Changes in Industrial Policy in India: 1948 to 1991 Reforms | UPSC Economy Notes
In India, industrial policy has changed significantly since Independence. The early phase emphasised state-led industrialisation, public sector dominance and import substitution. Later, especially after 1991, India shifted towards liberalisation, private sector participation, competition, foreign investment and integration with the global economy.
Thus, the evolution of industrial policy reflects India’s changing development priorities: from building a self-reliant industrial base to promoting efficiency, competitiveness, innovation and global integration.
Evolution of Industrial Policy in India
Industrial Policy Resolution, 1948
- It accepted the idea of a mixed economy, where both public and private sectors would have a role in industrial development.
- Industries were classified into four categories:
- Strategic Industries (Public Sector): Included arms and ammunition, atomic energy, and rail transport, where the central government had a monopoly.
- Basic/Key Industries (Public-cum-Private Sector): Included coal, iron and steel, Aircraft manufacturing, ship-building, telephone, telegraph, and wireless apparatus, and mineral oil.
- These industries were to be set up by the central government, but existing private enterprises were allowed to continue.
- Important Industries (Controlled Private Sector): Included 18 industries such as heavy chemicals, sugar, cotton textiles, cement, paper, salt, machine tools, fertilizers, rubber, air and sea transport, motor, tractor, and electricity.
- These industries remained under private sector control but were regulated by the government.
- Other Industries (Private and Cooperative Sector): All other industries not included In the above categories were left open for the private sector, with the government retaining the right to impose controls if necessary.
- Priority to Small scale and cottage industries: Small scale and cottage industries were given importance due to their wide spread, labour intensive nature and low capital and low skill requirements .
- Restrictions on foreign investments: The government restricted foreign investments to protect domestic industries from global competition
Industrial Policy Resolution, 1956
- In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted.
- This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.
- This resolution classified industries into three categories.
- In the first category will be industries the future development of which will be the exclusive responsibility of the State
- The second category will consist of industries which will be progressively state-owned and in which the State will, therefore, generally take the initiative in establishing new undertakings, but in which private enterprise will also be expected to supplement the efforts of the State
- The third category will include all other industries left to the private sector, but under state regulation through a system of licenses
- Licensing System: A system of licenses was introduced to regulate the establishment and expansion of industries, ensuring that new industries were set up in economically backward areas to reduce regional disparities.
- The private sector was kept under state control through a system of licenses. No new industry was allowed unless a license was obtained from the government.
- This policy was used for promoting industry in backward regions; it was easier to obtain a license if the industrial unit was established in an economically backward area.
- In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality.
- Even an existing industry had to obtain a license for expanding output or for diversifying production (producing a new variety of goods). This was meant to ensure that the quantity of goods produced was not more than what the economy required. License to expand production was given only if the government was convinced that the economy required a larger quantity of goods.
- The policy recognized the importance of small scale and cottage industries, providing them with support to promote their growth and development.
- Emphasis on reduction of regional disparities: Fiscal concessions were granted to open industries in the backward regions.
Industrial Policy Statement, 1977
- Its important focus was on
- Employment to the poor and reduction in the concentration of wealth.
- Decentralisation of industries
- Priority to small scale Industries
- The Industrial Policy Statement of 1977 laid emphasis on decentralisation and on the role of small-scale, tiny and cottage industries.
- Within the small scale sector, a tiny sector was also defined with investment in machinery and equipment upto Rs.1 lakh and situated in towns with a population of less than 50,000 according to 1971 census figures, and in villages
- Reservation of Products for Small-Scale Sector:The list of industries exclusively reserved for the small scale sector was expanded from 180 items to more than 500 items.
- District Industries Centres (DICs): DICs would be set up to provide, under a single roof, all the services and support required by small and village entrepreneurs.
- The areas delineated for the large scale industry were :
- basic industries that are essential for providing infrastructure and for the development for small and village industries, such as steel, non-ferrous metals, cement, oil refineries;
- capital goods industries;
- high technology industries that require large scale production and that are related to agricultural and small scale industrial development such as fertilizers, pesticides and petro-chemicals; and
- other industries that are outside the list of reserved items for the small scale sector, such as machine tools, and organic and inorganic chemicals.
The Industrial Policy Statement of 1980
- The Industrial Policy Statement of 1980 marked a shift towards modernisation, productivity and efficiency.
- Objectives:
- Optimum utilisation of installed capacity
- Maximum production and achieving higher productivity
- Higher employment generation
- Correction of regional imbalances
- Strengthening of the agricultural base through agrobased industries and promotion of optimum inter-sectoral relationship
- Promotion of export-oriented industries
- Promotion of economic federalism through equitable spread of investment and dispersal of returns
- Consumer protection against high prices and bad quality
- Economic Federalism: The government promoted a model where big industries (nucleus plants) are set up in a region. These big units would help small industries grow around them by providing demand, raw materials, and support.
