Impact of institutional and technological

change in Indian Agriculture

For a proper understanding of the changing agrarian structure, the

various strategies adopted foR augmenting growth should be
evaluated bearing in mind the highly skewed distribution of land
ownership and land holdings. Soon after independence India found
that the domestic production of foodgrains was not adequate to
meet the domestic demand. it was justifi ably considered
humiliating for a country of the size of India to be going around
with a begging bowl. Hence increasing foodgrain output and
achieving self suffi ciency in foodgrains become a matter of
high priority for the policy makers. The Grow More Food campaign,
the Community Development Programme and the Intensive Area
Development Programmes were all attempts at regenerating
Indian agriculture that had stagnated during the British period.
Having created an institutional structure, it was but obvious that
solutions had to be found within that framework. In this context
food output could only be increased through programmes like
JADP, through investment in infrastructure in already irrigated
areas and through increasing dependence on the main agents of
growth namely the upper middle and rich farmers. It was,
therefore, inevitable that the growth under such circumstances be
concentrated in irrigated regions and in absolute terms a major
proportion of incremental income should fl ow to the rich and very
big farmers. Looked at in this context, to blame green revolution
technology for distorted pattern of agricultural development is
totally misconceived and illogical. It could actually be argued that
without the introduction of new technology, India could not have
recorded high growth in agriculture and could not have achieved
near selfsuffi ciency in foodgrains: Major reasons for unequal
pattern of development, it may be repeated was the creation of
skewed land structure as a result of half-hearted land reforms The
nature of distortions that have taken place in the agrarian
structure and their implications for our polity may briefl y be
analysed. The following seem to be the major characteristics of
agrarian scene in India:

1. Interpersonal Inequality

Coming fi rst to interpersonal inequality, almost all studies bring

out there exists very large inequalities in the distribution of both
income and assets in rural India. Among the cultivator households
although income inequalities are generally highly correlated with
land ownership/land holding inequalities, the extent of income
inequalities are found to be slightly less than that of land holding
inequalities. This happens primarily because the smaller farmers
are able to put in more family labour on their holdings and are

also able to earn relatively higher income from nonagricultural

and allied agricultural occupations. All categories of cultivators
seem to have recorded substantial increases in their income as a
result of adoption of new technology in areas where new
technology has been introduced. It is the middle and small
farmers rather than the large farmers, who seem to have derived
relatively higher benefi ts out of the initial thrust of green
revolution, mainly because of their ability to augment yields by
adopting labour intensive methods by utilising their family labour
in an optimum manner. With the intensifi cation of new technology,
the capitalist farmers are also tending to become as effi cient as
the small owners through optimum utilisation of capital assets.

2. Regional inequality

Regional inequalities are equally notable. For example it is the

north western states of Punjab, Haryana and Uttar Pradesh which
have recorded consistently high growth rates since mid-sixties. On
the other hand the Eastern region comprising of Orissa, Bihar and
West Bengal has had a dismal performance. Except for Andhra
Pradesh the recent performance of the southern region has not
been very satisfactory. Being primarily dependent on rains the
central region has demonstrated a high degree of instability in its
growth performance. A disaggregated district wise analysis gives
very startling results. For example 60 per cent of the incremental
output achieved in the country during 1962-65 to 1980-83 was
accounted for by only 56 districts (having only a quarter of the
total cultivated area). At the other extreme 151 districts which
claimed nearly half the cultivated area accounted for only 20 per
cent of incremental output. Another 25 districts (with 7 per cent of
national area) actually made a negative contribution to total
output. The 56 highly productive districts are mainly concentrated
in the states of Punjab, Haryana and Uttar Pradesh, although quite
a few of these are also located in Andhra Pradesh and Gujarat.

3. Poverty

Coming now to rural poverty only a few points needs to be made.

Firstly it is established that rural poverty is inversely correlated
with agricultural growth. Secondly, notwithstanding the recent
data, the extent of rural poverty is extremely high. Thirdly,
although anti-poverty programmes have tended to somewhat
alleviate poverty in some parts, the vast amount of corruption and
leakages and the incapacity to create permanent assets have
made these programmes exorbitantly expensive. Eviction of
tenant farmers and growing social tension: since agriculture has
become more profi table after green revolution, there has been a
tendency of landlords to evict their tenant from land and bring the

land under self cultivation. This has increased the number of

landless farmer in agricultural sector.

4. Increase in import of agricultural inputs

Since the supply of chemical fertilizer and HYV seeds under green
revolution package are
limited in the domestic market, country had to import these inputs
after green revolution. This
has led to increase in import bill and balance of payment defi ct.

