Industrial policy

Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

Industrial policy is the government's plan to shape four things in industry: how fast it grows, which industries come up, who owns them, and where they are set up. The government does this through regulation, incentives, and trade and investment measures.

It matters because a country that cannot make its own machines cannot grow its industry on its own. India's industrial policy decided what the state would own, what private firms could do, and how both changed from 1948 to 1991 and after.

Explanation

The four things industrial policy shapes

• Growth: how fast industry expands.
• Structure: which industries come up. Examples are heavy or light industry, and capital goods or consumer goods.

• Capital goods are goods used to make other goods, such as machine tools, turbines and heavy machinery.

• Ownership: who owns industry. It can be the public sector (enterprises owned and run by the government), the private sector (owned by private people or firms and run for profit), or both.

• Location: where industries are set up, for example in backward regions.

The three kinds of tools

• Regulation: licences and limits on capacity.

• Industrial licensing means a firm needs government permission to set up a new unit, expand capacity or make a new product.

• Incentives: subsidies, tax breaks and cheap credit.

• Trade and investment measures: tariffs (taxes on imports), import quotas (limits on how much can be imported) and rules on foreign investment.
• Ownership lists: an Industrial Policy Resolution (IPR) is a formal government statement. It sorts industries by who may own and run them.

Why the state had to lead after 1947

• The industrial base was narrow.
• Most factories made cotton textiles and jute goods.
• India had only two well-managed steel firms, one at Jamshedpur and one at Kolkata.

• There was almost no capital goods industry, so India had to import machines before it could build any new factory.

• Reason 1: Indian industrialists did not have enough capital.

• Steel plants and heavy-machinery units need a huge investment at the start.

• Private savings were small, so no private group could pay for such projects alone.

• Reason 2: The market was too small.

• A giant plant has high fixed costs (costs that stay the same whatever the output). It makes a profit only if it sells a lot.

• Worked example (illustrative):

  • Fixed cost = ₹1,000 crore. Variable cost = ₹50 per unit. Price = ₹60 per unit.
  • Break-even output = Fixed cost ÷ (Price − Variable cost) = 1,000 crore ÷ 10 = 100 crore units.
  • If the market buys only 40 crore units, the firm makes a loss, so no private investor enters.
  • The state can accept this loss for a while for long-term national goals.

• Ideology:

• The Avadi session of Congress (1955) adopted the goal of a "socialist pattern of society". This meant the state would guide the economy to reduce inequality and stop wealth from gathering in a few hands.
• Commanding heights was a Second Plan idea. The state would control the industries most important to the economy, such as steel, heavy machinery, energy and mining. The public sector would lead and the private sector would support it.

How the choice of structure affects jobs

• The Mahalanobis strategy was the model behind the Second Plan. It put heavy industry and capital goods first.
• Result: growth became capital-intensive. It relied mainly on machines, with little labour for each unit of output.

• Capital intensity = Capital invested ÷ Number of workers employed

• Worked example (illustrative):

• ₹100 crore in a steel plant employs 1,000 workers, or ₹10 lakh per job.
• ₹100 crore in handloom or garment units employs 20,000 workers, or ₹50,000 per job.

• The same money creates 20 times more jobs in the labour-intensive sector.

• Lesson: when industrial policy picks the structure of industry, it also decides how many jobs are created.

In India

• IPR 1948 had four categories:
• State monopoly: arms and ammunition, atomic energy, railways.
• Six basic industries where only the state could start new units: coal, iron and steel, aircraft, shipbuilding, telecom equipment, mineral oils.
• 18 industries under central regulation.

• The rest were left to the private sector.

• IPR 1956 had three categories:

• Schedule A: 17 industries, owned only by the state.
• Schedule B: 12 industries that would move more and more into state ownership. The state starts new units and private firms add to them.
• Schedule C: all other industries. They stayed private but needed a licence.

• IPR 1956 formed the basis of the Second Plan (1956–61). It is often called the "economic constitution" of the planning era.

• The legal basis for licensing: the Industries (Development and Regulation) Act, 1951 (IDRA), Act No. 65 of 1951, dated 31 October 1951 [3].

