Industrial Policy Reforms 3.0 for India

INDUSTRIALISATION OF INDIA

Industrial Policy Reforms 3.0 for Unleashing Manufacturing Growth

Subhash Chandra Garg

Economy, Finance and Fiscal Policy Strategist; Former Economic Affairs and Finance Secretary, Government of India

SUMMARY

Industrialisation of an economy takes place when the entrepreneur (capital), risking his capital, uses most efficient/appropriate machines (technology) and rightly skilled human capital (labour) to produce new capital goods/machines and consumer products converting primarily raw material from the nature or other products of agriculture/ another industry. This trio of enterprise, technology and labour is at the heart of success or failure of industrialisation. The industrial policy of a country succeeds or fails depending upon its ability to get this concoction of enterprise, technology and labour right or wrong.

The invention of steam engine released the power constraint of agriculture production system. Industrial era technologies replaced and reduced manpower per unit of good produced for many goods. In all such cases, wherever manpower and machine power competed, manpower lost. Kargha (spinning wheel) could not compete with power looms for mass produced cloth. The industrial era technologies made all the primary value creating processes- cultivating, mining, construction, manufacturing, transporting, trading, entertaining, serving and financing- more efficient and productive.

India, basking under the riches of its agriculture era economy- ignored industrial revolution in much of the 18^th century. First Indian cotton yarn making factory is said to have been established in 1818 and the first cotton textile mill in 1854 in Bombay (now Mumbai). India’s cotton textile industry grew.  Some other consumer industries- steel ingots, paper, sugar and cement, glass, vanaspati etc.- also developed in the pre-independence period. First Plan noted the ‘relative backwardness of industrial development in India’ as ‘in 1948-49 factory establishments accounted for only 6.6 percent of the national income’.

The Industrial Policy 1.0 of the Government of India expressed through two Industrial Policy Resolutions of 1948 and 1956 and the Industrial (Development and Regulation) Act, 1951 (IDRA-51) placed the commanding heights of industrialisation, most particularly the establishment of basic industries and utilities, with government by reserving these industries for only the public sector. The Government was to increasingly expand investments in most other industries as well. The private sector was allowed to invest and operate industries largely in consumer goods field that too subject to very severe regulation and control of the government. While India did not adopt communist model of production which is total ownership of industries, by the government, India’s Industrial Policy 1.0 was essentially governmentalisation of industrialisation in India.

India’s industrialisation model was based on five key assumptions. First, there is a certain fixed relationship between the capital deployed and the output generated captured in the ‘incremental capital output ratio’ or ICOR. Second, the ownership of capital does not matter. It does not matter whether the government sets up a steel mill or the private entrepreneur does it. Large private entrepreneurship was bad as it led to concentration of wealth and incomes and leads to inequality in society. Fourth, there is no difference between the risk capital (equity) and debt capital (credit). It is the quantum of total capital which mattered. Fifth, social and economic benefits- employment, backward area development and the like- are most valuable from societal viewpoint and can outweigh the commercial advantages of markets, location of industry etc. These assumptions defined the government led industrialisation which India saw in 1950s-1970s though it ended up design of inappropriate policies and development of industries producing costly, non-competitive and poor-quality products.

The planning apparatus assumed that the Government would be able to fund industrial investment from surplus tax and enterprise revenues.  Unfortunately, this fell flat even in the first plan, and the government started relying on borrowings and ‘deficit financing’ right from the first plan. By reserving so much of industries only for public sector, the government clearly bit more than it could chew.

The Industrial Policy regime muzzled the private sector by grossly limiting the entry and presence of private sector in industry in four major ways. First, private sector was debarred from entering into basic goods, capital goods, utilities and mining of major minerals- Schedule A. Second, in the mixed economy- Schedule B industries- the private sector was treated a step child. Third, the rest of the industrial space was split up between large and small industry with a lot of industry- at one time exceeding 900- reserved only for small industry with artificial limits of investment in plant and machinery to distinguish the large and small sectors. Finally, the dynamic part of the industry- the large industry- was placed under a strangulating control regime making no new industrial unit or expansion of an existing unit permissible without the permission of government. Investment decisions in Industry 1.0 were made by the civil servants and not businessmen. The much vaunted and coveted ratio- the ICOR- kept deteriorating menacingly. ICOR rose from 2.95 in the first plan to a whopping high 6.63 in the sixth plan (1976-77 to 1980-81).