5. Green revolution was limited to few crops

We should mention that green revolution package was limited to

few crops like paddy wheat and
some major cereals. It is true that all crops are not equally
benefi ted from green revolution.

6. Failed to reduce fl uctuations in food grains

production

During post green revolution period, fl uctuation in food grains

production could not be reduced
to a great extent. New HYV seeds are prone to diseases. Increase
in the use of chemical fertilizer
increased salinity of soil and the use of pesticides created new
variety of pests which has led to
crop failure.
To sum up, the agrarian scene is not too comforting. Very large
inter personal inequalities have given rise to deep discontent
resulting in serious confl icts in many parts of India -- notably in
Bihar and Andhra Pradesh. The regional discontent is equally
disquieting. Assam, Gorkha Hills and Punjab are the clear
manifestations. It appears that with all these confl icts we are
sitting on a powder keg. The emergence in this scenario of rich
peasant leaders with strong regional affi liations has made the
scene even more murky. The important fact to remember is that
basically such peasant leadership is bound to be backward
looking, non-secular and tyrannical towards the rural poor. Their
increasing clout and elevation from the state to national politics is
bound to disrupt the national consensus so assiduously built by
the national bourgeoisie.

GREEN REVOLUTION

In the 20th century, massive public investments in modern

scientifi c research for agriculture led to dramatic yield
breakthroughs in the industrial countries .The story of English
wheat is typical. It took nearly 1,000 years for wheat yields to
increase from 0.5 to 2 metric tons per hectare, but only 40 years
to climb from 2 to 6 metric tons per hectare. Modern plant
breeding, improved agronomy, and the development of inorganic
fertilizers and modern pesticides fuelled these advances. Most
industrial countries achieved sustained food surpluses by the
second half of the 20th century, and eliminated the threat of
starvation.
These advances were much slower in reaching developing
countries .The colonial powers invested little in the food
production systems of these countries, and by independence, their
populations were growing at historically high rates. By the mid1960s, hunger and malnutrition were widespread, especially in
Asia, which increasingly depended on food aid from rich countries.
Back-to-back droughts in India during the mid-1960s made the
already precarious situation worse, and a 1967 report of the U.S.
Presidents Science Advisory Committee concluded that the scale,
severity and duration of the world food problem are so great that
a massive, long-range, innovative eff ort unprecedented in human
history will be required to master it.
In response, the Rockefeller and Ford foundations took the lead in
establishing an international agricultural research system to help
transfer and adapt scientifi c advances to the conditions in
developing countries.The fi rst investments were in research on
rice and wheat, two of the most important food crops for
developing countries.The breeding of improved varieties,
combined with the expanded use of fertilizers, other chemical
inputs, and irrigation, led to dramatic yield increases in Asia and
Latin America, beginning in the late 1960s. In 1968, U.S.Agency
for International Development (USAID) Administrator William S.
Gaud coined the term Green Revolution to describe this
phenomenal growth in agriculture.
To achieve higher yields for rice and wheat, scientists needed to
develop plants that were more responsive to plant nutrients and
that had shorter, stiff er straw to support the weight of heavier

heads of grain.They also needed to develop varieties that could

mature quicker and grow at any time of the year, thereby
permitting farmers to grow more crops each year on the same
land. New varieties also needed to be resistant to major pests and
diseases, which fl ourish under intensive arming conditions, and to
retain desirable cooking and consumption traits. Borrowing from
rice-breeding work undertaken in China, Japan, and Taiwan, the
International Rice Research Institute (IRRI) in the Philippines
developed semi-dwarf varieties that met most of these
requirements. Similar achievements were made for wheat after
Norman Borlaug (later awarded the Nobel Peace Prize for his work)
crossed Japanese semi-dwarf varieties with Mexican wheats at
what is now known as the International Center for Maize and
Wheat Improvement (CIMMYT) in Mexico.
Although the term Green Revolution originally described
developments for rice and wheat, high-yielding varieties (HYVs)
have since been developed for other major food crops important
to developing countries, including sorghum, millet, maize,
cassava, and beans. Moreover, a full-fl edged system of
international agricultural research centers now works on many
aspects of developing-country agriculture (the Future Harvest
Centers that make up the Consultative Group on International
Agricultural Research).

