INDIAN ECONOMY (1950–1990)- Part-2
INDUSTRY AND TRADE POLICY
Public sector was given a leading role in industrial development
1. At the time of independence, Indian industrialists did not have the capital to undertake
investment in industrial ventures required for the development of our economy.
2. The market was not big enough to encourage industrialists to undertake major projects even
if they had the capital to do so.
3. In addition, the decision to develop the Indian economy on socialist lines led to the policy
of the state controlling the commanding heights of the economy, as the Second Five Year
plan put it.
This meant that the state would have complete control of those industries that were vital for
the economy. The policies of the private sector would have to be complimentary to those of the
public sector, with the public sector leading the way.
Industrial Policy
Importance : Nations can progress only if they have a good industrial sector. Industry provides
employment which is more stable than the employment in agriculture and it promotes modernisation
and overall prosperity.
Industrial Policy Resolution 1956 (IPR 1956): In accordance with the goal of the state
controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was
adopted. This resolution formed the basis of the Second Five Year Plan, the plan which tried to build
the basis for a socialist pattern of society.
(a) This resolution classified industries into three categories.
1. The first category comprised industries which would be exclusively owned by the state.
2. the second category consisted of industries in which the private sector could
supplement the state sector, with the state taking the sole responsibility for starting
new units.
3. the third category consisted of the remaining industries which were to be in the
private sector.
(b) Industrial Licensing : The private sector was regulated through a system of licenses.
No new industry was allowed unless a license was obtained from the government.
Objective: This policy was used for promoting industry in backward regions.
it was easier to obtain a license if the industrial unit was established in an economically
backward area. In addition, such units were given certain concessions such as tax benefits
and electricity at a lower tariff. The purpose of this policy was to promote regional
equality.
➢ Even an existing industry had to obtain a license for expanding output or for diversifying
production (producing a new variety of goods).
➢ This was meant to ensure that the quantity of goods produced was not more than what
the economy required.
➢ License to expand production was given only if the government was convinced that the
economy required a larger quantity of goods.
Reservation for Small-Scale Industry
In 1955, the Village and Small-Scale Industries Committee, also called the Karve
Committee, noted the possibility of using small-scale industries for promoting rural
development.
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A ‘small-scale industry’ is defined with reference to the maximum investment
allowed on the assets of a unit. In 1950 a small-scale industrial unit was one which
invested a maximum of rupees five lakh; at present the maximum investment allowed is
rupees one crore.
Need to support SSI:
(a) It is believed that small-scale industries are more ‘labour intensive’ i.e., they use more
labour than the large-scale industries and, therefore, generate more employment.
(b) But these industries cannot compete with the big industrial firms; it is obvious that
development of small-scale industry requires them to be shielded or protected from the
large firms.
Steps taken by the government to support SSI:
(c) For this purpose, the production of a number of products was reserved for the
small-scale industry; the criterion of reservation being the ability of these units to
manufacture the goods.
(d) They were also given concessions such as lower excise duty and bank loans at
lower interest rates.
Trade policy: Import Substitution
In the first seven plans, trade was characterised by what is commonly called the Inward-looking
trade strategy.
Import substitution policy aimed at replacing or substituting imports with domestic
production.
(a) Objective was to protect the domestic industries from foreign competition.
(b) Protection from imports took two forms: tariffs and quotas. (instruments for import restrictions)
• Tariffs are monetary restrictions in the form of tax on imported goods.
they make imported goods more expensive and discourage their use.
• Quotas are quantitative restrictions on imports which specify the quantity of goods which
can be imported.
(c) The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic
firms from foreign competition.
(d) The policy of protection was based on the notion that industries of developing countries were not
in a position to compete against the goods produced by more developed economies. (infant
industry argument). It was assumed that if the domestic industries were protected, they would
learn to compete in the course of time.
(e) Our planners also feared the possibility of foreign exchange being spent on import of luxury
goods if no restrictions were placed on imports. Nor was any serious thought given to promote
exports until the mid-1980s.
Effect of Policies on Industrial Development during 1950-90:
• Positive effects of industrial and foreign trade policies
1) The proportion of GDP contributed by the industrial sector increased in the period from 13 % in
1950-51 to 24.6 % in 1990-91. The rise in the industry’s share of GDP is an important indicator
of development.
2) The 6% annual growth rate of the industrial sector during the period is commendable.
3) No longer was Indian industry restricted largely to cotton textiles and jute; in fact, the industrial
sector became well diversified by 1990, largely due to the public sector.
4) The promotion of small-scale industries gave opportunities to those people who did not have the
capital to start large firms to get into business.
5) Protection from foreign competition enabled the development of domestic/indigenous industries in
the areas of electronics and automobile sectors which otherwise could not have developed.
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• Negative effects of industrial and foreign trade policies
1. Overexpansion of public sector
(a) It is now widely held that state enterprises continued to produce certain goods and services
(often monopolising them) although this was no longer required. An example is the provision
of telecommunication service which continued to be reserved for the Public Sector even after
it was realised that private sector firms could also provide it.
(b) Another instance could be the establishment of Modern Bread, a bread-manufacturing firm or
managing hotels even when private sector could do the same.
Hence, no distinction was made between (i) what the public sector alone can do and (ii) what the
private sector can also do.
2. Inefficient functioning of the public sector as it started incurring losses leading to
drain on the nation’s limited resources.
(a) Many public sector firms incurred huge losses but continued to function because it is difficult
to close a government undertaking even if it is a drain on the nation’s limited resources.
(b) Quite a few of the public sector firms were originally private firms which were on the verge of
closure due to losses; they were then nationalised to protect the jobs of the workers.
3. Misuse of License – Permit License Raj
(a) Big industrialists would get a license not for starting a new firm but to prevent competitors
from starting new firms.
(b) More time was spent by industrialists in trying to obtain a license rather than on thinking
about how to improve their products.
The excessive regulation of private sector came to be called the permit license raj prevented
certain firms from becoming more efficient.
4. No incentive to improve the quality of Indian goods
Due to restrictions on imports, the Indian consumers had to purchase whatever the Indian
producers produced.
The producers were aware that they had a captive market; so they had no incentive to improve
the quality of their goods.
Conclusion
1. Our industries became far more diversified compared to the situation at independence.
2. India became self- sufficient in food production thanks to the green revolution. Land reforms
resulted in abolition of the hated zamindari system.
3. Excessive government regulation prevented growth of private entrepreneurship.
4. In the name of self-reliance, our producers were protected against foreign competition and this
did not give them the incentive to improve the quality of goods that they produced.
5. Our policies were ‘inward oriented’ and so we failed to develop a strong export sector.
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