The industrial growth started collapsing by the middle of 1960s, which made the policy makers worried. Instead of correcting the fundamental illogic of industrial policy, the Government went on a spree to further tighten licencing policies over the next fifteen years (1965-1980) and also enacted other legislations like Monopolies and Restrictive Trade Practices Act. Draconian FERA was brought in. These measures only compounded the original sin. Indian GDP grew by only about 3% during 1950-1980 and the manufacturing by barely 5%. A disappointing performance despite so much hype and investment.

It was only in 1980 that India decided to make some amends in the industrial policy regime. It was nothing blockbuster but there were certain significant measures taken to liberalise the licence and permit regime. The 1980 Industrial Policy Resolution opened the door for private sector led industrialisation of India again. India delivered a satisfactory industrial performance in 1980s. Indian manufacturing growth was over 7% during 1980-1990.

The 1991 foreign exchange crisis and trade and exchange reforms undertaken to deal with the same provided a good occasion to undertake reforms of the industrial policies as well. The Industry Policy 1991 (IP-1991) gave birth to Industrial Policy 2.0.

The most important reform brought about by IP-1991 was to almost terminate the reservation for the public sector and thereby permitting entry of private sector in almost every industrial activity. IP-1991 reserved only 8 industries for the public sector. There are only two industries, which are presently reserved exclusively for the public sector – a. railways operations and b. atomic energy. Lot of private sector investment has come in all these sectors. In fact, in case of many erstwhile reserved industries- iron and steel, oil and gas, major minerals, power etc.- private sector investment today far exceeds the public sector investment today which only proves that 1948 and 1956 policies were really bad policies which deprived the country of the benefit of private enterprise and investment.

The IP-1991 abolished industrial licencing for all industries, except those specified, irrespective of levels of investment leaving 18 industries only subject to compulsory licencing. The IP-1991 started the process of unraveling the licencing policies. Over the years, most of the compulsory industrial licencing has gone. There are only four items which require industrial licence currently.

The IP-1991 did not touch the artificial division of industries between small and large sectors. The small-scale reservation was based on mis-informed notion that it did not matter whether an industrial product is manufactured at small or large scale. At its peak in 1997-98, there were about 840 industrial products reserved for manufacture exclusively in small sector. The process of de-reservation started only in 1997-98. Finally, in April 2015, 20 remaining items were de-reserved. With this, the saga of small-scale industry reservations got over in India.

The Government initiated blockbuster FDI reforms vide the IP-1991. FDI with controlling interest of 51% was permitted, in automatic approval mode, in 34 high priority Annexure III industries. The IP-1991 led to steady liberalisation of FDI regime in India with more than 95% of all FDI flows coming under automatic route now. India recorded more than 30% rate of growth between 1986-2000. In last few years, India has become one of the ten best FDI recipient countries.

The IP-1991 also brought about total change in the mindset about technology imports. India decided to grant automatic permission for foreign technology imports in high priorities industries (Annex-III) and liberalised payment rules for royalties and technical fees. Even for non-Annex III industries, the royalty payment rules were liberalised. Likewise, no permission was required for hiring of foreign technicians and foreign testing of indigenously developed technologies. These reforms ushered in massive technological up-gradation of industrial base of India.

IP-1991 shifted policy gear with respect to controlling monopolies. The artificial construct of financial threshold for deciding a company as MRTP company was abolished and did away with the requirement of prior approval of Central Government for establishment of new undertakings, expansion of undertakings, merger, amalgamation and takeover and appointment of Directors under certain circumstances.’ These amendments virtually made MRTP and MRTP Commission redundant. Finally, the MRTP Act itself was repealed by the Competition Commission of India Act which came in force in 2009.

The reforms of 1991 helped Indian economy register higher rates of growth at about 7% plus during this period. The manufacturing grew higher than 8% on an average raising its share to about 17% in GDP. The ambition of the policy makers is to raise share of manufacturing to 25% of GDP.  The share of manufacturing in GDP, however, is proving quite sticky at around 16-17%. This calls for industrial reforms 3.0.

There are five major issues holding back India’s manufacturing growth. First, there is considerable technological obsolescence and scale inefficiency. Second, higher cost of land makes the capital investment non-competitive and equity is scarce. Third, there is still lot of government and public sector in several industries distorting policy and competition. Fourth, exclusive monopolies, distribution controls and reservations excessively raise the cost of doing business making Indian industry noncompetitive. Fifth, misplaced preference for excessively protecting organised labour hurts industry and labour both. Reforms are needed to addressed all of these.

