attention to technology choices.
(g) Industrial Dependence on the Government: Industries often rely on government policies for tax reductions, import facilitation, and capacity expansion, highlighting their dependence on government intervention.
(h) Poor Performance of the Public Sector: Public sector enterprises have often fallen short of their production and profit targets.
(i) Underutilization of Capacity: Some of the most critical industries are reported to be underutilized, with varying degrees of underutilization across different sectors.
(j) Increasing Capital-Output Ratio: The average and incremental capital-output ratios have been rising, mainly due to the increasing capital cost of new units and the capital-intensive nature of heavy industries.
2.5.4 Industrial Policy Resolution (IPR) of 1956
Industrial policy is a crucial instrument for regulating industrial activities in an economy. The 1956 Industrial Policy Resolution laid out several objectives for industrial policy in India:
(a) Accelerating economic growth and industrialization.
(b) Developing heavy industries and machine-making industries.
(c) Expanding the public sector.
(d) Reducing income and wealth disparities.
(e) Promoting a large and growing cooperative sector.
(f) Preventing monopolies and wealth concentration in the hands of a few individuals.
The 1956 Industrial Policy Resolution introduced a new classification of industries into three schedules:
(a) Industries exclusively under the responsibility of the State, including defense industries, heavy industries, and critical sectors like energy and power.
(b) Industries in which the State would establish new units, while private sector units could expand and establish new units in specified industries.
(c) Other industries open to the private sector, with the state having the authority to start new undertakings in the public interest.
The resolution also stressed the importance of cottage and small-scale industries, reducing regional disparities, industrial peace, technical education and training.
Industrial Licensing
1. Industries Development and Regulation Act (IDRA) of 1951
The practice of licensing serves as a tool for steering limited resources into predetermined priority sectors of an economy. To align with the Industrial Policy Resolution of 1948, the Industries Development and Regulation Act (IDRA) was enacted in 1951. The primary objectives of the IDRA Act of 1951 included:
(a) Regulating industrial development and investments in line with planned priorities.
(b) Preventing the emergence of monopolies.
(c) Promoting balanced regional development to reduce economic disparities across different regions.
(d) Mitigating undue competition between large-scale industries and small-scale and cottage industries.
(e) Ensuring the efficient utilization of scarce foreign exchange resources.
Under this Act, the following provisions were in effect:
(i) All scheduled industries were required to register with the government within a prescribed period.
(ii) All new industries, as well as existing undertakings seeking expansion, had to obtain a license.
(iii) The government was authorized to assess the operations of any industrial undertaking and issue necessary directives.
(iv) In cases of ongoing mismanagement, the government had the power to assume control of the management of such undertakings.
However, the industrial licensing system faced several criticisms:
(a) The acceptance or rejection of license applications followed an ad hoc and disorganized process.
(b) The quality of techno-economic evaluations carried out by the Directorate General of Technical Development (DGTD) was often subpar.
(c) Licensing policies resulted in underutilization of capacity in numerous industries, with many licensed enterprises failing to reach their production capacity.
(d) In reality, the system inadvertently empowered large business conglomerates by occasionally granting licenses without rigorous scrutiny, which was sometimes referred to as the “permit-license raj.”
2. Industrial Licensing Policy of 1991
Noteworthy revisions to India’s industrial licensing policy were introduced in the Industrial Licensing Policy of 1991, characterized by the following key points:
(a) Industrial licensing would be abolished for all projects, except for a select list of industries reserved due to security, strategic concerns, social considerations, hazardous chemicals, overriding environmental considerations, and luxury items.
(b) Only eight industry groups predominantly related to security and strategic interests would remain exclusively reserved for the public sector.
(c) Automatic clearance would be granted for some specified cases requiring imported capital goods.
(d) In areas with populations of less than one million, there would be no requirement for obtaining industrial approvals from the central government, except for industries subject to compulsory licensing.
(e) The mandatory convertibility clause would no longer be applicable for term loans from financial institutions for new projects.
(f) The system of phase manufacturing programs, which had operated on a case-by-case basis, would not apply to new projects.