IMPACTS ON AGRICULTURAL PRODUCTION

The adoption of HYVs occurred quickly. By 1970, about 20percent

of the wheat area and 30 percent of the rice area in developing
countries were planted to HYVs, and by 1990, the share had
increased to about 70 percent for both crops. Yields of rice and
wheat virtually doubled. Higher yields and profi tability also led
farmers to increase the area of rice and wheat they grew at the
expense of other crops.And with faster-growing varieties and
irrigation, they grew more crops on their land each year.These
changes more than doubled cereal production in Asia between
1970 and 1995, while population increased by 60 percent. Instead
of widespread famine, cereal and calorie availability per person
increased by nearly 30 percent, and wheat and rice became
cheaper. Latin America experienced signifi cant gains as well, but
the impact in Sub-Saharan Africa was much more modest. Poor
infrastructure, high transport costs, limited investment in
irrigation, and pricing and marketing policies that penalized
farmers made the Green Revolution technologies too expensive or
inappropriate for much of Africa.

SOCIAL IMPACTS

The Green Revolution led to sizable increases in returns toland,

and hence raised farmers incomes. Moreover, with greater income
to spend, new needs for farm inputs, and milling and marketing
services, farm families led a general increase in demand for goods
and services.This stimulated the rural nonfarm economy, which in
turn grew and generated signifi cant new income and employment
of its own. Real per capita incomes almost doubled in Asia
between 1970 and 1995, and poverty declined from nearly three
out of every fi ve Asians in 1975 to less than one in three by
1995.The absolute number of poor people fell from 1.15 billion in
1975 to 825 million in 1995 despite a 60 percent increase in
population. In India, the percentage of the rural population living
below the poverty line fl uctuated between 50 and 65 percent
before the mid-1960s but then declined steadily to about one-third
of the rural population by 1993. Research studies show that much
of this steady decline in poverty is attributable to agricultural
growth and associated declines in food prices.
The Green Revolution also contributed to better nutrition by
raising incomes and reducing prices, which permitted people to
consume more calories and a more diversifi ed diet. Big increases
occurred in per capita consumption of vegetable oils, fruits,
vegetables, and livestock products in Asia.u
t

PROBLEMS WITH THE GREEN REVOLUTION

A revolution of this magnitude was bound to create someproblems

of its own. Critics charged that the Green Revolution resulted in
environmental degradation and increased income inequality,
inequitable asset distribution, and worsened absolute poverty.
Some of these criticisms are valid and have been or still need to
be addressed. But there is a tendency today to overstate the
problems and to ignore the appropriate counterfactual situation:
what would have been the magnitude of hunger and poverty
without the yield increases of the Green Revolution and with the
same population growth?
The Green Revolution in Asia stimulated a large body of empirical
literature on how agricultural technological change aff ects poor
farmers. Critics of the Green Revolution argued that owners of
large farms were the main adopters of the new technologies
because of their better access to irrigation water, fertilizers,
seeds, and credit. Small farmers were either unaff ected or harmed
because the Green Revolution resulted in lower product prices,
higher input prices, and eff orts by landlords to increase rents or
force tenants off the land. Critics also argued that the Green

Revolution encouraged unnecessary mechanization, thereby

pushing down rural wages and Employment. Although a number of
village and household studies conducted soon after the release of
Green Revolution technologies lent some support to early critics,
more recent evidence shows mixed outcomes. Small farmers did
lag behind large farmers in adopting Green Revolution
technologies, yet many of them eventually did so. Many of these
small-farm adopters benefi ted from increased production, greater
employment opportunities, and higher wages in the agricultural
and nonfarm sectors.
Moreover, most smallholders were able to keep their land and
experienced signifi cant increases in total production. In some
cases, small farmers and landless laborers actually ended up
gaining proportionally more income than larger farmers, resulting
in a net improvement in the distribution of village income.
Development practitioners now have a better understanding of the
conditions under which the Green Revolution and similar yieldenhancing technologies are likely to have equitable benefi ts
among farmers. These conditions include:
(1) a scaleneutral technology package that can be profi tably
adopted on farms of all sizes;
(2) an equitable distribution of land with secure ownership or
tenancy rights;
(3) effi cient input, credit, and product markets so that farms of all
sizes have access to modern farm inputs and information and are
able to receive similar prices for their products; and
(4) policies that do not discriminate against small farms and
landless laborers (for instance, no subsidies on mechanization and
no scale biases in agricultural research and extension).
These conditions are not easy to meet.Typically, governments
must make a concerted eff ort to ensure that small farmers have
fair access to land, knowledge, and modern inputs.t Another
shortcoming of the Green Revolution was that it spread only in
irrigated and high-potential rainfed areas, and many villages or
regions without access to suffi cient water were left out.Although
evidence suggests that even in these cases villagers obtained
important indirect benefi ts through increased employment and
migration opportunities and cheaper food, the benefi ts were rarely
suffi cient to prevent further widening of income gaps. In India, for
example, poverty in many low-potential rainfed areas has
improved little even while irrigated and high-potential rainfed
areas have progressed. Regional inequalities have worsened in
China as well.

