What Do You Mean by Industrial Policies? Evolution of Industrial Policy

Table of Contents

1 What Do You Mean by Industrial Policies?
2 Evolution of Industrial Policy in India
3 Industrial Policy Resolution in India 1948 to 1991
4 What Do You Mean By Privatization?
- 4.1 Advantages of Privatization
5 FAQ Related to Industrial Policies

What Do You Mean by Industrial Policies?

Industrial policy is an important document that lays a wide canvas and sets a tone for implementing promotional or regulatory roles of the government. The term “industrial policy” refers to the government’s policy towards industries – their establishment, functioning, growth, and management.

The policy indicates the respective areas of the large, medium, and small-scale sectors. It also spells out the government’s policy toward foreign capital, labor, tariff, and other related aspects. Naturally, the industrial development of a country is shaped, guided, fostered, regulated, and controlled by its industrial policy.

Industrial policy is the most important document that indicates the relationship between the government and the business. But, it has no legal sanction, and as such its violation can’t be challenged in a court as is possible in the case of the Fundamental Rights guaranteed by the constitution.

Evolution of Industrial Policy in India

During the pre-British period, India was an industrially developed country. But, with the advent of British rule in India, all these industries faced threats from British rulers. The industrial revolution in England and the trade policy followed by the British rulers offered a huge blow to the tradition-bound Indian industries. Thus, at the time of independence, the industrial base in India was very weak.

India possesses a huge reserve of natural resources but in spite of that, the country could not develop a sound industrial sector that could contribute a good portion to its national product. During the 200 years of British rule, no serious efforts were made by the Britishers to develop industries, especially basic and heavy industries.

During the mid-19th century, tea, jute, textile, and coal industries were mostly developed in India by the British rulers with the help of British industrialists.

In the post-independence era, i.e. on 6th April 1948, the Government of India adopted the Industrial Policy Resolutions for accelerating the industrial development of the country. Industrial policy is a comprehensive package of policy measures that cover various issues connected with different industrial enterprises of the country.

This policy is essential for devising various procedures, principles, rules, and regulations for controlling industrial enterprises of the country

Industrial Policy Resolution in India 1948 to 1991

The industrial policy resolution in India started in 1948. We have discussed this in detail below:

Industrial Policy Resolution, 1948

The Industrial Policy Resolution of 1948 contemplated a mixed economy that included both the public and private sectors on the industrial front. Accordingly, the Indian industries were divided into four categories:

Exclusive govt. Monopoly: This includes the manufacture of arms and ammunition, production and control of atomic energy, and the ownership and management of railway transport. These industries were under the exclusive control of the Central Government.

Government Monopoly for New Units: This category included coal, iron and steel, shipbuilding, aircraft manufacture, manufacture of telephone, telegraphs and wireless apparatus (excluding radio receiving sets), and mineral oils. New undertakings in this category could be undertaken by the State only, although the existing units of such industries would continue to be run by the private sector.

Regulation: This category included 20 important large-scale and basic industries like machine tools, chemicals, fertilizers, non-ferrous metals, rubber manufacturers, electric engineering, paper, newsprint, cement, automobiles, etc. which were kept reserved for the time being to the private sector although the state reserved the right to plan, regulate and control as and when necessary.

Unregulated private enterprise: The industries in this category were left open to the private sector, individuals as well as cooperatives.

The following are the features of Industrial Policy 1948

Dual role of public and private sectors.
Division of industries.
Importance of small and cottage industries.
Importance of foreign capital.

Industrial Policy Resolution, 1956

On April 20, 1956, the government of India adopted another Industrial Policy Resolution which replaced the 1948 resolution. The new resolution had become necessary due to the changes and developments that had taken place during eight years. After completion of the first five years, the government introduced the second five-year plan for the sake of industry. The target of investment in heavy industries and mining is fixed at Rs.890 crores.

Following are some of the important provisions of the 1956 policy:

New Classification of Industries: The Industrial Policy Resolution of 1956 classified the entire industrial sector in three Schedules.

Encouragement to Cottage and Small Scale Industries: To encourage the small sector, in the policy resolution, various steps were proposed such as:

The direct subsidy was provided to small scale sector,
Suitable taxation relief was given to this sector,
It was made the objective of the State to protect small scale sector by advancing technical assistance.

Foreign Investment: It allowed foreign capital to participate in Indian economic development but the major share should belong to India.

Removing regional inequalities: One of the major objectives of the resolution was a reduction of regional inequalities and imbalances.

The followings are the features of Industrial Policy 1956

Accelerating the growth of the economy and speeding up industrialization
Expansion of the public sector development of heavy and machine making industry.
Increase employment opportunities, and improve living standards and working conditions.
Prevention of monopolies and concentration of economic power.

Industrial Policy Resolution 1977

This resolution was adopted by the Janata Government as a result of a change in government at the center. Consequently, it had more focus on small-scale industry, villages, and industry cottage. This was a move away from Nehruvian- Mahalanobis ideology to Gandhian ideology of economic development.