• Industries listed in its First Schedule needed a licence.
• The state used licences to decide how much was produced, where, and by whom.

• IDRA still matters today. The Union Cabinet moved to amend the First Schedule so that regulation of "potable alcohol" (alcohol for drinking) would pass to the States [4].

• Public-sector reservation means keeping certain industries only for state enterprises. The list shrank over time:

• 17 industries in 1956 (Schedule A)
• 8 under the New Industrial Policy, 1991

• 2 today: atomic energy (specified activities) and railway operations

• Atomic energy: since India's first industrial policy in 1948, atomic energy has been kept for the Government alone. Only the Central Government and its PSUs may explore, mine and process atomic minerals [2].

• Nationalisation was also used as a tool. It means the government takes over private firms and pays their owners compensation.
• Imperial Bank became SBI (1955), and life insurance became LIC (1956).
• 14 banks, each with deposits of over ₹50 crore, were nationalised on 19 July 1969 [1]. 6 more followed on 15 April 1980 [1].

• Coal mines were nationalised in 1971–73, and general insurance became GIC (1972).

• After 1991: the private sector was largely freed from licensing controls.

Don't confuse with

• Industrial Policy Resolution (IPR): an IPR is one formal statement that sorts industries by ownership, such as IPR 1948 or IPR 1956. Industrial policy is the government's whole strategy, and it also covers incentives, trade measures and location.
• Industrial licensing (IDRA 1951): licensing is only one tool of industrial policy, and IDRA gives it its legal basis [3]. IDRA is an Act of Parliament. An IPR is a government policy statement.
• Nationalisation vs public-sector reservation: nationalisation means the state takes over existing private firms, such as banks in 1969 [1]. Reservation means only the state may operate in certain industries, such as the 17 industries in 1956 or the 2 today.
• IPR 1948 vs IPR 1956: IPR 1948 had four categories. IPR 1956 had three (17 / 12 / the rest) and gave the state a much bigger role.

Prelims Hooks

• IPR 1948 had four categories. IPR 1956 had three: Schedule A (17), Schedule B (12) and Schedule C (the rest, private but licensed).
• IDRA is Act No. 65 of 1951. It is the legal basis of industrial licensing. Changing its First Schedule changes which industries come under central control [3][4].
• Trap: the "socialist pattern of society" goal came from the Avadi session of Congress (1955), not from IPR 1948.
• "Commanding heights" is linked to the Second Plan and IPR 1956. IPR 1956 formed the basis of the Second Plan (1956–61).
• Public-sector reservation shrank from 17 (1956) to 8 (1991) to 2 today: atomic energy (specified activities) and railway operations.
• Trap on the order of events: SBI (1955) and LIC (1956) came before the 1969 bank nationalisation (19 July 1969) [1]. Coal mines (1971–73) and GIC (1972) came after it.

Mains Points

• State-led industrialisation was a sensible answer to market failure in 1950, not just ideology.
• Private capital was scarce, the market was small, and there was no capital goods base.
• Big projects with high fixed costs and long waits for profit needed a buyer of last resort. Only the state could carry that risk.

• IPR 1956 and the Second Plan were built on this reasoning.

• The hidden costs of this model led to the 1991 reforms.

• Capital-intensive Mahalanobis growth created few jobs. This is the root of India's jobs problem.
• IDRA licensing led to delays and rent-seeking (earning money through permits and favours instead of production), known as the "licence raj".

• Loss-making private firms were nationalised to save jobs. This left the public sector with sick units, which later became candidates for disinvestment.

• The state's changing role (useful for a GS-III answer): the state moved from owner (17 reserved industries in 1956) to regulator and facilitator (2 reserved today). Strategic areas like atomic energy stayed with the Central Government and its PSUs [2]. Bank nationalisation in 1969 and 1980 pushed credit towards agriculture, small industry and rural areas [1]. But it also tied banks to state priorities, and this later showed up as governance and bad-loan problems.

Related concepts

• Capital goods industry
• Commanding heights
• Capital-intensive industrialisation
• Private sector
• Public sector reservation
• Nationalisation

Read more

• Why the state led: the industrial base at Independence, IPR 1948 and IPR 1956