The Green Revolution has also been widely criticized for causing
environmental damage. Excessive and inappropriate use of
fertilizers and pesticides has polluted waterways, poisoned
agricultural workers, and killed benefi cial insects and other
wildlife. Irrigation practices have led to salt build-up and eventual
abandonment of some of the best farming lands. Groundwater
levels are retreating in areas where more water is being pumped
for irrigation than can be replenished by the rains.And heavy
dependence on a few major cereal varieties has led to loss of
biodiversity on farms. Some of these outcomes were inevitable as
millions of largely illiterate farmers began to use modern inputs
for the fi rst time, but inadequate extension an training, an
absence of eff ective regulation of water quality, and input pricing
and subsidy policies that made modern inputs too cheap and
encouraged excessive use also created negative environmental
impacts.These problems are slowly being rectifi ed without yield
loss, and sometimes with yield increases, thanks to policy reforms
and improved technologies and management practices, such as
pest-resistant varieties, biological pest control, precision farming,
and crop diversifi cation.
Often ignored, however, is the positive impact of higher yields in
saving huge areas of forest and other environmentally fragile
lands that would otherwise have been needed for farming. In Asia
cereal production doubled between 1970 and 1975, yet the total
land area cultivated with cereals increased by only 4 percent.

Conclusions

Overall, the Green Revolution was a major achievement for many

developing countries and gave them an unprecedented level of
national food security. It represented the successful adaptation
and transfer of the same scientifi c revolution in agriculture that
the industrial countries had already appropriated for
themselves.The Green Revolution also lifted large numbers of poor
people out of poverty and helped many nonpoor people avoid the
poverty and hunger they would have experienced had the Green
Revolution not occurred.The largest benefi ts to the poor were
mostly indirect, in the form of lower food prices, increased
migration opportunities, and greater employment in the rural
nonfarm economy.The direct benefi ts to the poor through their
own on-farm adoption, greater agricultural employment, and
empowerment have been more mixed and depend heavily on local
socioeconomic conditions. In many cases inequalities between
regions and communities that adopted Green Revolution

technologies and those that did not also worsened.At the same
time, the Green Revolution had many negative environmental
impacts that have still to be adequately redressed.
Agricultural research remains a potent force for good in the
developing world and is the key to increasing yields further to
meet the continuing growth of food needs in developing
countries.This need is especially urgent in Sub-Saharan Africa,
which has yet to experience an agricultural revolution of its own.
But simply adding to the pile of food will not be enough.The
indirect benefi ts for the poor are likely to be weaker in the future
as globalization and trade make food prices less responsive to
local production and as agriculture becomes less important to the
livelihoods of the poor. Policymakers will need to target the poor
more precisely to ensure that poor people receive greater direct
benefi ts from new technologies. New technologies will also need
to be more environmentally sustainable. By building on the
strengths of the Green Revolution while seeking to avoid its
weaknesses, scientists and policymakers can take signifi cant steps
toward achieving sustainable food security for all the worlds
people possibility of feeding ever-growing populations, as exemplified in the writings of
Thomas Malthus (17661834). The task seemed even more daunting as advan

INDUSTRIAL POLICY SINCE 1956

When India achieved Independence in 1947, the national

consensus was in favour of rapid industrialization of the economy
which was seen not only as the key to economic development but
also to economic sovereignty. In the subsequent years, India's
Industrial Policy evolved through successive Industrial Policy
Resolutions and Industrial Policy Statements. Specifi c priorities for
industrial development were also laid down in the successive Five
Year Plans. Building on the so-called "Bombay Plan"1 in the preIndependence era, the fi rst Industrial Policy Resolution announced
in 1948 laid down broad contours of the strategy of industrial
development. At that time the Constitution of India had not taken

fi nal shape nor was the Planning Commission constituted.

Moreover, the necessary legal framework was also not put in
place. Not surprisingly therefore, the Resolution was somewhat
broad in its scope and direction. Yet, an important distinction was
made among industries to be kept under the exclusive ownership
of Government, i.e., the public sector, those reserved for private
sector and the joint sector. Subsequently, the Indian Constitution
was adopted in January 1950, the Planning Commission was
constituted in March 1950 and the Industrial (Department and
Regulation) Act (IDR Act) was enacted in 1951 with the objective
of empowering the Government to take necessary steps to
regulate the pattern of industrial development through licensing.
This paved the way for the Industrial Policy Resolution of 1956,
which was the fi rst comprehensive statement on the strategy for
industrial development in India.