Following are the main elements of this policy:

Development of Small Scale Industrial Sector

This policy was for the effective promotion of cottage and small industries. According to the policy the small sector was classified into three groups:

Cottage and household industries
Tiny sector
Small-scale industries

Areas for Large Scale Sector

It prescribed the following areas for large scale industrial sector:

Basic industries
Capital Goods
High technology industries d. Other industries

Role of the Public Sector

This policy expanded the role of the public sector, especially in respect of strategic goods of basic nature.

Management-labour Relations

It gave emphasis on reducing the occurrence of labor unrest. The government encouraged the worker’s participation in management from shop floor level to board level.

Industrial Policy Resolution, 1980

On 3rd July 1980, the Congress government announced the new industrial policy after its comeback. This policy sought to promote the concept of economic federation, raise the efficiency of the public sector and reverse the trend of industrial production over the past three years and reaffirm its faith in the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).

The followings are the features of Industrial Policy 1980

This policy introduced the concept of nucleus plants which would concentrate on assembling the products of the ancillary units falling within its orbit, producing the inputs needed by a large number of smaller units, and making adequate marketing arrangements. It would also make provisions or upgrade the technology of small units.
Some of the items reserved for small-scale industries were de-reserved.
Many units/companies were operating on excess capacities; these excess capacities were regularized.
Foreign Investment was allowed with technology transfer.
It tried to correct the regional imbalances within the country.

New Industrial Policy 1991

Scrapping of industrial licensing and registration
End to monopoly law
A more welcoming approach to foreign investments
Redefining the role of the public sector.

To fulfill these objectives, the government introduced a series of initiatives in the new industrial policy, as discussed below:

Abolition of Industrial Licensing

In order to liberalize the economy and to bring transparency to the policy, the new policy abolished the system of industrial licensing to all industrial undertakings, irrespective of the level of investment, except for a shortlist of industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental concerns and items of elitist consumption.

Policy Regarding the Public Sector

The 1956 Resolution reserved 17 industries for the public sector. But, the 1991 industrial policy reduced this number to 8. As of now, only 3 industries are reserved for the government – a. Atomic Energy b. Mining of Atomic Minerals c. Railway Transport.

MRTP Act

Under the Monopolistic and Restrictive Trade Practice Act, all firms with assets above a certain size (Rs.100 crore since 1985) were classified as MRTP firms. These kinds of firms were permitted to enter selected industries only and this was also on a case-by-case approval basis. In addition, to controlling through industrial licensing, separate approvals were required by such large firms for any investment proposals.

Foreign Technology and Investment

The New Industrial Policy arranged a specified list of high technology and high investment priority industries, wherein automatic permission was to be made available for direct foreign technology and investment up to 51 percent foreign equity.

Location Policy Liberalized

Regarding the location of industries, it was mentioned that other than cities of more than 1 million population, no industrial approval is required from the center, except for industries subject to compulsory licensing.

Removal of Mandatory Convertible Clause

In pre liberalization era, there was a mandatory convertible clause in the loan agreements with borrowers (industries in this case). As per this clause, banks have the right to convert their loan amount into equity whenever they felt so and this will make them ‘owner’ from ‘lender’ in that enterprise.

What Do You Mean By Privatization?

Privatization can be defined as the transfer of rights of businesses from a government to a privately owned entity. The transition from a publicly traded or owned company to a company that is privately owned and can no longer deal or trade publicly on a stock exchange.

Advantages of Privatization

Advantages of privatization are listed below:

Increases the Efficiency of Enterprise

It increases the overall efficiency and reduces the bureaucratic system which is the main culprit because typically in government organizations work happens at its own leisurely pace which results in delay in decision making and therefore decreases the effectiveness and competence of public sector enterprise.

Decreases the Sluggish Economy

As far as the government is concerned it has also benefited from privatization because the majority of governments all over the world have a fiscal deficit and by privatization, the government can reduce the fiscal deficit to an extent, however full control is possible only when government controls its unnecessary expenditures.

Reduces the Interference of Politics

Another advantage of privatization is that once privatization is done completely there is no interference from political leaders and also one does not need to do undue favor to them which in itself is a big thrust when it comes to doing business or increasing profitability.

FAQ Related to Industrial Policies

What do you mean by industrial policies?

The term “industrial policy” refers to the government’s policy towards industries – their establishment, functioning, growth, and management. Industrial policy is an important document that lays a wide canvas and sets a tone for implementing promotional or regulatory roles of the government.

What do you mean by privatization?

What are the advantages of privatization policy?

A few advantages of privatization policy are given below:
1. Increases the Efficiency of Enterprise
2. Decreases the Sluggish Economy
3. Reduces the Interference of Politics

When was the New Industrial Policy announced? and what are the objectives of the New Industrial Policy?

On July 24, 1991, the government of Sri Late P.V. Narasimha Rao announced a new industrial policy. The new policy radically liberalized the industrial policy itself and deregulated the industrial sector substantially.
The main objectives of the new industrial policy were:
1. Scrapping of industrial licensing and registration
2. End to monopoly law
3. A more welcoming approach to foreign investments
4. Redefining the role of the public sector.