Meaning of Industrialization

• Industrialization refers to the grdual change in the technology used to produce goods and
service, it is a much broader process of economic development which has in view the
integrated development of all other sectors, i.e. agriculture, power, transport and other
services.

• Industrialization is a process of economic development in which the resources of the

economy are mostly used to establish highly efficient industries on a sustainable basis to
diversify the structure of the economy .

• Industrialization becomes the main source of income, output, employment, and economic
growth.

• A satisfactory rate of industrialisation generates many advantages for the economy which
will ultimately lead to create an all round prosperity and progress.

Rationale behind industrialization

Industrialization may lead to many advantages, of which the following are the major ones:

• Creates employment opportunities:

 It may initiate many structural changes in the economy.

 The industrial sector not only expands in size but also generates considerable
employment opportunities.
 Changes in occupation structure makes it possible to shift more and more labour
force to the industrial sector with higher level of income and output per capita
income.

• Aids agriculture : Agriculture sector can get more implements and inputs (like fertilizers) and
increase the demand for wage goods thereby becoming more modern and dynamic.

• Boosts GDP: ( is a mandatory measure of the market value of all the final goods and services
produced during a period of time, often annually.

 As per the research and analysis industrialization increases both the National GDP and
the Per Capita Income.
 This is so because the industrial activities are more productive than the agricultural
occupations in a stagnant economy.
 The traditional outlook of lethargy, stagnation, and low productivity is replaced by that
of dynamism, productivity and industrial discipline.
  One of the most important driving force for industrialization is the idea that a higher per
capita income will be able to banish poverty, hunger, unemployment, malnutrition and
dependency.

• Improves standard of living :

• Increase in per capita Income

• Growth of International Trade

• Growth of Infrastructure

Industrial development in India before independence (1857-1947)

 India was made a source of raw materials and market for the British goods.
 Thus, in the real sense, India never experienced the industrial revolution of the type that
Great Britain witnessed.
 The modern industry in India started from 1860. The main industry then was the
plantation industry.
 Towards the end of the 18th century, modern industrial enterprise began in India, when
some indigo plantations were started.
 Early in the 19th century, tea, coffee, and rubber plantations started.
 The industrial development of India was greatly stimulated by the opening of the Suez
Canal in 1869 and the construction of railways.
 Indian industries received encouragement from Swadeshi movement, war demand, and
the grant of protection to industries in 1923.
 The Second World War affected Indian industries by stimulating them as demand
increased during war time. Due to this, the output of the existing industries such as
machine tools, heavy chemicals, etc. increased.

• Many positive incentives, including subsidy, tax concessions, cheap loan facilities, and so
on, are granted to those industries that are nationally important, and

• many types of penalties including high taxation are imposed on those industries that are
unwanted.

• The policy of privatization must ensure that it does not lead to allocative inefficiency,
market power, and the growth of monopoly

• It would be imperative for an industrial policy to devise a productivity-linked wage and

income policy and keep inflation under control. A successful and pragmatic industrial
policy has both micro and macro dimensions.

Industrial policy resolution of 1948

The following are the main features of Industrial Policy of 1948:

(i) Category of Industries:

Large scale industries were divided into four categories.

(a) Public sector:

It includes industries owned and managed by Govt. viz. Arms and ammunitions atomic
energy and railways.

(b) Public-cum-Private sector:

It included six basic industries coal, iron and steel, aircraft manufacture, ship building,
mineral oil, telephones, cable and wireless industry. The new ventures relating to these
industries will be established by Govt. and already existing units will continue to be
managed and developed for next 10 years by Private Sector.

(c) Controlled private sector:

In includes 18 important industries viz. motor vehicles, heavy machine tools, cotton textiles,
cement, sugar, paper, shipping material and tractor. These industries will continue to
remain under private sector but Central Govt. will have overall control over them.
(d) Private and co-operative sector:
The rest of the industries will be run under private ownership or on co-operative basis Govt.
can keep check on these.

(ii) Policies for Development of Cottage and Small scale industries:

Rapid development of these industries was emphasised in order to use local resources
generating employment avenues and production of consumer goods.

(iii) Employee-employer relation:

It was aimed that employee- employer relations should be congenial. The worker should get
fair wages and social security.

