Industrial Policy: Meaning and Importance

The Industrial Policy Resolution of 1948 was the first comprehensive industrial statement by the Government of India. It laid the foundation for a mixed economy. Its key aspects included the classification of industries into four broad categories:

• Strategic Industries (Public Sector): Exclusively owned by the state, such as Arms and Ammunition, Atomic Energy, and Rail Transport.
• Key Industries (Public-cum-Private Sector): Six industries like coal, iron and steel, and shipbuilding, where the state would take primary responsibility for new units, with private sector cooperation.
• Controlled Private Sector: Eighteen important industries that would remain under private ownership but would be subject to government control and regulation.
• Other Industries (Private and Cooperative Sector): All remaining industries were left open to the private and cooperative sectors.

The Industrial Policy of 1956, often called the "Economic Constitution of India," significantly expanded the role of the state compared to the 1948 policy. The key difference was the more rigid classification of industries into three schedules:

• Schedule A: 17 industries that became the exclusive responsibility of the State (e.g., defence, atomic energy, railways).
• Schedule B: 12 industries that would be progressively state-owned, with the state taking the lead in establishing new enterprises, while the private sector supplemented these efforts.
• Schedule C: All remaining industries were left to the private sector, though they were still subject to the state's overall industrial policy and licensing.

The New Industrial Policy of 1991 marked a paradigm shift from a state-dominated to a market-driven economy, introducing the LPG (Liberalisation, Privatisation, Globalisation) reforms. Its main features were:

• De-reservation of Public Sector: The number of industries reserved for the public sector was drastically reduced from 17 to just 8, and later to only two (atomic energy and railways).
• Abolition of Industrial Licensing: The system of industrial licensing, also known as the 'Permit Raj,' was abolished for most industries, allowing for easier entry and expansion.
• Liberalised Foreign Investment: It allowed for a significant increase in Foreign Direct Investment (FDI), with automatic approval for up to 51% foreign equity in high-priority industries.
• Disinvestment of Public Sector Undertakings (PSUs): The policy initiated the process of selling parts of the equity of selected PSUs to the public and private sectors to improve efficiency and raise funds.

Industrial licensing, a core feature of pre-1991 policies, was abolished primarily because it had become a major obstacle to economic growth. The system, intended to ensure balanced development, led to several problems:

• It created the 'Permit Raj,' a complex system that caused long delays, corruption, and inefficiency in setting up or expanding industries.
• It stifled competition and innovation by protecting existing firms from new entrants.
• It discouraged investment and led to under-utilisation of industrial capacity, as entrepreneurs were hesitant to navigate the bureaucratic hurdles.

The role of the public sector underwent a dramatic transformation between the 1956 and 1991 policies. Under the 1956 policy, the public sector was envisioned as the primary driver of industrialisation, controlling the 'commanding heights' of the economy. It was responsible for developing heavy industries and infrastructure. In contrast, the 1991 policy repositioned the public sector's role. Instead of expansion, the focus shifted to improving the performance of existing PSUs, initiating disinvestment, and opening up most sectors previously reserved for it to private competition.

Allowing Foreign Direct Investment (FDI) is a critical component of modern industrial policy because it serves multiple purposes. Firstly, it provides a crucial source of capital for industrial development, supplementing domestic savings. Secondly, FDI is not just about money; it brings in advanced technology, managerial skills, and operational expertise that can modernise domestic industries. Thirdly, it fosters a competitive environment, forcing domestic firms to improve their efficiency and product quality. Finally, it helps integrate the domestic economy with the global economy, opening up new markets for exports.

An industrial policy can be a powerful tool to promote balanced regional growth by correcting regional disparities. This is achieved by:

• Providing incentives and subsidies like tax holidays, cheaper land, and concessional loans for setting up industries in backward or underdeveloped regions.
• The government can focus on developing infrastructure (roads, power, communication) in these areas, making them attractive for private investment.
• By deliberately locating public sector undertakings in less-developed areas, the government can create an industrial hub that spurs ancillary industries and generates local employment.

While early industrial policies helped build a diversified industrial base, they had significant limitations that constrained growth. Key issues included:

• Over-regulation: The complex system of licensing and controls ('Permit Raj') stifled entrepreneurship and led to inefficiency.
• Inward-looking Trade Strategy: The focus on import substitution made domestic industries uncompetitive on the global stage as they were protected from foreign competition.
• Poor Performance of PSUs: Many Public Sector Undertakings became inefficient and loss-making, becoming a drain on the national budget instead of contributing to it.
• Neglect of the Private Sector: The excessive focus on the public sector often crowded out private investment and limited its potential contribution to the economy.