Industrial Policy in India- Objectives, Resolutions and Limitations

Industrial policy is a plan, a framework, or a set of standard rules, guidelines, and regulations that the government forms for how an industry needs to be run. These standards are made such that a conducive environment can be formed for industries, which leads to the growth and development of that industry and the economy of the country.

Read below this comprehensive article to learn about the objectives of the industrial policies of India and the updated industrial policy.

Objectives of Industry Policy

• Economic growth of the industry, in such a manner, will lead to the growth and development of the country.
• Employment generation: to provide more employment opportunities in industry.
• Utilization of Human Resources: Through employment generation, human resources can be better utilized and, thus, living standards can be improved.
• Healthy competitiveness: to promote an environment of healthy competitiveness so that even small-scale industries can grow.
• Foreign Investment: A better environment for industries attracts more foreign investment, expertise, and new technology.

Industrial policies of India

After the independence of India in 1947, one of the significant steps taken by the Indian government for the growth and development of nations was to promote trade and industry. To do so, Indian leaders felt the need to formulate an industrial policy. As a result, many industrial policies were formed by the Indian government from 1948 onward, which are as follows:

Industrial Policy Resolution of 1948

• It was the first plan in independent India to create a self-sufficient economy. Some of the important features of this policy are:
• It declared India to be a mixed economy.
• It gave importance to small-scale industries.
• It restricted foreign investments.
• It divided Indian industries into four categories, which are as follows:

1. Industries on which there was an exclusive monopoly of the central government. Such as those dealing with arms and ammunition, atomic energy production, railway management, etc.
2. A new undertaking to be controlled by the state alone dealt with industries related to coal, iron and steel, aircraft manufacturing, shipbuilding, telegraph, telephone, etc.
3. Industries to be regulated (which means private participation as well) by the government that are of basic importance and needed, such as sugar and chemicals,.
4. Open to private enterprises, individuals, and cooperatives, including all remaining industries other than those above

Industrial Policy Resolution (IPR) 1956

This policy emphasized government control or public ownership and laid the basic framework of industrial policy, also known as the economic constitution of India.

It classified industries into three sectors.

Schedule A: Industries under this section are known as public sector industries, which are exclusively owned and operated by the state. It includes 17 industries, such as arms and ammunition, atomic energy, and railways.

Schedule B: Industries under this section are also known as mixed-sector (i.e., public and private) industries, which both state and private owners own, and the percentage of this ownership can vary. It includes 12 items, such as iron and steel, heavy machinery, and aircraft manufacturing.

Schedule C: Private Industries: These industries are completely owned by private enterprises and include industries such as textiles, paper, and chemicals.

This has provisions for the public sector, small-scale industry, and foreign investment. It made foreign investment restrictions stricter and introduced a licensing system. To meet new challenges, from time to time, IPR 1956 was modified through statements in 1973, 1977, and 1980.

Industrial Policy Statement, 1977

This policy was an extension of the 1956 policy and was introduced in the emergency era, when there was a large concentration of power in the hands of the government.

• This policy emphasized employment for people with low incomes (poverty eradication) and a reduction in the concentration of wealth.
• This policy is primarily focused on decentralization.
• It gave priority to small-scale industries (also in rural and small-town areas).
• It divided the small-scale sector into three categories. They were cottage and household, micro, and small-scale industries.
• This policy imposed restrictions on multinational companies (MNCs).

Industrial Policy Statement, 1980

The Industrial Policy Statement of 1980 was made to provide a long-term direction for the country’s industrial growth. It focused on promoting healthy competition in the domestic market, modernization through technological advancement, and selective liberalization.

• It liberalized licensing and provided for the automatic expansion of capacity.
• This policy introduced the MRTP Act (Monopolies Restrictive Trade Practices) and the FERA Act (Foreign Exchange Regulation Act, 1973).
• The objective was to liberalize the industrial sector to increase its competitiveness in domestic markets and boost Indian products in international markets.
• It encouraged export-based enterprises.
• It promoted the growth of new industries and technologies, especially the high-technology (high-tech) industry.

New Industrial Policy, 1991

The New Industrial Policy of 1991 is the most significant policy that revolutionized Indian industries and the economy. Its main objective was to make the economy market-oriented and increase efficiency.

This policy has three main components, which are as follows:

Liberalization (reduction of government control and influence)

Privatization (increasing the role and scope of private sector enterprises)

Globalization (integration of the Indian economy with the world economy by welcoming foreign investments instead of restrictions)

These LPG reforms enhanced the competition in the market.

• Old domestic firms have to compete with new domestic firms, MNCs, and imported items; more competition leads to a greater number of products in the market. Thus, people have many more options and varieties to buy the same products.
• The government allowed domestic firms to import advanced technology to improve efficiency and access better technology.
• The foreign direct investment ceiling was increased from 40% to 51% in selected sectors.
• The maximum FDI is limited to 100% in selected sectors, like infrastructure. The Foreign Investment Promotion Board was established.
• A single-window FDI clearance agency. The technology transfer agreement was allowed under the automatic route.
• Industrial licensing was abolished except for 18 industries. . So the reduction in cumbersome licensing processes and red tape can be curbed.
• The Phased Manufacturing Programme was a condition that forced 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 or can be converted to equity of the company if the banks want the loan in a specified time. This was also abolished.
• Monopolies and Restrictive Trade Practices Act: Under MRTP, a commission was established. The MRTP Act was introduced to check monopolies. The MRTP Act was relaxed in 1991.
• It also aims to simplify labor laws and increase hiring flexibility.

On the recommendation of the SVS Raghavan committee, the Competition Act 2000 was passed. Its objectives were to promote competition by creating a conducive and enabling environment for industries and markets to grow.

Conclusion

It has been three decades since the last landmark reform in Indian industrial policy. Since then, there have been many changes, new kinds of industries, and technological advancements that need different rules and guidelines. Also, with increasing global warming and other environmental hazards, there is a need for a plan for sustainable growth of industry and economy while keeping these concerns in mind. Thus, there is a need for introducing new measures and frameworks in the new and changed conditions.

FAQs on Industrial Policy and the Economic Growth

1. Why did India’s first industrial policy restrict foreign companies?

Ans: Before Indian Independence, East India Company also arrived as a trading company and later colonized India. Because of this, Indian leaders had fears and apprehensions about foreign companies and thus restricted foreign companies.

2. What is a mixed economy?

Ans: A mixed economy where the private sector and state (government) run industries and businesses work for the growth and development of the economy.

3. What is foreign direct investment?

Foreign direct investment is any investment by a foreign enterprise in any resident economy or industry of that area that has lasting impacts. Such investments include some percentage of ownership in the enterprise, semi- or complete technology transfer, and food chains of foreign brands in other countries, for example, McDonald’s, KFC, and Domino’s in different parts of the world.

4. Why is there a need for an industrial policy?

Ans. Industrial policy formulated by the government safeguards the interests of both industries and employed people while keeping the nation’s growth in mind. These policies stop the concentration of power in the hands of a few powerful industries and help promote small-scale industries. Thus making the industrial area a place where everyone can get a fair chance while having healthy competition.

5. Why do the LPG reforms limited to 1991 hold much importance in Indian industrial policy?

Ans: Before LPG reforms, the Indian economy was very restricted. The LPG reforms of 1991 opened Indian markets for foreign goods and investments, increasing foreign reserves and economic growth. It made India a market-oriented economy.