Industrial Policy Resolution 1956

The Industrial Policy Resolution - 1956 was shaped by the

Mahalanobis Model of growth, which suggested that emphasis on
heavy industries would lead the economy towards a long term
higher growth path. The Resolution widened the scope of the
public sector. The objective was to accelerate economic growth
and boost the process of industrialization as a means to achieving
a socialistic pattern of society. Given the scarce capital and
inadequate entrepreneurial base, the Resolution accorded a
predominant role to the State to assume direct responsibility for
industrial development. All industries of basic and strategic
importance and those in the nature of public utility services
besides those requiring large scale investment were reserved for
the public sector.
The Industrial Policy Resolution - 1956 classifi ed industries into
three categories. The fi rst category comprised 1 7 industries
(included in Schedule A of the Resolution) exclusively under the
domain of the Government. These included inter alia, railways, air
transport, arms and ammunition, iron and steel and atomic energy.
The second category comprised 12 industries (included in
Schedule B of the Resolution), which were envisaged to be
progressively State owned but private sector was expected to
supplement the eff orts of the State. The third category contained
all the remaining industries and it was expected that private
sector would initiate development of these industries but they
would remain open for the State as well. It was envisaged that the
State would facilitate and encourage development of these
industries in the private sector, in accordance with the
programmes formulated under the Five Year Plans, by appropriate

fi scal measures and ensuring adequate infrastructure. Despite the

demarcation of industries into separate categories, the Resolution
was fl exible enough to allow the required adjustments and
modifi cations in the national interest.
Another objective spelt out in the Industrial Policy Resolution 1956 was the removal of regional disparities through development
of regions with low industrial base. Accordingly, adequate
infrastructure for industrial development of such regions was duly
emphasized. Given the potential to provide large-scale
employment, the Resolution reiterated the Governments
determination to provide all sorts of assistance to small and
cottage industries for wider dispersal of the industrial base and
more equitable distribution of income. The Resolution, in fact,
refl ected the prevalent value system of India in the early 1950s,
which was centered around self suffi ciency in industrial 3
production. The Industrial Policy Resolution 1956 was a landmark
policy statement and it formed the basis of subsequent policy
announcements.

Industrial Policy Measures in the 1960s and 1970s

Monopolies Inquiry Commission (MIC) was set up in 1964 to review

various aspects pertaining to concentration of economic power
and operations of industrial licensing under the IDR Act, 1951.
While emphasizing that the planned economy contributed to the
growth of industry, the Report by MIC concluded that the industrial
licensing system enabled big business houses to obtain
disproportionately large share of licenses which had led to preemption and foreclosure of capacity. Subsequently, the Industrial
Licensing Policy Inquiry Committee (Dutt Committee), constituted
in 1967, recommended that larger industrial houses should be
given licenses only for setting up industry in core and heavy
investment sectors, thereby necessitating reorientation of
industrial licensing policy.
In 1969, the monopolies and restrictive Trade Practices (MRTP)
Act was introduced to enable the Government to eff ectively
control concentration of economic power. The Dutt Committee had
defi ned large business houses as those with assets of more than
Rs.350 million. The MRTP Act, 1969 defi ned large business houses
as those with assets of Rs. 200 million and above. Large industries
were designated as MRTP companies and were eligible to
participate in industries that were not reserved for the
Government or the Small scale sector. The new Industrial
Licensing Policy of 1970 classifi ed industries into four categories.
First category, termed as Core Sector, consisted of basic, critical

and strategic industries. Second category termed as Heavy

Investment Sector, comprised projects involving investment of
more than Rs.50 million. The third category, the Middle Sector
consisted of projects with investment in the range of Rs.10 million
to Rs.50 million. The fourth category was Delicensed Sector, in
which investment was less than Rs.10 million and was exempted
from licensing requirements. The industrial licensing policy of 1
970 4 confi ned the role of large business houses and foreign
companies to the core, heavy and export oriented sectors.

The Industrial Policy Statement - 1973

With a view to prevent excessive concentration of industrial

activity in the large industrial houses, this Statement gave
preference to small and medium entrepreneurs over the large
houses and foreign companies in setting up of new capacity
particularly in the production of mass consumption goods. New
undertakings of up to Rs.10 million by way of fi xed assets were
exempted from licensing requirements for substantial expansion of
assets. This exemption was not allowed to MRTP companies,
foreign companies and existing licensed or registered
undertakings having fi xed assets of Rs.50 million and above.