Allow free import of technology. There is no advantage in restricting technology imports, including for digitalised industrialisation the so-called Industry 4.0, in the name of self-reliance or controlling expenditure on royalties or technical fees as commercially agreed upon by the private entrepreneur. Sickness need not be tolerated at all. Government should not provide any subsidies to perpetuate sickness. The IBC should be allowed to operate normally for all industrial sick/non-competitive units- small or large- by removing the artificial props of moratorium and suspension of IBC.

Land markets should be freed up. The default classification of land as agricultural should be given up. There should not be any need to get land converted from agriculture to non-agriculture from the revenue administration. Each government should create a land management corporation by transferring all the land owned by the government and the public sector which should manage the land as an asset management company. 

The rump IDRA-91 serves two minor and inconsequential purposes today- first, it prevents the States to institute licence and control systems and second, there are still four industries for which the licencing is mandatory. The Industrial (Development and Regulation) Act, 1951 should be repealed. Remaining two industries- railways operation and atomic energy- should be deserved closing the chapter of reservation for the public sector in India. The industry specific Ministries and Departments should be disbanded by housing the industrial policy and industrial infrastructure development and coordination work in one single Department of Industrial Policy and Infrastructure Development. This re-organised Department should be tasked with two specific goals to achieve in next 10 years- a. craft industrial policy and programme (with no direct fiscal support) to raise India’s manufacturing GDP to $2.5 trillion and b. raise India’s manufacturing exports to 20% of India’s manufacturing GDP i.e. $500 billion.

Industrial monopolies are gone in many cases. However, a number of distribution industries- power distribution, petroleum products, railways’ operations etc.- are still monopoly operations in the country. The Government should reorganise all the remaining industries and businesses which operate as monopolies or virtual monopolies to bring in effective private enterprises and make these run as real competitive businesses in the country.

Labour working with technology- tools and machines- produce goods. The most automatic industrial processes also require some workmen and supervisory personnel for supervising and controlling the industrial process. Low technologies work with more labour. The mix of labour and machines differ from industry to industry.  The working conditions, most notably in the large industry where most of the labour laws apply, have improved massively. The Factories Act need to be modernised. Most of the labour laws need to reviewed for being modernised. The Industry has to get the freedom to hiring and retaining the workers most suited for the technology used for the production. It would also be necessary that the Government stops being the arbiter between the industry and labour. The industry should have complete freedom to start and close the factories.

Indian entrepreneur has outstanding credentials to be the world beater. These reforms would make Indian entrepreneurs make Indian manufacturing to be world class and most competitive. That would be real self-reliance and make India a developed industrialised nation.

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INDUSTRIALISATION OF INDIA

Industrial Policy Reforms 3.0 for Unleashing Manufacturing Growth

The objective of economic policy is to increase gross domestic product at a rapid pace, maintaining nature’s bounties wholesome, and to distribute the national income in an equitable, fair and efficient manner for the benefit of all.

Industrialisation of the economies transformed predominantly but stagnant agricultural economies in high growth economies in the West after invention of steam engine provided a great source of power to drive machines to do work more efficiently and economically at scale. India was a latecomer on the industrialisation bandwagon.    

Industrialisation of an economy takes place when the entrepreneur (capital), risking his capital, uses most efficient/appropriate technology (technology) and rightly skilled labour (labour) to produce new capital goods/machines and consumer products using primarily raw material from the nature or otherwise produced by agriculture/ another industry.

This trio of enterprise, technology and labour is at the heart of success or failure of industrialisation. The industrial policy of a country succeeds or fails depending upon its ability to get this concoction of enterprise, technology and labour right or wrong.

Industrialisation Created Massive Value, Income and Wealth in 19^th and 20^th Centuries

The invention of steam engine released the power constraint of agriculture production system. Power produced by steam engine could drive machines to produce goods and services at larger scale, in shorter time and at cheaper costs. A loom run by steam power (power loom) produced much larger quantity of cloth and at lesser cost than a loom worked by human hand (handloom). A car driven by steam power would go to longer distances at faster pace carrying larger number of passengers than a cart run by bullocks or horses. Industrial era was borne in late 1880s in the West.

Industrial era technologies replaced and reduced manpower per unit of good produced for many goods. In all such cases, wherever manpower and machine power competed, manpower lost. Kargha (spinning wheel) could not compete with power looms for mass produced cloth.

The industrial era technologies however expanded production of consumer goods and machines phenomenally. This created new opportunities for labour for employment without using the manpower. Cycle rickshaw was decidedly inefficient compared to car/ auto-rickshaw. Auto rickshaw required a driver. Number of cars and auto rickshaws in India today are manifold than cycle rickshaws. Cycle rickshaw drivers could, with better skills acquisition, convert in car/autorickshaw drivers. Employment expanded not reduced.

