Unit 3: Indian Industrial Development since Independence

1. Phases of industrial growth since independence

India's industrial strategy has evolved through distinct phases since 1947.

Phase 1 (1950-1965): The Nehru-Mahalanobis Strategy

• Strategy: Based on the Second Five-Year Plan (1956-61), this strategy emphasized **rapid industrialization** led by the public sector.
• Core Idea: **Import-Substituting Industrialization (ISI)**. The goal was to build domestic capacity in **heavy and basic industries** (like steel, machinery, power, chemicals) to reduce dependence on foreign countries.
• Policy Tool: The Industrial Policy Resolution (IPR) of 1956, often called the "Economic Constitution of India." It reserved key industries for the public sector (Schedule A) and protected domestic industries with high tariffs and import quotas.

Phase 2 (1965-1980): Industrial Stagnation and "License-Permit Raj"

• Trend: This period saw a significant slowdown in industrial growth.
• Causes:
  • External Shocks: Wars with China (1962) and Pakistan (1965, 1971), and global oil price shocks (1973, 1979).
  • Domestic Issues: Severe droughts diverted resources from industry to agriculture.
  • Policy Issues: The ISI strategy, implemented via a complex system of industrial licensing (**"License-Permit Raj"**), became extremely restrictive. It stifled competition, innovation, and efficiency.

Phase 3 (1980s): Tentative Liberalization

• Trend: The government began a "pro-business" tilt, cautiously easing some licensing restrictions and import controls.
• Result: Industrial growth picked up significantly during this decade, though it was financed by external borrowing, which contributed to the 1991 crisis.

Phase 4 (1991-Present): The Post-Reform Era

• Strategy: In response to the 1991 Balance of Payments (BoP) crisis, India launched the **New Economic Policy (NEP)**.
• Core Idea: A complete reversal from ISI to an outward-looking, market-driven economy. This is known as the **LPG** model (covered in section 3).

2. Public sector enterprises

Public Sector Enterprises (PSEs), also known as Public Sector Undertakings (PSUs), are companies owned and controlled by the government (central or state).

Rationale for PSEs (Why were they created?)

In the 1950s, the private sector lacked the massive capital and risk-appetite needed to build an industrial base. PSEs were created to:

1. Build Core Infrastructure: To control the **"commanding heights"** of the economy (e.g., power plants, steel mills, heavy machinery, oil).
2. Long Gestation Projects: Invest in projects that take a long time to become profitable (like dams), which private capital would avoid.
3. Promote Regional Balance: Set up industries in backward regions to create jobs.
4. Social Objectives: Prevent the concentration of economic power and provide essential goods at subsidized prices.

Problems with PSEs

By the 1980s, many PSEs (with some exceptions like the "Navratnas") had become a major problem:

• Low Profitability and Inefficiency: Many PSEs made huge losses, becoming a drain on the government budget.
• Over-staffing: They were often seen as job providers, leading to bloated, unproductive workforces.
• Political Interference: Decisions were often based on political needs rather than commercial logic.
• Lack of Competition: As monopolies, they had no incentive to innovate or improve quality.

3. Industrial reforms since independence

While minor reforms happened in the 1980s, the most significant "industrial reforms" are synonymous with the New Economic Policy (NEP) of 1991. These reforms are popularly known as the **LPG Reforms**.

The LPG Reforms:

• (L) Liberalization:
  • Abolition of Industrial Licensing: This was the biggest reform. The "License-Permit Raj" was ended. Businesses no longer needed government permission to start a new factory, expand capacity, or diversify products (except in a few strategic sectors like defense, atomic energy).
  • Freedom of Entry: Abolished monopolies, allowing private companies (including foreign ones) to enter sectors previously reserved for the public sector.
• (P) Privatization:
  • Disinvestment and Sale: As discussed in the previous section, this involved reducing the government's ownership stake in PSEs to improve their efficiency and raise funds.
• (G) Globalization:
  • Trade Liberalization: Drastically cutting **tariffs** (taxes on imports) and abolishing **quotas** (limits on the quantity of imports). This forced Indian industries to compete with foreign goods.
  • Foreign Investment: Actively encouraging **Foreign Direct Investment (FDI)** and Foreign Institutional Investment (FII) to bring in capital, technology, and management expertise.

4. Small and Medium Scale industries in India: Problems and prospects

This sector is now known as **MSME (Micro, Small, and Medium Enterprises)**. It is considered the backbone of the Indian economy.

Prospects (Importance of MSMEs)

• Employment Generation: They are the largest employer after agriculture. They are **labor-intensive**, meaning they create more jobs per rupee invested than large-scale industries.
• Regional Balance: They can be set up in smaller towns and rural areas, countering the "urban bias" of large industries and reducing migration.
• Export Potential: They contribute significantly to India's total exports (e.g., textiles, gems, leather products).
• Flexibility and Innovation: They can adapt quickly to changing market demands.
• Use of Local Resources: They often use local raw materials and skills, promoting entrepreneurship.

Problems (Major Challenges)

1. Access to Credit: This is the single biggest problem. Banks are often hesitant to lend to MSMEs due to a lack of proper collateral and records, forcing them to rely on informal, high-cost loans.
2. Outdated Technology: Many MSMEs use old, inefficient machinery, which results in low productivity and poor quality.
3. Competition: They face stiff competition from cheap imports (especially from China) and large domestic companies.
4. Marketing and Branding: They lack the resources for large-scale advertising and brand-building to reach national or global markets.
5. Infrastructure Deficit: They are hit hardest by poor infrastructure, such as unreliable power supply, bad roads, and high transport costs.
6. Regulatory Hurdles: They often face a complex web of regulations and inspections ("Inspector Raj").