(iv) Control over Foreign Capital:

The role of foreign capital for industrial development was recognised. But Govt. took full
control over foreign capital to watch the interests of nation. The state strongly felt that the
flow of foreign capital must be controlled keeping in mind the basic objective of our overall
development principles and policies.

(v) Development of infrastructure:

Special stress was laid on development of roads, railways, electricity and irrigation etc..

Industrial Policy of 1956: Main features of 1956 Policy

A comprehensive industrial policy was formulated in 1956. It has following objectives:

(i) Development of machine-building industries.

(ii) Increase in rate of industrial development.

(iii) Reduction of income and wealth inequalities.

Main Features of 1956 Policy:

The following are the features of this policy:

(i) Categories of Industries:

Large scale industries have been divided into 3 categories.
(a) Public Sector:
Under Schedule A, 17 industries were included. These industries were arms and
ammunition, atomic energy, iron and steel, heavy machinery, mineral oil, coal etc.

(b) Public-cum-private sector:

Under Schedule B, 12 industries were included. Industry will be state owned but private
sector can also establish industry. Industries like aluminium, machine tools, drugs, chemical
fertilizer, road and sea transport, mines and minerals were included.

(c) Private sector:

Under Schedule C, all remaining industries not covered in A and B Schedule were included.
These industries will be established by private sector.

(ii) Cottage and small scale industries:

Govt. will make efforts to promote cottage and small scale industries. Those industries will
make use of local resources and will generate employment.

(iii) Concession to public sector:

Govt. will provide facility of power, transport and finance to Public sector units. However,
Govt. will not adopt indifferent attitude towards private sector units.

(iv) Balanced regional development:

Industrially backward regions will be given priority in establishing industries. More
incentives will be given to industries which will be established in these regions.

(v) Training to managers:

Private and public sector managers will be given technical and managerial training so that
they can perform well. Management courses will be started in universities for these
persons.

(vi) Better facilities for labour:

Under this policy, better facilities for labour will be provided. Workers will be given fair
remuneration, better working conditions and opportunities to participate in management.

(vii) Management in public units:

Policy laid emphasis on the proper management of public units. Public units can be a good
source of revenue if efficiently managed.

(viii) Foreign capital:

Policy laid stress that foreign capital can play important role in industrial development.
Many concessions were offered to make use of foreign capital.
The Industrial Policy of 1991 (NIP): Features and Comments

The year 1991 is an important landmark in the economic history of post-Independence India.
The country went through a severe economic crisis triggered by a adverse Balance of
Payment , lower GDP growth and higher inflation rate. The crisis was converted into an
opportunity to introduce some fundamental changes in the economic policy of the country.

Former Prime Minister Manmohan Singh is considered to be the father of New Economic
Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24,1991.

Main Objectives of New Economic Policy – 1991, July 24

The main objectives behind the launching of the New Economic policy (NEP) in 1991
by the union Finance Minister Dr. Manmohan Singh are stated as follows:

1. The main objective was to plunge Indian economy in to the arena of ‘Globalization and to
give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation

3. It intended to move towards higher economic growth rate and to build sufficient foreign
exchange reserves.

4. It wanted to achieve economic stabilization and to convert the economy into a market
economy by removing all kinds of un-necessary restrictions.

5. It wanted to permit the international flow of goods, services, capital, human resources and
technology, without many restrictions.

6. It wanted to increase the participation of private players in the all sectors of the economy.
That is why the reserved numbers of sectors for government were reduced.

Main Objectives

• Build on the gains already achieved from previous IPRs.

• Correct the imperfections, distortions, and weaknesses.
• Achieve and maintain international competitiveness at all levels of industrial
development.
• Facilitate foreign investments .
• Encourage foreign technology agreements in high-priority industries.
• Remove all obstacles that stand in the way of industrial growth, that is, introduction
of more and more liberalization and openness.
• Abolish industrial licensing.
• Replace the MRTP Act by the Competition Act later.
• Introduce the liberalization, privatization, and globalization (LPG) model of
development in India.
Beginning with mid-1991, the govt. has made some radical changes in its policies related to
foreign trade, Foreign Direct Investment, exchange rate, industry, fiscal discipline etc.

The various elements, when put together, constitute an economic policy which marks a big
departure from what has gone before.

The thrust of the New Economic Policy has been towards creating a more competitive
environment in the economy as a means to improving the productivity and efficiency of
the system.