The industrial era technologies made all the primary value creating processes- cultivating, mining, construction, manufacturing, transporting, trading, entertaining, serving and financing- more efficient and productive.

INDUSTRIAL POLICY 1.0 (1947-1991)

Pre-Independence Industrialisation of India

India, basking under the riches of its agriculture era economy- ignored industrial revolution in much of the 18^th century. India’s large, thriving and quality cloth making industry based on exquisite use of handlooms and handicraft faced its real challenge for the first time only in early 19^th century when cheaper mill cloth started arriving on Indian ports from Britain.

First Indian cotton yarn making factory is said to have been established in 1818 and the first cotton textile mill in 1854 in Bombay (now Mumbai). India’s cotton textile industry grew.  Some other consumer industries- cotton piece goods, steel ingots, paper, sugar and cement besides matches, glass, vanaspati, soap and several engineering industries and electrical equipment- also developed in the pre-independence period. First Plan noted the ‘relative backwardness of industrial development in India’ judged by the fact that ‘in 1948-49 factory establishments accounted for only 6.6 percent of the national income’.

It is estimated that India’s share of global GDP had declined to only about 4% from close to 20% during Mughal period and share of Indian industry as a proportion of global industrial output was less than 2%. India was a very low industrialised state in 1947-48.

India Turns Socialist and Government Becomes Industrialist

At independence, Indian industry, barring railways and post office, was all private. The government was not present in the industry space. Policy makers, at the stroke of independence, however, decided that the government would have to take charge of India’s industrialisation. More and more industries were to be set up and run by the government. The private sector was to be debarred from lot of industrial sectors. Wherever not barred, the private sector would be controlled. Industrial Policy Resolution 1948 was adopted to enunciate this policy.

The Industries (Development and Regulation) Act, 1951, (IDRA-1951) was enacted to implement the 1948 Industrial Policy Resolution. The IDRA-1951 provided for registration of every existing significant industrial unit by including most goods produced in the country in the Schedule. It also introduced licencing of every new industrial unit and expansion of an existing unit.

The 1956 Resolution made the intent of placing ‘commanding heights’ of industries in government hand abundantly clear to achieve the socialist pattern of society. To accelerate the rate of economic growth and to speed up industrialisation, it was emphasised, that it was necessary to develop heavy industries and machine making industries, to expand the public sector, and to build up a large and growing co-operative sector in India.

The Industrial Policy Resolution 1956 classified industries into three categories. First, the industries the future development of which will be the exclusive responsibility of the State were listed in Schedule A. Second, the industries listed in Schedule B were to be progressively State-owned with the government taking initiative in establishing new undertakings in such industries. The private enterprise was expected to only supplement the effort of the State.  Third, for all the remaining industries, the future development was, in general, left to the initiative and enterprise of the private sector, though it was open to the State to start any industry in this category as well besides taking over any private enterprise.

The policy of the Government of India expressed through these two resolutions and the IDRA-51 was very clear. Industrialisation, more particularly the establishment of basic industries and utilities, was reserved for only public sector. The Government was to increasingly expand investments in most other industries. The private sector was allowed to invest and operate industries largely in consumer goods field that too subject to very severe regulation and control of the government. While India did not adopt communist model of production which is total ownership of industries, by the government, India’s Industrial Policy 1.0 was essentially governmentalisation of industrialisation in India.

Industrialisation Model 1.0 was Based on Five Key Assumptions

India’s industrialisation model was based on five key assumptions:

First, there is a certain fixed relationship between the capital deployed and the output generated captured in the ‘incremental capital output ratio’ or ICOR.

Second, the ownership of capital does not matter. It does not matter whether the government sets up a steel mill or the private entrepreneur does it. The amount of capital invested would produce same amount of output, irrespective of the ownership. The government was assumed to be as efficient an industrialist as a private entrepreneur was.

Third, all kinds of entrepreneurship- private or government, large or small, company or cooperative- were equally effective as far as industrialisation goes but large private entrepreneurship was bad as it led to concentration of wealth and incomes and leads to inequality in society.

Fourth, there is no difference between the risk capital (equity) and debt capital (credit). It is the quantum of total capital which mattered.

Fifth, social and economic benefits- employment, backward area development, exploitation of natural resources and the like- which industrialisation brings in are most valuable from societal viewpoint. These benefits outweigh the commercial advantages of markets, location of industry etc. Economic rate of return and social benefit was more valuable and that should guide the investment decision.

