Current Challenges Facing Indian Economy
Development Experience (1947-90) & Economic Reforms since 1991

Industry: IPR 1956, Public & Private Sectors, License System & Small Scale Industries

Need for Development of Industry

➢The industry provides employment which is more stable than the employment in agriculture; it promotes modernization and overall prosperity.

➢At the time of independence, the variety of industries was very narrow- largely confined to cotton textiles and jute.

➢There were two well-managed iron and steel firms — one in Jamshedpur and the other in Kolkata — but, obviously, we needed to expand the industrial base with a variety of industries if the economy was to grow.

The occupational structure of the Indian economy

Sector

1950-51

1990-91

Agriculture

72.1

66.8

Industry

10.7

12.7

Services

17.2

20.5

Question of Public sector or private sector

➢The big question facing the policymakers was -what should be the role of the government and the private sector in industrial development?

➢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; nor was the market big enough to encourage industrialists to undertake major projects even if they had the capital to do so.

➢It is principally for these reasons that the state had to play an extensive role in promoting the industrial sector. 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.

➢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 complementary to those of the public sector, with the public sector leading the way.

Industrial Policy Resolution 1956 (IPR 1956)

Objectives:

  • Improvement in living standards and working conditions for the mass of the
  • Reduction in income and wealth disparities Prevention of private monopolies and concentration of economic power in different fields in the hands of small numbers of individuals.
  • Sought to accelerate the rate of economic growth and speed up industrialization to achieve a socialist pattern of society.

IPR 1956 classified industries into three categories:

❖The first category comprised industries which would be exclusively owned by the state. (Schedule A industry)

❖The 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 (Schedule B industry)

❖The third category consisted of the remaining industries which were to be in the private sector. (Schedule C industry)

➢Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses.

➢No new industry was allowed unless a license was obtained from the government. This policy was used for promoting the 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.

Small-Scale Industry

  • The concept of small-scale industries was born in 1955, when the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for promoting rural
  • 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 lakhs; at present, the maximum investment allowed is rupees one

Characteristic features of a small-scale industry

Labour intensive:

Small-scale industries are fairly labour-intensive. They provide an economic solution by creating employment opportunities in urban and rural areas at a relatively low cost of capital investment.

Flexibility:

Small-scale industries are flexible in their operation. They adapt quickly to various factors that play a large part in daily management. Their flexibility makes them best suited to constantly changing the environment.

One-man show:

A small-scale unit is generally a one-man show. It is mostly set up by individuals. Even some small units are run by partnership firm or company, the activities are mainly carried out by one of the partners or directors.

Use of indigenous raw materials:

Small-scale industries use indigenous raw materials and promote intermediate and capital goods. They contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas.

Localised operation:

Small-scale industries generally restrict their operation to local areas in order to meet the local and regional demands of the people. They cannot enlarge their business activities due to limited resources.

Steps were taken by the government to promote small scale industries

➢For the propose of shielding small scale industries from the large firms, the production of a number of products was reserved for the small-scale industry; the criterion of the reservation is the ability of these units to manufacture the goods.

➢They are also given concessions such as lower excise duty and bank loans at lower interest rates.

➢It aims at providing management and technical support to the current small and micro-entrepreneurs in rural areas.

Effect of Policies on Industrial Development

➢The proportion of GDP contributed by the industrial sector increased in the period from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91.

➢The six per cent annual growth rate of the industrial sector during the period is commendable.

➢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.

➢The promotion of small-scale industries gave opportunities to those people who did not have the capital to start large firms to get into the business.

➢Protection from foreign competition enabled the development of indigenous industries in the areas of electronics and automobile sectors which otherwise could not have developed.

The usefulness of public sector

Creation of a strong industrial base:  Heavy industries required huge investment and incurred no profit in a short period, the private sector was unwilling to take part in these fields of production. Therefore, the public sector undertakings created a strong industrial base by developing heavy and capital-intensive technique-based industries in India.

Long-run gestation projects: The private sector firms were reluctant to invest in long period projects as it was economically infeasible. Hence, the public sector made investments in long-run projects.

Improving social welfare: Public sector undertakings produced goods and services in the fields of health, education and infrastructural facilities such as hospitals, roads, highways, schools and electricity to improve the welfare of the nation.

Reducing income inequality: Since the government-owned and regulated public undertakings, the profit earned by them were spent on special welfare programmes and a certain amount of profit for industrial development. The government helped the poor to attain benefit from their regulation and thus promoted equal distribution of income and wealth in the economy.

Employment generation: The public sector created substantial employment opportunities in a situation of the twin problems of poverty and unemployment.

Hence, we can conclude that public sector undertakings significantly contributed to the growth and development of the Indian industrial sector.

Though many public sector undertakings are incurring huge losses, they are still very useful in the areas of strategic concerns. Public sector undertakings are required for:

  1. Creation of a Strong Industrial Base
  2. Development of Infrastructure
  3. Development of Backward Areas
  4. To Mobilize Savings and Earn Foreign Exchange
  5. To Prevent the Concentration of Economic Power
  6. To Promote Equality of Income and Wealth Distribution
  7. To Provide Employment
  8. To Promote Import Substitution.

 

Public sector enterprises are owned and managed by the government.

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; nor was the market big enough to encourage industrialists to undertake major projects even if they had the capital to do so.

It is principally for these reasons that the state had to play an extensive role in promoting the industrial sector. Also, since Public sectors work to ensure social welfare rather than profit, it would have led to equity in society.

Red Tapism is the practice of requiring excessive paperwork and tedious procedures before official action can be considered or completed. It cause delayed in decision making and inefficiency in operations.

Yes, it is true that although the public sector is essential for industries, many public sector undertakings are inefficient in operations, over-employed and there was delayed decision making due to the red-tapism incur huge losses, are a burden on the exchequer and are a drain on the economy’s resources.

However, the public sector plays an important role in improving social welfare and economic development of India. The usefulness of the public sector can be better understood through the following points:

Creation of a strong industrial base:  Heavy industries required huge investment and incurred no profit in a short period, the private sector was unwilling to take part in these fields of production. Therefore, the public sector undertakings created a strong industrial base by developing heavy and capital-intensive technique-based industries in India.

Long-run gestation projects: The private sector firms were reluctant to invest in long period projects as it was economically infeasible. Hence, the public sector made investments in long-run projects.

Improving social welfare: Public sector undertakings produced goods and services in the fields of health, education and infrastructural facilities such as hospitals, roads, highways, schools and electricity to improve the welfare of the nation.

Reducing income inequality: Since the government-owned and regulated public undertakings, the profit earned by them were spent on special welfare programmes and a certain amount of profit for industrial development. The government helped the poor to attain benefit from their regulation and thus promoted equal distribution of income and wealth in the economy.

Employment generation: The public sector created substantial employment opportunities in a situation of the twin problems of poverty and unemployment.

Hence, we can conclude that public sector undertakings significantly contributed to the growth and development of the Indian industrial sector.

IPR 1956 classified industries into 3 categories:

The first category comprised industries which would be exclusively owned by the state. (Schedule A industry)

The 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. (Schedule B industry)

The third category consisted of the remaining industries which were to be in the private sector. (Schedule C industry)

Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses.

  • No new industry was allowed unless a license was obtained from the government.

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.