Changes in Industrial Policy and their Effects on Industrial Growth

Free PDF's 5th August 2023

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According to IMF “Industrial policy” refers to government efforts to shape the economy by targeting specific industries, firms, or economic activities. This is achieved through a range of tools such as subsidies, tax incentives, infrastructure development, protective regulations, and research and development support.

Goals of Industrial Policy in India:

Goals of Industrial Policy in India

Evolution of Industrial Policies in India:

Industrial Policy Resolution 1956 (IPR 1956):

This resolution classified industries into three categories.

The first category comprised industries which would be exclusively owned by the state;
Second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units;
Third category consisted of the remaining industries which were to be in the private sector.

Industrial Policy Resolution 1977 (IPR 1977):

Thrust on cottage and small-scale industries
Development of industrial technology that was appropriate in Indian context
Recognized the role of large-scale industries for building up infrastructure, meeting the requirements of machinery of other industries.
Use of Monopolies and Restrictive Trade Practices (MRT P) Act to curb monopoly power of big industries

India’s Industrial Policy Statement, 1980:

Integrating Industrial Development by Promoting the concept of Economic Federalism
Optimum utilization of installed capacity
Promotion of export-oriented and import substitutions industries

New Industrial Policy During Economic Reforms of 1991

Features of the New Industrial Policy

De-reservation of Public Sector: Sectors that were previously exclusively reserved for the public sector were reduced in scope. However, certain core areas, including arms and ammunition, atomic energy, mineral oils, rail transport, and mining, retained the pre-eminent position of the public sector.
De-licensing: Currently, industrial licenses are required for only four industries related to security, strategic concerns, and environmental issues, which include electronic aerospace and defence equipment, specified hazardous chemicals, industrial explosives, and cigars and cigarettes of tobacco and manufactured tobacco substitutes.
Disinvestment of Public Sector: The government reduced its stakes in Public Sector Enterprises (PSEs) to enhance their efficiency and competitiveness.
Liberalization of Foreign Investment: The new industrial policy marked the first-time foreign companies were allowed to have majority ownership in India. Up to 51% Foreign Direct Investment (FDI) was permitted in 47 high-priority industries, and for export trading houses, FDI up to 74% was allowed.
Foreign Technology Agreements: Automatic approvals were granted for technology-related agreements. The Monopolies and Restrictive Trade Practices (MRTP) Act was amended, removing asset threshold limits for MRTP companies and dominant undertakings. The MRTP Act was subsequently replaced by the Competition Act of 2002.

Outcomes of the New Industrial Policies

1. Reduction of Bureaucratic Hurdles

2. Limited Role of the Public Sector

3.Easier Entry of Multinational Companies and Privatization

4. Focus on Export Promotion

Limitations of Industrial Policies in India

1. Stagnation of the Manufacturing Sector

2. Distortions in Industrial Pattern

4. Absence of Incentives for Efficiency

5. Vaguely Defined Industrial Location Policy

Way Forward

Shift from Socialistic to Capitalistic Industrial Policies: India's industrial policies have transitioned from a predominantly socialistic pattern in 1956 to a more capitalistic approach since 1991. The current industrial policy regime in India emphasizes increased foreign investment and reduced regulations.
Positive Reforms and Campaigns: Reforms related to insolvency resolution (Bankruptcy and Insolvency Act, 2017) and the Goods and Services Tax (GST) have yielded positive outcomes for the industrial sector. Initiatives like Make in India and Start-up India have contributed to enhancing the business ecosystem in the country.
Ongoing Challenges: Challenges such as electricity shortages, high prices, credit constraints, labor regulations, political interference, and other regulatory burdens continue to hinder the growth of the industrial sector in India.
Need for a New Industrial Policy: To boost the manufacturing sector, there is a need for a new industrial policy in India. The government recognized this necessity in December 2018 and expressed the intention to introduce a comprehensive industrial policy that would serve as a roadmap for all business enterprises in the country.