These assumptions defined the government led industrialisation which India saw in 1950s-1970s. These assumptions led to the design of inappropriate policies. These assumptions led to development of industries producing costly, non-competitive and poor-quality products.  These assumptions required more and more controlling measures to protect these enterprises with high tariffs and directed credit. These assumptions ultimately failed India’s foray in industrialisation.

Government Investment Goes Awry Even in Basic Industry

The planning apparatus in the beginning assumed that the Government would be able to raise tax revenues in surplus of the governments revenue expenditures and would thus be able to generate some surplus from current revenues for investment. The plans started relying on borrowings and ‘deficit financing’ right from the beginning of plan era to fund ‘planned investment’.

By reserving basic industries, mining and utilities only for public sector and also new investments in most other capital-intensive industries (Schedule A and Schedule B of the Industrial Policy Resolution 1956), the government clearly bit more than it could chew.

Industrial projects suffered from both ends. The project costs kept going up and means of financing the projects kept getting more and more stressed. Smaller availability of resources led to thin allocation to the projects started. Thin allocations meant time overruns which led to cost overruns. India had severe under capacity in all the basic industries- iron and steel, cement, capital goods and even in cars, scooters, telecom equipment and so on. No wonder many of these commodities had to be placed under control orders issued under Essential Commodities Act, 1955 and had to be rationed. India failed to adequately industrialise in even basic industries. By the 1970s, these shortages reached their extremes. Instead of controlling commanding heights of industry, the public sector was struggling to somehow meet the demand of these commodities.

Private Sector Debarred from Considerable Industry Space

The Industrial Policy regime, instituted in 1950s, muzzled the private sector by grossly limiting the entry and presence of private sector in industry in four major ways:

First, private sector was debarred from entering into basic goods, capital goods, utilities and mining of major minerals- Schedule A- making private sector presence minuscule. Some units like Tata Steel were allowed to continue. Some other units like Air India were taken over by the Government. In some sector like electricity, coal mining etc. slowly the private sector was eased out completely.

Second, in the mixed economy- Schedule B industries- the private sector was treated a step child with distinct preference for public sector and reluctant tolerance of the private sector. BALCO and NALCO could get preferential mining leases but private sector entities had to struggle hard.

Third, the rest of the industrial space was split up between large and small industry. Lot of industry- at one time exceeding 900- were reserved only for small industry. There were artificial limits of investment in plant and machinery to distinguish the large and small sectors leading to very stunted development of Indian industry in the lines reserved for small sector.

Finally, the dynamic part of the industry- the large industry- was placed under a strangulating control regime. No new industrial unit, no expansion of an existing unit was permissible without the permission of government. Investment decisions were finally made by civil servants and not businessmen.

Industry was to lead the growth story of independent India. Unfortunately, the industrial policies were not working on account of muzzled private sector. The much vaunted and coveted ratio- the ICOR- kept deteriorating menacingly. ICOR rose from 2.95 in the first plan to a whopping high 6.63 in the sixth plan (1976-77 to 1980-81).

Government Kept Tightening Noose Over Private Sector

The fact that industrial growth started collapsing by the middle of 1960s made the policy makers worried. The Dutt Committee Report, published in 1969, concluded that the ‘licencing system as it actually worked, had by and large, failed to achieve its objectives, and that the complexities and delays of the licencing system operated in favour of larger Industrial Houses.’  

Instead of correcting the fundamental illogic of industrial policy, the Government went on a spree to further tighten licencing policies over the next fifteen years (1965-1980) and also enacted other legislations like Monopolies and Restrictive Trade Practices Act. These measures compounded the original sin.

Industrial Licencing Policy of 1970 imposed additional severe restrictions on the ‘Large Industrial Houses’. Concepts of ‘core’ industries- similar to Schedule A industries of 1956 Policy and ‘heavy investment’- new investment of Rs. 5 crore or more- were evolved. The Government permitted the private sector to make heavy investment only in joint sector. It was also prescribed that for all industrial investments in middle sector- Rs. 1 crore to Rs. 5 crores investment- ‘licence applications of parties other than undertakings belonging to the Larger Industrial Houses were to be given special consideration.’ Country’s licencing system was being tightened to control and contain large industrial houses.

The Government was worried about the ‘concentration of economic power’ in this era of socialist pattern of society than the industrialisation of economy. Monopolies and Restrictive Trade Practices (MRTP) Act was enacted in 1969. Besides stopping concentration of economic power, the MRTP Act was to control monopolies and restrictive trade practices ‘injurious to the public welfare.’ FERA was enacted in 1973 which controlled foreign investments in Indian industry. Capital Issues were further tightened.

