Economic Advancement in Industrial sector in India 

Economic theories have emphasized a good industrial sector in India for the effective progress of a nation. Further, the industrial sector provides stable employment, reduces over-dependency on agriculture and promotes modernisation. 

Hence five five-year plans focussed on the development of the industrial sector in India, aimed to expand the industrial base with a variety of industries for economic growth after independence.

Government Intervention and the Evolution of Industrial Sector in India

• Public and Private Sectors in the Industrial Sector in India Development, At the time of independence, Indian industrialists did not have enough capital to undertake major investments, so the government had to promote the industrial sector in India.
• Besides, India’s inclination towards socialist principles caused the government to control industries that were vital for the economy, which was also put in the Second Five-Year Plan. 

Industrial Policy Resolution 1956: Shaping India’s Economic Landscape

• This resolution was aligned on the lines of socialist principles and formed the basis for the Second Five-Year Plan. 
• It classified industries into 3 categories:
  • Industries that are exclusively owned by the government, 
  • Industries in which the private sector could supplement the efforts of the public sector and 
  • Remaining industries which were to be in the private sector. 
• State Control and Licensing Requirements: Irrespective of categories, the private sector was also kept under state control, as all these industries needed a license to operate. 
• Promoting Regional Equity: It was easier to obtain a license if the industrial unit was established in an economically backward area which ensured regional equality. 
• Regulating Industrial Growth: There was a license for expanding output or producing a new variety of goods so that the goods produced were not more than what the economy required. The Industrial sector in India witnessed significant regulatory measures during this period.

Empowering Rural India: Evolution and Challenges of Small-Scale Industries

• Rural Development through Small-Scale Industries: In 1955, the Village and Small-Scale Industries Committee (Karve Committee) highlighted the role of small-scale industries in promoting rural development in promoting rural development in the industrial sector in India.
• Definition: A Small-Scale Industry is defined with reference to the maximum investment allowed in an industry. This limit has been revised over time. 
  • At present, the maximum investment allowed is rupees one crore.
• Labor-Intensive: They are more labor intensive and thus provide more employment
  • However, they can’t compete with big industrial firms (domestic as well as foreign)
• Product Reservations and Incentives to Foster Growth: 
  • So the government intervened and reserved a certain number of products for small-scale industries. 
  • Besides, they were given concessions such as lower excise duty and bank loans at lower interest rates.
  • However, the reservation policy was dismantled between 1997 and 2015, with many products removed from the reserved list.

Development of Import Substitution in Industrial sector in India: Fostering Domestic Growth

• In the first 7 Five Year Plans (FYPs), we followed a trade policy called import substitution which aimed at replacing or substituting imports with domestic production.
• This policy aimed at protecting domestic industries from foreign competition. 
• For this, the government used tariffs & quotas to regulate imports. 
  • Tariffs are tax on imported goods which are imposed to make imports expensive.
  • Quotas are the quantity of imported goods which restrict imports.

Growth of Industrial Sector in India: Achievements and the Role of the Public Sector

• Expansion of India’s Industrial Sector: The industrial sector in India experienced a significant increase in its share of GDP from 11.8% in 1950-51 to 24.6% in 1990-91, indicating significant development(Refer Figure)
• The Role of the Public Sector: 
  • The industrial sector’s annual growth rate of 6% is commendable.
  • By 1990, it had become well-diversified due to the public sector. 
• Indigenous Industry Growth: The promotion of small-scale industries and protection from foreign competition enabled the development of indigenous industries in the electronics and automobile sectors.

Comparison between the contribution of different sectors to GDP in 1950-51 and 1990-91

Assessing India’s Public Sector: Challenges, Criticisms, and Calls for Reform

Despite the public sector’s significant contribution to the Indian economy, some economists criticised its performance. 

• State-Led Production and Monopolies: Initially, the public sector was required, but state enterprises continued to produce certain goods and services, often monopolising them.
  • Example: Telecommunication services were reserved for the public sector even after private sector firms could provide them. 
• The Era of Permit Licence Raj:
  • It regulated industries, which had been criticised for being misused by industrialists to prevent competitors from starting new firms. 
  • This excessive regulation prevented firms from becoming more efficient and spending more time lobbying with ministries. 
• Continued Protectionism: 
  • Protection from foreign competition has been criticised for continuing even after it proved to do more harm than good.
  •  Indian consumers had to purchase what producers produced, leading to low-quality goods being sold at high prices.
• The Lack of Differentiation Between Public and Private Sector:
  • After four decades of planned development, no distinction has been made between what the public sector can do and what the private sector can also do. 
  • This has led some scholars to argue that the state should focus on areas where the private sector can manage, and the government should focus on important services that the private sector cannot provide. 
• The Dilemma of Public Sector Firms in India: 
  • Public sector firms in India have faced significant losses due to the difficulty of closing government undertakings, which drains limited resources. 
  • Economists argued that the public sector should be evaluated based on their contribution to the welfare of the nation, not on profits. 

Due to all these conflicts, economists called for change in policy with a restricted role of the public sector and more freedoms for the private sector which led to a New Economic policy in 1991.

Conclusion

• Progress of India during the first seven plans included self-sufficiency in food production (green revolution), diversified industries and abolition of the zamindari system (land reforms).
• However, excessive government regulation and inward-oriented trade strategies both reduced the efficiency of the industrial sector in India

This showed the need for reform of economic policy in 1991.

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