This was to be achieved by removing the barriers to entry and the restrictions on the growth
of firms.

Due to various controls, the economy became defective.

The entrepreneurs were unwilling to establish new industries ( because laws like MRTP Act
1969 de-motivated entrepreneurs).
Corruption, undue delays and inefficiency risen due to these controls. Rate of economic
growth of the economy came down.
So in such a scenario economic reforms were introduced to reduce the restrictions imposed
on the economy.

Salient Features of the NIP:

The NIP does away with licensing for all major industries, irrespective of the investment
level, proposes liberal foreign investment, dispenses with MRTP clearances but curbs unfair
trade practices and emphasises technological up-gradation.

While allowing a greater role for the private sector, it vests the Government with necessary
control in key areas of industry as per the Industrial Policy Resolution of 1956.

(a) Abolition of licensing procedures:

The NIP has abolished the industrial licensing requirement irrespective of the level of
investment in all industries except those 18 industries specified in Annexure II of the ID & R
Act (1951). The industries where industrial licensing will be necessary include areas like coal,
petroleum, sugar, cigarettes, motor cars, hazardous chemicals, drugs and pharmaceuticals
and some luxury items.

(b) Broad branding facility and FMP:

Existing and new industrial units have been provided with the broad branding facility to
produce any article so long as no additional investment in plant and machinery is
undertaken. The Phased Manufacturing Programme (PMP) will no longer be applicable to
new projects.
(c) Modifications in the MRTP Act:
The MRTP Act will be amended to remove the threshold limit of assets in respect of MRTP
companies and dominant undertakings. This would eliminate the requirement of prior
approval of the Central Government for establishment of new undertakings, merger,
amalgamation, takeover and appointment of directors under certain circumstances.

(d) Foreign investment:

While welcoming foreign investment with its attendant advantage of technology transfer,
marketing expertise, introduction of modern managerial techniques and export promotion,
the NIP provides for automatic approval of foreign equity participation up to 51% in high
priority industries which include 34 broad areas like metallurgy, electrical equipment, trans-
former, food processing, hotel and tourism.

There will be no bottlenecks of any kind in clearing proposals for foreign equity
participation. Such clearance will be available if foreign equity covers the foreign exchange
requirement for imported capital goods. Furthermore, the foreign equity proposals need
not necessarily be accompanied by foreign technology agreements. Companies with 51%
foreign equity will be encouraged to act as trading houses primarily engaged in exporting
activities in order to generate greater passage of Indian goods to export markets.

A specially empowered Board will be constituted to negotiate with large international firms
called multinational corporations (MNCs) and encourage direct foreign investment in select
areas.

This would be a special programme to attract substantial investment that would provide
access to high technology and world markets.

Repatriation of dividends by companies with foreign equity will have to be met through
export earnings over a period of time.

(e) Foreign collaboration:

On foreign technology agreements, the Government intends to combine the need for
updating technology in high priority areas with incentives for domestic sales and export
promotion.

The stress is on foreign technology agreements in high priority areas with incentives for
domestic sales and export promotion.

Foreign technology agreements in high priority industries will be given automatic permission
up to a lump-sum payment of Rs. 1 crore. In non-high priority areas, automatic permission
would be given as per the same guidelines provided no free foreign exchange is required for
the payments.

So far as hiring foreign technicians or foreign testing of indigenously developed products, no

permission would be required. Payments may be made from blanket permits or free foreign
exchange as per RBI guidelines.

(f) Import of capital goods:

The NIP envisages automatic clearances for import of capital goods provided the foreign
exchange requirement for such imports is ensured through foreign equity. In addition, with
effect from April 1992, such automatic approval would be given provided the cost,
insurance and freight (c.i.f.) value of the capital goods to be imported was less than 25% of
the total value of plant and machinery and subject to maximum limit of Rs. 2 crores.

(g) Public sector:

The pre-eminent place of public sector will be continued in 8 core areas. These are arms and
ammunition, atomic energy, mineral oils, rail transport and mining of coal and minerals.

Though the role of the public sector has been emphasised, the Government has committed
to ensure that it runs on sound commercial lines and continues to innovate and maintain its
dominant role in strategic areas.