Reviews of licencing policy undertaken in early 1970s itself revealed that the government was not able to develop an efficient public sector, it was nationalising private industries, especially sick industries and the licencing policy was fettering the private sector. Some relaxations were granted in the Revised Licencing Policy 1973 and Industrial Licencing Policy of 1975. The Licencing Policy of 1977 again went back and tightened the licencing control.

As a result of these restrictive policies, the expansion of private sector in the limited space it was allowed to operate stopped. The private sector became more and more stunted.

Results were disappointing; Industrial Growth Became Anaemic

India grew poorly in the 1950-1980 period. The GDP grew by hardly 3% to 3.5% on an average. Many Asian countries- Japan, South Korea, Singapore, Taiwan and later other South Asian countries like Malaysia and Thailand- raced to generate much higher growth during this period.

Indian industry proved to be an equally disappointing show despite considerable investment (capital formation?) by the Government. Growth rates of secondary sector plummeted, most particularly in the 1965-66 to 1974-75 period, when the licence permit raj was at its peak and investments in public sector investment had slowed down considerably. During this ten-year period, except for the two years (1969-70; 5.1% and 1969-70; 7.8%), the secondary sector grew only sub-4% rates. Manufacturing growth rate averaged only about 5% during the thirty years (1950-1980).

Industrial Policy Reversal Begins in 1980s

It was only in 1980 that India decided to make some amends in the industrial policy regime. It was nothing blockbuster but there were certain significant measures taken to liberalise the licence and permit regime. 1980 clearly marked the beginning of reversal of failed industrial policies of 1947-1979.

The 1980 Industrial Policy Statement was the beginning of the process of this dismantling. A number of liberalising measures followed in 1980s. Several industries were de-licenced. Licenses for large investments in backward areas were abolished. Broad banding of licences was permitted in 1986. Industrial undertakings could switch over their assembly lines from one product to another in the same industry group. Automatic regularisation of capacity increase was permitted for higher limits. MRTP permissions were done away with for several industries. Distribution controls over a number of industries were also done away with.

The 1980 Industrial Policy Resolution opened the door for private sector led industrialisation of India again. Additional measures taken during 1980s strengthened the private industrial sector in India.

India delivered a satisfactory industrial performance in 1980s. Indian manufacturing growth was over 7% during 1980-1990. Share of manufacturing in GDP grew from about a little less than 14% to about 17% in 1990. Exports grew handsomely in second half of 1980s recording growth rate of over 14%.

INDUSTRIAL POLICY 2.0 (1991- continuing)

Balance of payments crisis of 1990-1991 made reforms of trade policy and foreign exchange policy unavoidable. These reforms had to be undertaken to save India from the ignominy of making default on its international payment obligations and then live a hard life of international pariah and unhappy existence on account of her sure inability to import even crude for meeting her minimum energy needs. 

The crisis and trade and exchange reforms provided a good occasion to undertake reforms of the industrial policies as well.

IP-1991 Dismantled Reservation for Public Sector

The most important reform brought about by IP-1991 was to terminate the reservation for the public sector and thereby permitting entry of private sector in almost every industrial activity. IP-1991 reserved only 8 industries for the public sector (Annex I of the IP-1991).

By separate notifications over the years, these industries reserved exclusively for public sector have been almost completely abolished. There are only two industries, which are presently reserved exclusively for the public sector – a. railways operations and b. atomic energy (production, separation and enrichment of special fissionable materials and substances and operations of the facilities). The exclusive reservation for the public sector which hurt the industrial development of the country so badly is totally gone after 1991.

Lot of private sector investment has come in all these sectors earlier reserved for public sector. In fact, in case of many erstwhile reserved industries- iron and steel, oil and gas, major minerals, power, you name any- private sector investment far exceeds the public sector investment today. This only proves that 1948 and 1956 policies were really bad policies which deprived the country of the benefit of private enterprise and investment in a large segment of manufacturing and industries.

IP-1991 Abolished Rapacious Licencing Regime

The policy statement in the matter of abolishing licencing regime was quite forthright and unequivocal. It said “industrial policy will henceforth be abolished for all industries, except those specified, irrespective of levels of investment’. The Annex-II still left 18 industries for which compulsory licencing was continued with. This list included major industries like coal and lignite, petroleum, alcoholic drinks, sugar, motor cars, drugs, paper and newsprint etc.

The IP-1991 started the process of unraveling the licencing policies. Over the years, most of the compulsory industrial licencing has gone. There are only four items which require industrial licence currently. These are also more for safety reasons considering the hazardous nature of these industry. These four remnants of the dreadful industrial licencing of 1950s to 1980s are: a. cigars and cigarettes, b. electronic aerospace and defence equipment, c. industrial explosives and d. three specified hazardous chemicals.