- In order to eliminate the artificial distinction of conflicting interests between small and large scale industry, the concept of economic federalism was to be promoted through the setting up of a few nucleus plants in identified industrially backward districts.
- The nucleus plant would concentrate on assembling the products of the ancillary units falling within its orbit, on producing inputs needed by a large number of smaller units and making adequate marketing arrangements. The nucleus plant would also work for upgrading the technology of small units. The Government would promote the development of a system of linkages between nucleus large plants and the satellite ancillaries.
- To boost the development of small scale industries, the investment limit in the case of tiny units was enhanced to Rs.2 lakh, of a small scale units to Rs.20 lakh and of ancillaries to Rs.25 lakh.
- An automatic expansion of capacity up to five per cent per annum was allowed, particularly in the core sector and in industries with long-term export potential.
- Special incentives were granted to industrial units which were engaged in industrial processes and technologies aiming at optimum utilization of energy and the exploitation of alternative sources of energy.
- Policy measures were announced to revive the efficiency of public sector undertakings (PSUs) by developing the management cadres in functional fields viz., operations, finance, marketing and information system.
New Industrial Policy 1991
Making a sharp departure from the Industrial Policy Resolution of 1956, the government announced a new industrial policy on July 24, 1991 with a new set of objectives and policy thrust.
Objectives
The principal objectives of the new industrial policy (NIP 1991) were identified as follows:
- to consolidate the strengths gained during the four decades of economic planning over 1951-91
- to correct the distortions (or weaknesses) that had crept in to the industrial structure (i.e. one of low productivity and high cost production)
- to improve and maintain sustained growth in industrial productivity with gainful employment creation
- to attain international competitiveness.
Elements of Industrial Policy, 1991
- Industrial Licensing
- Foreign Investment
- Foreign Technology Agreements
- Public Sector Policy
- MRTP Act
Industrial Licensing Policy:
Industrial licensing has been abolished for all projects except for a short list of industries (e.g. industries of security and strategic concern, social concerns owing to usage or generation of hazardous substances creating environmental degradation or destruction, items of elitist consumption, etc.). Thus, the four industry groups which are specifically mentioned to require industrial licensing are:
- distillation and brewing of alcoholic drinks;
- electronic aerospace and defence equipment, defence aircraft and warships, manufacture of aerospace substitutes;
- industrial explosives including detonating fuses, safety fuses, gun powder, nitro-cellulose and matches; and
- cigars and other tobacco products.
Foreign Investment
- In order to attract foreign investment in high priority industries requiring large capital and advanced technology, approval for direct foreign investment upto 51% of equity in high priority sectors known as Appendix I industries was provided.
Foreign Technology Agreements
- Access to advanced technology was enabled, by providing for automatic approval of technology agreements related to high priority industries within specified parameters. Indian companies were made free to negotiate the terms of technology transfer with their foreign counterparts according to their commercial judgement.
The principal features of the policy on foreign technology agreements were: - Automatic permission will be given to foreign technology agreements in identified high priority industries up to a lumpsum payment of $ 2 million, 5 percent royalty for domestic sales and 8 percent for exports, subject to total payment of 8 percent of sales over a 10 year period from the date of agreement or 7 years from commencement of production.
- In respect of industries other than those specifically mentioned, automatic permission will be given subject to the same guidelines as in cases where no foreign exchange is required for any payment.
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Public Sector Policy
- De-reservation of Public sector: Sectors that were earlier exclusively reserved for the public sector were reduced.
- Reduction in the number of industries reserved for the public sector from 17 to 8 (and then to 3)
- In the 1956 resolution on Industrial policy, 17 industries were reserved for the public sector. In 1991, only 8 industries were reserved for the public sector; they were restricted to atomic energy, arms and communication, mining, and railways. In 2001, only three industries were reserved exclusively for the public sector. These were atomic energy, arms and rail transport.
- Presently, only two sectors- Atomic Energy and Railway operations- are reserved exclusively for the public sector.
- Industrial Sickness: Measures were introduced to address the problem of industrial sickness and to revive sick units.
- Public enterprises which were chronically sick and which were unlikely to be turned around were to be referred to the Board of Industrial and Financial Reconstruction for revival/rehabilitation schemes.
- Disinvestment: The government initiated the process of disinvestment in public sector enterprises to improve their efficiency and competitiveness.
- The objective was to raise resources and encourage wider participation of the general public and workers in the ownership of these enterprises.