The Industrial Policy Statement -1977

This Statement emphasized decentralization of industrial sector

with increased role for small scale, tiny and cottage industries. It
also provided for close interaction between industrial and
agricultural sectors. Highest priority was accorded to power
generation and transmission. It expanded the list of items
reserved for exclusive production in the small scale sector from
180 to more than 500. For the fi rst time, within the small scale
sector, a tiny unit was defi ned as a unit with investment in
machinery and equipment up to Rs.0.1 million and situated in
towns or villages with a population of less than 50,000 (as per
1971 census). Basic goods, capital goods, high technology
industries important for development of small scale and
agriculture sectors were clearly delineated for large scale sector.
It was also stated that foreign companies that diluted their foreign
equity up to 40 per cent under Foreign Exchange Regulation Act
(FERA) 1973 were to be treated at par with the Indian companies.
The Policy Statement of 1977 also issued a list of industries where
no foreign collaboration of fi nancial or technical nature was
allowed as indigenous technology was already available. Fully
owned foreign companies were allowed only in highly export
oriented sectors or sophisticated technology areas. For all
approved foreign investments, companies were completely free to
5 repatriate capital and remit profi ts, dividends, royalties, etc.

Further, in order to ensure balanced regional development, it was

decided not to issue fresh licenses for setting up new industrial
units within certain limits of large metropolitan cities (more than 1
million population) and urban areas (more than 0.5 million
population).

Industrial Policy Statement -1980

The industrial Policy Statement of 1980 placed accent on

promotion of competition in the domestic market, technological
upgradatrion and modernization of industries. Some of the socio economic objectives spelt out in the Statement were i) optimum
utilisation of installed capacity, ii) higher productivity, iii) higher
employment levels, iv) removal of regional disparities, v)
strengthening of agricultural base, vi) promotion of export
oriented industries and vi) consumer protection against high
prices and poor quality.
Policy measures were announced to revive the effi ciency of public
sector undertakings (PSUs) by developing the management cadres
in functional fi elds viz., operations, fi nance, marketing and
information system. An automatic expansion of capacity up to fi ve
per cent per annum was allowed, particularly in the core sector
and in industries with long-term export potential. Special
incentives were granted to industrial units which were engaged in
industrial processes and technologies aiming at optimum
utilization of energy and the exploitation of alternative sources of
energy. In order to boost the development of small scale
industries, the investment limit was raised to Rs.2 million in small
scale units and Rs.2.5 million in ancillary units. In the case of tiny
units, investment limit was raised to Rs.0.2 million.

Industrial Policy Measures during the 1980s

Policy measures initiated in the fi rst three decades since

Independence facilitated the establishment of basic industries and
building up of a broadbased infrastructure in the country. The
Seventh Five Year Plan (1985-1900), recognized the need for
consolidation of these strengths and initiating policy measures to
prepare the Indian industry to respond eff ectively to emerging 6
challenges. A number of measures were initiated towards
technological and managerial modernization to improve
productivity, quality and to reduce cost of production. The public
sector was freed from a number of constraints and was provided
with greater autonomy. There was some progress in the process of
deregulation during the 1980s. In 1988, all industries, excepting

26 industries specifi ed in the negative list, were exempted from

licensing. The exemption was, however, subject to investment and
locational limitations. The automotive industry, cement, cotton
spinning, food processing and polyester fi lament yarn industries
witnessed modernization and expanded scales of production
during the 1980s.
With a view to promote industrialization of backward areas in the
country, the Government of India announced in June, 1988 the
Growth Centre Scheme under which 71 Growth Centers were
proposed to be set up throughout the country. Growth centers
were to be endowed with basic infrastructure facilities such as
power,water, telecommunications and banking to enable them to
attract industries.

Industrial Policy Statement- 1991

The Industrial Policy Statement of 1991 stated that the

Government will continue to pursue a sound policy framework
encompassing encouragement of entrepreneurship, development
of indigenous technology through investment in research and
development, bringing in new technology, dismantling of the
regulatory system, development of the capital markets and
increased competitiveness for the benefi t of common man". It
further added that "the spread of industrialization to backward
areas of the country will be actively promoted through appropriate
incentives, institutions and infrastructure investments.
The objective of the Industrial Policy Statement - 1991 was to
maintain sustained growth in productivity, enhance gainful
employment and achieve optimal utilization of human resources,
to attain international competitiveness, and to transform India
into a major partner and player in the global arena. Quite 7
clearly, the focus of the policy was to unshackle the Indian
industry from bureaucratic controls. This called for a number of
far-reaching reforms :
A substantial modifi cation of Industry Licencing Policy was
deemed necessary with a view to ease restraints on capacity
creation, respond to emerging domestic and global
opportunities by improving productivity. Accordingly, the
Policy Statement included abolition of industrial licensing for
most industries, barring a handful of industries for reasons of
security and strategic concerns, social and environmental
issues. Compulsory licencing was required only in respect of
18 industries. These included, inter alia, coal and lignite,
distillation and brewing of alcoholic drinks, cigars and
cigarettes, drugs and pharmaceuticals, white goods,