The IP-1991 stated categorically that thenceforth the entrepreneurs would be required to file only an information memorandum on new projects and substantial expansions. The system of filing only ‘industrial entrepreneurs memorandum (IEM) has got established in the country that too electronically and the electronic receipt thereof constitutes registration of the investment intention and investment made.

Indian industry has been un-strangulated and is breathing free since 1991. The Baital of licencing is off the back of industry Vikram.

Policy Decisions Subsequent to IP-1991 Abolished Artificial Division of Industries Between Small and Large Sectors

The IP-1991 did not touch the artificial division of industries between small and large sectors. It said ‘industries reserved for the small-scale sector will continue to be so reserved.’ A separate policy statement was issued which increased the investment limits in different segments of small sector and also announced some financial measures for supporting small scale industry. However, the winds of liberalisation and deregulation of industrial sector had started blowing. It was only a matter of time that the reservations for small scale sector would also blow away.

The reservation of some items for manufacture by the small-scale industries started sometime in late 1960s. Section 29B in the Industries (Development and Regulation) Act 1951, inserted sometime in early 1970s, provided the framework for small industry reservations. More and more items were added to the list of items reserved.

The notification issued on 25^th July 1991, immediately after announcement of Industrial Policy 1991 listed all the items reserved for small sector in Annex III of the notification. Only a few more items were added to the list in the post liberalisation period. At its peak in 1997-98, there were about 840 industrial products reserved for manufacture exclusively in small sector.

The process of de-reservation started in 1997-98 when the first notification was issued in April 1997 de-reserving about 15 items, including ice-cream, vinegar, rice milling, dal milling, biscuits, hair-dryers and ash-trays. The process continued over next 18 years, taking out items from the list of small- scale sector reservation. Finally, vide notification issued on 10^th of April 2015, 20 remaining items were de-reserved. With this, the saga of small-scale industry reservations got over in India.

The small-scale reservation was based on mis-informed notion that it did not matter whether an industrial product is manufactured at small or large scale. Scale economies were not clear to the policy makers. This misconception got removed only after fifty years of independence.

IP-1991 Opened the Door for FDI  

India, at independence, was flush with foreign reserves- in the form of sterling balances. However, by the time the second plan (1957-1962) was under implementation, the foreign exchange situation started deteriorating and India got on to the bandwagon of self-reliance- we will manufacture everything in India. The foreign exchange situation became very bad in the third plan and India made its first substantive devaluation in 1966. Foreign Exchange Regulation Act or FERA- 1973 shut the door on foreign investments and foreign technology imports.

Foreign Direct Investment globally was galloping in 1980s, but India’s performance was only pathetic. The world-wide flows of FDI tripled between 1984 and 1987. It was increasing at rates higher than 20% in four years prior to 1991. Annual growth rate of FDI between 1983 and 1989 was 29%. India’s growth of FDI was 0.1% in 1980-82 and 0.2% during 1985-1987.

The Government initiated blockbuster FDI reforms vide the IP-1991. A long list of high priority industries was drawn (Annexure III of IP-1991 containing as many as 34 industries). FDI with controlling interest of 51% was permitted in automatic approval mode. Foreign Investment Promotion Board (FIPB) was created and FERA-73 was amended to deliver bottleneck free approvals.

The IP-1991 led to steady liberalisation of FDI regime in India. Progressively, most of the industries (it is claimed that it exceeds 95% of all FDI flows) were opened for automatic FDI inflows. Global FDI growth continued to be very strong in 1990s. India joined the ranks of high FDI receiving countries. It became part of the top category of FDI recipients- the countries which recorded more than 30% rate of growth between 1986-2000, as per the World Investment Report 2000. In last few years, India has become one of the ten best FDI recipient countries. IP-1991 opened the doors which scripted the success story of FDI reforms and performance of India.

IP-1991 Accepted Technology as Key to Competitiveness

India initially accepted international technology to build steel plants, power machinery and other basic industries in 1950s. However, gradually India developed an acutely short-sighted approach towards technology in the name of self-reliance. Import substitution became key industrial policy in 1960s and 1970s. Technology is the biggest differentiating factor for competitiveness and quality. In line with this import substitution mindset, India became averse to foreign technology imports. By 1980s we had one of the most obscurantist and closed technology import regimes. Ironically, the East-Asia was building its industrial muscle by importing technology and reverse engineering the same.

