As far as can be ascertained, during the pre-independence period, there were few aspects of government policy, which could be, characterized as any kind of industrial policy. Apart from public investment in roads, railways and irrigation, there was little public investment of any kind. In particular, education was highly neglected and industrial protection to the nascent industries was hardly provided. The industrial scene at independence can be characterized as follows:

• The industrial sector was extremely undeveloped.
• There was great resentment at the lack of infrastructure industries.
• The lack of government intervention in favour of industries sector was seen as an important cause of underdevelopment.
• Export orientation had been against the country’s interests.
• Structure of ownership was highly concentrated and family-based.
• Technical and managerial skills were in very short supply.

As a result, the national consensus was that economic sovereignty and economic independence lay in rapid industrialization including particularly the promotion of industrial infrastructure. The Indian industrial houses of the day were seen as having served the nationalist cause in the face of colonial adversity and were therefore deserving of all protection. Furthermore the composition of exports was tilted towards the export of primary goods whereas imports were mainly of manufactures. Thus, excessive exports were seen as being against the economic necessities of the country rather than as growth-inducing process. The discrimination faced by Indians in all economic activities, particularly related to the attainment of responsible positions, both in the government and in private sector, provided a great urge towards rapid indigenization in all respects and a general antipathy towards foreign influence, foreign trade and foreign investment. The stage was, therefore, set for the practice of economic and industrial policies, which emphasized rapid industrialization, but through an activist and interventionist role of the government, accompanied by a tendency towards autarky.

INDUSTRIAL POLICY

The evolution of the policy environment of Indian Industry is a fascinating story. The genesis of industrial policy in independent India can be traced back to the setting up of a National Planning Committee in 1938 under the chairmanship of Jawaharlal Nehru, which emphasized active state planning and control.

Industrial policy resolution April 1948

It divided the industries into four broad categories and retained defence production, atomic energy and railways under the exclusive domain of the central government and provided that industries like aircraft manufacture, shipbuilding, coal, iron and steel, mineral oils and manufacture of telecommunication equipment should be set up only by the central or state governments.

Industrial policy resolution, April 1956

The second industrial policy resolution, April 1956: It classified the industries under three schedules and extended the sphere of government ownership and control by clubbing the first two categories of industries of the 1948 resolution and also adding heavy machinery, heavy electrical, core mining, generation and distribution of electricity, basic metals, air transport to the reserved list. The resolution also emphasized the need for reducing regional disparities, securing a balanced regional development, developing village and small-scale industries while recognizing the necessity of securing participation of foreign capital and enterprise for fostering industrial development and imparting training to Indian personnel.

Industrial licensing mechanism

The industrial licensing mechanism: This was evolved in 1951 and strengthened over time till the early seventies. Under this regime, industrial diversification and growth proved to be limited from the mid-sixties to the early seventies. The continued slow industrial growth for the third year in succession since the onset of the seventies, the shortage of wage goods and the high inflation rate forced the government to take a serious view of its industrial policy.

Monopolies & Restrictive Trade Practices Act, 1969

The important objectives of MRTP Act, 1969 are:

• To prevent centralization of economic power and to put a control on monopolies.
• To check restrictive and unhealthy trade practices.

After the enforcement of this Act, all those companies whose assets were more than a prescribed limit (Rs. 100 crore w.e.f. 1989) and which were classified as MRTP companies were given the permission of entry in some selected industries only (That too on the basis of separate permission in different matters).  Besides control through industrial licensing, these big firms had to obtain permission separately in matters of investment proposals.  Consequently, an adverse effect on the development and extension plans of many large private firms was observed. 

In order to remove the initial limits of assets related to MRTP the Parliament passed MRTP Amendment Act, 1991.  The Amendment Act has totally eliminated pre-entry restrictions.  No prior approval of the Central Government is required now for expansion establishment of new undertakings, major amalgamation take over or appointment of directors in respect of the undertakings.

According to a major decision taken by MRTP commission, Government departments providing commercial services will also be excluded form the MRTP Act. In this services like telecommunication, transportation (including railways), and housing services have been included.  Services, which are provided without fees, are not included in the provisions of MRTP Act.

Industrial policy statement, February 1973

Industrial policy statement, February 1973: It was intended to merely make some changes in the industrial structure. It allowed larger industrial houses with assets of not less than Rs. 20 to participate in the establishment of core industries along with other applicants provided the item was not reserved for production in the public sector or the small sector.

Delicensing, October 1975

The government first delicensed 21 industries and permitted unlimited capacity expansion in 30 other industries by monopoly houses as well as foreign companies. The government followed this up in November 1975 by declaring 25 per cent of excess unauthorized capacity as legal under normal expansion and by allowing another 25 per cent to be covered by automatic licensing over a five-year period. Thus, while industrial licensing was not formally withdrawn. Unauthorized capacities were ratified periodically in order to ensure that production was augmented.