Furthermore, in order to raise resources and encourage wider public participation, a part of
the Government’s shareholding in the public sector units would be offered to mutual funds,
financial institutions, the public and workers.

Chronically sick PSUs, which are unlikely to turn around, will be referred to the BIFR or other
such institutions to formulate a rehabilitation-cum- revival scheme for such units. Also, a
social security mechanism will be created to protect the interests of workers likely to be
affected by such rehabilitation packages.

(h) Non-applicability of convertible clause:

In a significant step, the NIP has dispensed with the applicability of the mandatory
convertibility clause which enabled financial institutions to convert loans into equity for the
term loans extended by financial institutions for new projects.

(i) Reservation for small-scale industries:

The reservation of items for small-scale sector will be continued to promote industrial and
agro-industrial employment base. A package for tiny and small-scale sector will be
announced by the Government separately.
(j) Locational policy:
In cities of less than 1 million population there will be no need for obtaining industrial
approvals from the Central Government except for industries subject to compulsory
licensing. In respect of cities with population greater than 1 million, industries (other than
those of a non-polluting nature such as electronics, computer software and printing) will be
located outside 25 kms. of the periphery, except in prior designated industrial areas.

Comments:
The New Industrial Policy announced by the Government is a landmark policy in the history
of industrial development of the country. It is in line with the current economic philosophy
of the Government to liberalise the existing industrial and commercial policies with the
objective of increasing efficiency, competitive advantage and modernisation in the
economy.

The abolition of the system of licensing in most industrial areas as also the break from the
‘big is evil’ syndrome in terms of the withdrawal of the asset criterion from the MRTP Act
are policy initiatives which are likely to boost industrial growth in the country.

Similarly, the raising of the automatic foreign equity participation to 51% in 34 high priority
areas will lead to greater foreign portfolio investment and thereby reverse the phenomenon
of capital flight from the economy. This—in conjunction with the liberalised foreign
technology agreements and doing away with the Phased Manufacturing Programmes (PMP)
provisions for new projects—will lead to technology up-gradation and modernisation of the
industrial sector.

A novel feature of NIP has been the effort to encourage direct foreign investment. In
particular, the constitution of a special empowered Board to negotiate with large
international firms for this purpose is a step in the right direction. The Board should perform
a promotional role so that domestic firms can derive the benefits of international markets.

By the removal of the convertibility clause on term loan of financial institutions, the new
policy will give a fillip to the capital market as the profitability and the consequent rise in
dividend payments is likely to promote equity culture in the country.

In view of the drain on the exchequer the large and public sector imposes, the new policy
rightly emphasised the need to promote privatisation in the economy. The commitment to
run the existing PSUs on commercial lines will, however, have to be watched. However, the
revival package for the perpetually sick PSUs needs to be formulated without any delay so
that the burden on the Centre’s financial resources can be removed at early as possible.
New industrial policy to be announced soon: Suresh Prabhu
The new policy, aimed at modernising existing industries, is expected to encourage
adoption of frontier technologies such as robotics and artificial intelligence.

New Delhi: The government has finalised the new industrial policy, which is set to be
announced soon, Commerce and Industry Minister Suresh Prabhu said today.

The new policy will replace the industrial policy of 1991 which was prepared in the backdrop
of balance of payment crisis.

"We have finalised the new industrial policy and will be announcing it soon. It is going
through an inter-ministerial consultation," Prabhu said here at an international SME
convention.

The proposed policy aims at promoting emerging sectors and modernising the existing
industries. It will also look to reduce regulatory hurdles and encourage adoption of frontier
technologies such as robotics and artificial intelligence.

The Department of Industrial Policy and Promotion (DIPP) in August last year floated a draft
industrial policy with an aim to create jobs for the next two decades, promote foreign
technology transfer and attract USD 100 billion FDI annually.

Talking about the importance of micro, small and medium enterprises (MSMEs), Prabhu said
the sector holds huge potential to boost economic growth.
Speaking at the convention, Minister of State for External Affairs M J Akbar said the
government is taking steps to promote the sector.

About the Mudra Yojana, which funds the self-employed, he said: "Do you know how much
money has already been transferred? (It is) upwards of Rs 4,30,000 crore".

This has been transferred to 12 crore people and they are now creating jobs and products,
he said adding "NPAs (non performing assets) of Mudra from 120 million people are less
than 7 ..