hazardous chemicals. The small scale sector continued to be

reserved. Norms for setting up industries (except for
industries subject to compulsory licensing) in cities with
more than one million population were further liberalised.
Recognising the complementarily of domestic and foreign
investment, foreign direct investment was accorded a
signifi cant role in policy announcements of 1991. Foreign
direct investment (FDI) up to 51 per cent foreign equity in
high priority industries requiring large investments and
advanced technology was permitted. Foreign equity up to 51
per cent was also allowed in trading companies primarily
engaged in export activities. These important initiatives were
expected to provide a boost to investment besides enabling
access to high technology and marketing expertise of foreign
companies.
With a view to inject technological dynamism in the Indian
industry, the Government provided automatic approval for
technological agreements related to high priority industries
and eased procedures for hiring of foreign technical
expertise. Major initiatives towards restructuring of public
sector units (PSUs) were initiated, in view of their low
productivity, over staffi ng, lack of technological upgradation
and low rate of return. In order to raise 8 resources and
ensure wider public participation PSUs, it was decided to
off er its shareholding stake to mutual funds, fi nancial
institutions, general public and workers. Similarly, in order to
revive and rehabilitate chronically sick PSUs, it was decided
to refer them to the Board for Industrial and Financial
Reconstruction (BIFR). The Policy also provided for greater
managerial autonomy to the Boards of PSUs.
The Industrial Policy Statement of 1991 recognized that the
Governments intervention in investment decisions of large
companies through MRTP Act had proved to be deleterious for
industrial growth. Accordingly, pre-entry scrutiny of
investment decisions of MRTP companies was abolished. The
thrust of policy was more on controlling unfair and restrictive
trade practices. The provisions restricting mergers,
amalgamations and takeovers were also repealed.

Industrial Policy Measures Since 1991

Since 1991, industrial policy measures and procedural

simplifi cations have been reviewed on an ongoing basis. Presently,
there are only six industries which require compulsory licensing.
Similarly, there are only three industries reserved for the public
sector. Some of important policy measures initiated since 1991 are
set out below:

 Since 1991, promotion of foreign direct investment has been

an integral part of Indias economic policy. The Government
has ensured a liberal and transparent foreign investment
regime where most activities are opened to foreign
investment on automatic route without any limit on the
extent of foreign ownership. FDI up to 1 00 per cent has also
been allowed under automatic route for most manufacturing
activities in Special Economic Zones (SEZs). More recently,
in 2004, the FDI limits were raised in the private banking
sector (up to 74 per cent), oil exploration (up to 100 per
cent), petroleum product marketing (up to 100 per cent),
petroleum product pipelines (up to 100 per cent), natural
gas and LNG pipelines (up to 100 per cent) and printing of
scientifi c and technical magazines, periodicals and journals
(up to 100 per cent). In 9 February 2005, the FDI ceiling in
telecom sector in certain services was increased from 49 per
cent to 74 per cent.
Reservation of items of manufacture exclusively in the small
scale sector has been an important tenet of industrial policy.
Realizing the increased import competition with the removal
of quantitative restrictions since April 2001, the Government
has adopted a policy of dereservation and has pruned the
list of items reserved for SSI sector gradually from 821 items
as at end March 1999 to 506 items as on April 6, 2005.
Further, the Union Budget 2005-06 has proposed to
dereserve 108 items which were identifi ed by Ministry of
Small Scale Industries. The investment limit in plant and
machinery of small scale units has been raised by the
Government from time to time. To enable some of the small
scale units to achieve required economies of scale, a
diff erential investment limit has been adopted for them
since October 2001. Presently, there are 41 reserved items
which are allowed investment limit up to Rs.50 million
instead of present limit of Rs.10 million applicable for other
small scale units.
Equity participation up to 24 per cent of the total
shareholding in small scale units by other industrial
undertakings has been allowed. The objective therein has
been to enable the small sector to access the capital market
and encourage modernization, technological upgradation,
ancillarisation, sub-contracting, etc.
Under the framework provided by the Competition Act 2002,
the Competition Commission of India was set up in 2003 so
as to prevent practices having adverse impact on
competition in markets.
In an eff ort to mitigate regional imbalances, the