These initiatives however did not make a lasting impact on industrial growth and productivity. Exogenous shocks such as the oil crises had influenced the sector’s development in the seventies. Competition did not flourish, given the system of licensing, reservations, pricing and other quantitative restrictions and high tariffs. Therefore, a new industrial policy statement was framed in 1980 removing the artificial divisions between the small and large scale industries and regularizing the unauthorized excess capacity installed in the private sector, apart from the normally permitted capacity expansion of up to 25 per cent of the authorized capacity. This statement also proposed to allow automatic expansion of capacity to all industries listed in the First Schedule of India Industries (Development and Regulation) Act, 1951.

Subsequently in May 1985, 27 industries were exempted from the MRTP Act, A scheme of re-endorsement of capacity was announced in May 1985 under which automatic expansion in capacity was allowed to units for achieving economics of scale and a further 49 per cent rise was allowed for modernization. This was done to facilitate rapid growth of the industrial sector and to induct latest technology. The concept of broad banding was introduced for a large number of items under which flexibility was given to an undertaking to manufacture any type of item so long as the total production did not exceed the overall licensed capacity. This was done in order to enable variations in the product mix depending upon demand in the market. In January 1986, 23 industries located in centrally declared backward areas were delicensed for MRTP Act and FERA. Raising of the threshold asset limit in respect of MRTP companies from Rs. 20 crore to Rs. 100 crore led 112 companies out of the purview of the Act. Investment limits for small-scale and ancillary units were enhanced and 200 items reserved for production in the small-scale sector were de-reserved.

Further liberalization of industrial licensing was attempted when in June 1988 projects having investment in fixed assets upto Rs. 50 crore in centrally declared backward areas and upto Rs. 15 crore in other areas were not required to obtain industrial licenses under the Industrial Development and Regulation Act in respect of non-MRTP and non-FERA companies. Industrialization was also sought to be promoted in backward areas by offering income tax relief.

The experience of the 1980’s showed that industrial growth could pick up if entry barriers were eliminated, and units were made free to respond to demand. It had also become clear that public sector could not expand. The pick up in capital market activity showed that industrial financing could be increasingly undertaken from private funds.

Major external payments problem, 1991

Major external payments problem, 1991: Partly because of large fiscal deficits and partly because of overvalued currency, the government undertook a major decision of introducing comprehensive economic reforms, with emphasis as much on structural as on macro-economic areas.

New industrial policy, July 24, 1991

The new industrial policy, July 24, 1991: The new policy aimed at eliminating barriers to entry and removing restrictions of MRTP Act on the domestic industry to enable it to expand, for facing foreign competition, promoting direct foreign investment, restructuring the public sector and integrating the Indian economy with the global economy. Industrial licensing for all industries, except a few, was abolished. Eight major categories of industries were placed in the reserved list for the public sector and 18 industries were listed for which industrial licensing was made compulsory. Of these, nine were subsequently taken out from the purview of industrial licensing by July 1997. The remaining nine industries for which industrial licensing is necessary are coal and lignite, petroleum (other than crude) and its distillation products, distillation and brewing of alcoholic drinks, sugar, cigars and cigarettes of tobacco and manufactured tobacco substitutes, electronic aerospace and defence equipment of all types, industrial explosives, hazardous chemicals, and drugs and pharmaceuticals. The important aspect of the new industrial policy was that FDI was allowed upto 51 per cent of equity in priority industries, which required high investment and advanced technology. 100 per cent equity was allowed if the entire output was to be exported. High priority industries were to be accorded automatic approval for technology agreements within certain specified parameters. Other industries were also extended this facility provided no expenditure of free foreign exchange was involved. The terms of technology transfer were also left to the commercial judgment of individual companies. The Monopolies & Restrictive Trade Practices Act was toned down to allow large companies free rein.

Evaluating the performance of public sector enterprises, the industrial policy noted that these have yielded low rate of return on capital invested and need to be restructured by rehabilitation of loss-making enterprises through the Board for Industrial and Financial Reconstruction (FIPB) and raising resources by dilution of government equity holdings.

National Manufacturing Policy and National Investment and Manufacturing Zones (NIMZ)

The objective of the National Manufacturing Policy is to

The policy aims to increase the share of manufacturing in the country's GDP from the current 16% to 25% by 2022 and to create 100 million additional jobs in the next decade.

development of world-class infrastructure and investments in India's manufacturing space.

To promote manufacturing in the country, the Government in March 2013 issued norms for setting up of National Investment and Manufacturing Zones (NIMZs) with a host of benefits, including exemption from capital gains tax. NIMZs will be eligible for viability gap funding, which cannot exceed 20 per cent of the project cost. As per the norms, the developers of NIMZs will be allowed to raise funds through external commercial borrowings (ECBs) for developing the internal infrastructure of NIMZs

The draft policy envisages establishment of National Investment and Manufacturing Zones (NIMZ) which would be autonomous and self-regulated and developed in partnership with the private sector. Each NIMZ would have area of 5,000 hectares, selected by State Governments with preference to uncultivable land. It would make industrial land (land acquisition) available through creation of land banks by states. Both state and central Government would fund trunk infrastructure.

 will be developed as integrated industrial townships with state-of-the art infrastructure and land use on the basis of zoning; clean and energy efficient technology; necessary social infrastructure; skill development facilities, These NIMZs would be managed by SPVs (Special Purpose Vehicles) NIMZ would be different from SEZs in terms of size, level of infrastructure planning, and governance structures related to regulatory procedures and exit policies.