MRTP Act
- It was decided that the MRTP Act will be amended to remove threshold limits of assets in respect of MRTP companies and dominant undertakings. It also abolished the requirement of prior approval of the Central Government for establishing new undertakings.
Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 Conceived as a competition law, the Monopolies and Restrictive Trade Practices Act had the following objectives: - curbing the concentration of economic power and growth of monopolies
- imposing restrictions on the acquisition and transfer of shares of, or by, certain corporate bodies
- controlling monopolistic trade practices
- controlling restrictive and unfair trade practices.
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Gramdan: Later Development of the Movement
- Towards the end of 1955, the movement took a new form known as Gramdan or “donation of village”.
- In Gramdan villages, the movement declared that all land was owned collectively or equally, as it did not belong to any one individual.
- Influence of Gandhian Ideal
- Gramdan was based on the Gandhian idea that land belongs to the community and should be used for the welfare of all.
- It tried to move beyond individual land donation and towards collective village ownership.
Extent of Gramdan
- The movement started in Orissa and was most successful there.
- By the end of 1960, there were more than 4,500 Gramdan villages.
- Most of these were in Odisha, followed by Maharashtra, Kerala, Andhra Pradesh and Madras.
Significance of the Bhoodan Movement
- Non-Legislative Attempt at Land Reform
- Bhoodan was significant because it attempted land reform through a movement rather than through government legislation.
- It showed that agrarian reform could also be pursued through moral mobilisation and social action.
- Moral Ambience for Land Reform
- The movement created a moral atmosphere in favour of land redistribution.
- It put pressure on landlords and created conditions favourable to land reform debates.
- Peaceful Alternative to Agrarian Conflict
- In a period when some regions were witnessing violent agrarian struggles, Bhoodan offered a non-violent method for addressing land inequality.
- Its importance lies in its attempt to resolve rural inequality through persuasion rather than confrontation.
- Link with Gandhian Constructive Politics
- The movement represented the Gandhian approach to social change after Independence.
- It combined constructive work, trusteeship, village-level mobilisation and ethical appeal.
Limitations
- Loss of Momentum and Weak Continuity
- After the initial success, the movement gradually lost momentum.
- Very little new land was received as donation after the first few years. By the 1960s, the Bhoodan-Gramdan movement had largely lost its energy.
- Donated Land Often Unfit for Cultivation
- A substantial part of the donated land was unfit for cultivation or was under litigation.
- This reduced the actual value of the land received and made redistribution difficult.
- Limited Actual Distribution
- Although some land was received under the Bhoodan Movement, actual distribution among the landless remained limited.
- For example, in Bihar, the state government decided in June 1999 to dissolve the State Bhoodan Committee because it had failed to distribute even half of the available Bhoodan land over several decades.
- Regional Inequity: The movement struggled in areas with high land inequality and entrenched socio-economic hierarchies.
- It has been argued that this movement was successful mainly in villages where class differentiation had not yet emerged and there was little if any disparity in ownership of land or other property , such as those inhabited by certain tribal communities. Vinoba is said to have picked such villages for this movement
- Failure to Become a Mass Movement
- The movement had revolutionary potential because it was based on trusteeship and moral pressure. However, it failed to transform itself into a larger mass movement capable of creating irresistible pressure for social transformation.
- The Sarvodaya Samaj did not succeed in building a large-scale active movement against injustice.
- Limited Structural Change
- Bhoodan did not fundamentally alter land relations across India.
- Since it depended on voluntary action, it could not replace state-led land reforms such as ceilings, tenancy reforms and redistribution through law.
Overall Assessment
- Positive Contribution
- The Bhoodan Movement made an important moral contribution to land reform. It highlighted the problem of landlessness, mobilised public opinion and encouraged voluntary sharing of land.
- Its early success showed the power of moral appeal in rural society.
- Practical Failure
- However, its practical results remained limited. Much of the donated land was uncultivable or disputed, actual redistribution was limited, and the movement lost momentum after the mid-1950s.
- It could not become a substitute for state-led legal land reforms.
- The movement should neither be dismissed completely nor over-glorified. Its moral and symbolic impact was significant, but its economic and redistributive impact remained limited.
Conclusion
The evolution of India’s industrial policy shows a shift from state-led industrialisation and public sector dominance to liberalisation, private sector participation, competition and global integration. The 1991 reforms were the most important turning point, as they dismantled the licence raj and opened the economy to private and foreign investment.
Q1. Trace the evolution of industrial policy in India from Independence to the New Industrial Policy of 1991.
(150 words, 10 marks)
Q2. The Industrial Policy Resolution of 1956 laid the foundation for state-led industrialisation in India. Discuss.
(150 words, 10 marks)
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