Government announced a new North-East Industrial Policy in

December 1997 for promoting industrialization in the NorthEastern region. This policy is applicable for the States of
Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram,
Nagaland and Tripura. The Policy has provided various
concessions to industrial units in the North Eastern Region,
e.g., 10 development of industrial infrastructure, subsidies
under various schemes, excise and income-tax exemption for
a period of 10 years, etc. North Eastern Development
Finance Corporation Ltd. has been designated as the nodal
disbursing agency under the Scheme.
The focus of disinvestment process of PSUs has shifted from
sale of minority stakes to strategic sales. Up to December
2004, PSUs have been divested to an extent of Rs.478
billion.
Apart from general policy measures, some industry specifi c
measures have also been initiated. For instance, Electricity
Act 2003 has been enacted which envisaged to delicense
power generation and permit captive power plants. It is also
intended to facilitate private sector participation in
transmission sector and provide open access to grid sector.
Various policy measures have facilitated increased private
sector participation in key infrastructure sectors such as,
telecommunication, roads and ports. Foreign equity
participation up to 100 per cent has been allowed in
construction and maintenance of roads and bridges. MRTP
provisions have been relaxed to encourage private sector
fi nancing by large fi rms in the highway sector.
Evidently, in the process of evolution of industrial policy in India,
the Governments intervention has been extensive. Unlike many
East Asian countries which used the State intervention to build
strong private sector industries, India opted for the State control
over key industries in the initial phase of development. In order to
promote these industries the Government not only levied high
tariff s and imposed import restrictions, but also subsidized the
nationalized fi rms, directed investment funds to them, and
controlled both land use and many prices.
In India, there has been a consensus for long on the role of
government in providing infrastructure and maintaining stable
macroeconomic policies. However, the path to be pursued toward
industrial development has evolved over time. The form of
government intervention in the development strategy needs to be
chosen from the two alternatives: Outward-looking development
policies encourage not only free trade but also the free

movement of capital, workers and enterprises. By contrast,

inward-looking development policies stress the need for ones
own style of development. India initially adopted the latter
strategy.
The advocates of import substitution in India believed that we
should substitute imports with domestic production of both
consumer goods and sophisticated manufactured items while
ensuring imposition of high tariff s and quotas on imports. In the
long run, these advocates cite the benefi ts of greater domestic
industrial diversifi cation and the ultimate ability to export
previously protected manufactured goods, as economies of scale,
low labour costs, and the positive externalities of learning by
doing cause domestic prices to become more competitive than
world prices. However, pursuit of such a policy forced the Indian
industry to have low and inferior technology. It did not expose the
industry to the rigours of competition and therefore it resulted in
low effi ciency. The inferior technology and ineffi cient production
practices coupled with focus on traditional sectors choked further
expansion of the India industry and thereby limited its ability to
expand employment opportunities. Considering these
inadequacies, the reforms currently underway aim at infusing the
state of the art technology, increasing domestic and external
competition and diversifi cation of the industrial base so that it can
expand and create additional employment opportunities.
In retrospect, the Industrial Policy Resolutions of 1948 and 1956
refl ected the desire of the Indian State to achieve self suffi ciency
in industrial production. Huge investments by the State in heavy
industries were designed to put the Indian industry on a higher
long-term growth trajectory. With limited availability of foreign
exchange, the eff ort of the Government was to encourage
domestic production. This basic strategy guided industrialization
until the mid-1980s. Till the onset of reform process in 1991,
industrial licensing played a crucial role in channeling
investments, controlling entry and expansion of capacity in the
Indian industrial sector. As such industrialization occurred in a
protected environment, which led to various distortions. Tariff s
and quantitative controls largely kept foreign competition out of
the domestic 12 market, and most Indian manufacturers looked on
exports only as a residual possibility. Little attention was paid to
ensure product quality, undertaking R&D for technological
development and achieving economies of scale. The industrial
policy announced in 1 991, however, substantially dispensed with
industrial licensing and facilitated foreign investment and
technology transfers, and threw open the areas hitherto reserved

for the public sector. The policy focus in the recent years has been
on deregulating the Indian industry, enabling industrial
restructuring, allowing the industry freedom and fl exibility in
responding to market forces and providing a business environment
that facilitates and fosters overall industrial growth. The future
growth of the Indian industry as widely believed, is crucially
dependent upon improving the overall productivity of the
manufacturing sector, rationalisation of the duty structure,
technological upgradation, the search for export markets through
promotional eff orts and trade agreements and creating an
enabling legal environment.