Role of Central Government: NIMZ will be notified by the Central Government, by notification in the Official Gazette. The Department of Industrial Policy and Promotion will act as the nodal agency for the central government in matters pertaining to the NIMZs. Central Government will also improve/provide external physical infrastructure linkages to the NIMZs including Rail, Road (National Highways), Ports, Airports, and Telecom, in a time bound manner.

The NIMZ would be managed by special entity. The policy has envisaged fiscal sops to boost manufacturing. Small & medium enterprises to be reimbursed for technology purchase. Industrial training and skills development programmes

The policy embodies an

• easy exit policy and single window clearance in zones.
• Flexible labor laws
• Relaxation in environmental regulations
• Financial and tax incentives to small and medium enterprises
• Incentives to states for infrastructure development
• Incentives for Green Manufacturing
• Increased focus on employment intensive industries, capital goods industry, industries with strategic significance and those in which India enjoys a competitive edge.
• Foreign investments and technologies will be welcomed
• The policy notes that on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. The policy suggests that Central/ State Governments may provide exemptions subject to fulfilment of conditions as provided in the statute.
• SPV may act as a facilitator in this regard. Mechanisms may be developed for cooperation of public or private institutions with government inspection services under the overall control of statutory authorities.

Industrial Performance

From a purely descriptive standpoint, the facts suggest that the Indian industrialization experience can be divided into three qualitatively distinct phases (upto the advent of NIP ’91).

1951-66

The first phase 1951-66 coincided with the first three Five Year Plans, and was characterized by high rates of growth of industrial output, concentrated on capital goods and metal based industries in the public sector. The stimulus to growth came partly from large doses of public investment, as well as significant degree of import substitution. Productivity level and growth rates were low. The high level of capital intensity of these investments was accompanied by slow but steady growth of employment, and wage growth in excess of productivity growth. Exports grew-slowly, and there were a significant shift of destination away from OECD (Organization for Economic Cooperation and Development) countries towards East European countries, apart from an increase in the role of capital goods exports.

1966 Till 1980

The second phase lasted from 1966 till 1980, and was characterized by significantly slower growth, resulting from the slow-down in public investment, impact of wars of 1965 and 1971, slower agricultural progress in the initial few years, increase in costs-direct or indirect due to global hike of oil prices in 1973 and emerging problems of coordination between critical intermediate goods producing enterprises within the public sector. Consequently the slowdown was especially marked in capital goods industries. Productivity levels continued to stay low, and capital intensity continued to rise. Industrial wages also fell in the late sixties, and stagnated thereafter till 1980, while employment continued to grow at a crawling pace. No more import substitution was achieved: dependence on imports actually rose (even after excluding petroleum imports). Exports grew faster especially in textiles, leather and handicrafts (Overall, phase of deceleration and retrogression).

1980s

The third phase, lasting the decade of eighties, in contrast witnessed a gradual recovery of industrial growth. Despite the continuing growth of capital intensity, the growth process appeared to be qualitatively dissimilar from the first phase. Product GroupWise, chemicals and petrochemicals achieved the fastest growth while end-user wise, while the consumer durables - exhibited the fastest growth, capital goods (with the exception of electrical machinery) continued to grow slowly. For the first time productivity tended to improve, though slowly. This was probably related to a host of varied factors; improved labor utilization, easier access to imports, liberalization of regulations, greater reliance on exports, especially to OECD countries, improved demand for consumer durables resulting from liberal fiscal regime and hence wage growth and expansion of public expenditure and from increased prosperity of large farmers in certain regions of the country during the post-green revolution phase. This phase of industrial recovery came to an abrupt end in nineties essentially because it was based on an unsustainable demand conceived and developed by fiscal deficit, which also effected the balance of payments unfavorably as the demand spilled over as the economy liberalized.

On the whole, some of the main objectives of industrial policy laid down during the fifties were therefore achieved:

• An increasingly diversified industrial structure; an increasing role for basic, intermediate and capital goods;
• Growing importance of public sector, and a reduction of dependence on foreign imports.

1990s[1]

The overall rate of industrial growth gradually increased from 2.3 per cent in 1992-93 to 6.0 percent in 1993-94, 9.4 per cent in 1994-95 and 12.1 per cent in 1995-96. However, in 1996-97 it slumped to 7.1 per cent resulting in an average growth rate of 7.3 per cent - against a target of 7.4 per cent - during the Eighth Plan period. Since then the industrial growth has been continuously falling.