The IP-1991 signaled the change of mindset completely. India decided to grant automatic permission for foreign technology imports in high priorities industries (Annex-III) and liberalised payment rules for royalties and technical fees. Payment of technology imports- lumpsum Rs. 1 crore or limited to 5% royalty for domestic sales and 8% for exports- were permitted freely. Even for non-Annex III industries, the royalties could be paid at these rates if no free foreign exchange was required for payment. Likewise, no permission was required for hiring of foreign technicians and foreign testing of indigenously developed technologies. The lumpsum payment limit was raised to $2 million in early 1990s.

There was an attempt in 2015-2018 to roll back India’s free technology import regime on account of misplaced perception that there is large outgo in the form of royalty payments. Fortunately, it did not go far and the proposal is more or less shelved.

Control Monopolies Approach Shifted to Promoting Competitiveness

India was a poorly industrialised country in 1960s. Yet, the Government went for a sledgehammer to contain the stigmatised but the only dynamic segment of industry- the large industry. MRTP Act enacted in 1969 was tightened in 1970s and almost every large industry group was brought under its tentacles to ensure that concentration of economic power does not get in the hands of a few rich industrialists. All MRTP companies, besides getting licence, were required to get it investigated by the MRTP Commission that their new investment would not lead to development of monopolies and dominant control in that product.

The real desirable orientation of industry is to develop it in competitive manner. Competition is the real antidote to monopolies and restrictive trade practices. Controlling producers in the name of monopolies without bringing competition is a worthless endeavour. There were some relaxations in MRTP regime in 1980s but these did not deal with the fundamental problem. A company was defined as an MRTP company if an undertaking or the undertakings of an industrial group had investment of more than 100 crores.

IP-1991 shifted policy gear in this respect as well decisively. The artificial construct of financial threshold for deciding a company as MRTP company was abolished. This eliminated the ‘requirement of prior approval of Central Government for establishment of new undertakings, expansion of undertakings, merger, amalgamation and takeover and appointment of Directors under certain circumstances.’ The amendments carried out in the MRTP Act post IP-1991 virtually made MRTP and MRTP Commission redundant. Finally, the MRTP Act itself was repealed by the Competition Commission of India Act which came in force in 2009.

GOVERNMENT INDUSTRIAL POLICIES AND PROGRAMMES CHANGE FROM LICENCE AND PERMIT MODE TO PROMOTIONAL MODE

The IP-1991 effectively dismantled the strangulating control of the government over industry. 1991 proved to be the watershed in industrial development and growth in the country.

The IDRA 1951, which had institutionalised the licencing and permit regime in the industrial space, was hardly a piece of legislation to promote development of industry. It was only the regulatory legislation to institutionalise control of government over every aspect of industrial development in the country.

IP-1991 changed it all. The Government shifted to promotional mode, which is the developmental approach. It is instructive to see the annual reports of the Department of Industrial Policy and Promotion (DIPP), now renamed Department of Promotion of Industry and Internal Trade (DPIIT). The objective of the existence of the Department is to promote industries and internal trade.

Industrial Licencing Replaced by Industrial Entrepreneur Memorandum

In July 1991, the IP-1991 announced abolition of industrial licencing for most industries. In August 1991, the requirement to file applications for obtaining licences was replaced by filing of Industrial Entrepreneur Memorandum (IEM), largely for meeting information requirement for monitoring industrial development in the country.

As the mindset changed totally, filing the IEM became an extremely simple affair. The IEMs provide very useful information to track investment intentions, actual investment taking place and qualitative aspects of investments- which industries the investments are headed, where the project implementations are facing delays and cost overruns, where the projects are getting stalled and the like.

The annual report of the DPIIT informs that total of 1.06 lakh IEMs have been filed since August 1991 with proposed investment of about 128 lakh crores.

Government Initiates A Number of Promotional Schemes

Subsidies in different forms became the instrument of industrial development post 1991. Capital subsidy, operating cost subsidies, tax concessions and supportive infrastructure expenditure became the different forms of providing subsidies. Subsidies were directed to achieve developmental objectives- development of least industrialised areas, development of small-scale industries, development of priority industries and development of employment-oriented industries.

The Government continued with one operating cost subsidy scheme which was going on since 1971. Transport Subsidy Scheme subsidised extra transport cost incurred by industrial units in remote, hilly and inaccessible areas to make them competitive with industry located in geographically better areas. The Scheme still continues with an outlay of Rs. 300 crores.

A number of programmes were initiated for development of industries in industrially backward areas with subsidy support from the Government. North Eastern Industrial and Investment Promotion Programme (outlay 2020-21: Rs. 200 crores), Package for Special Category States for Jammu and Kashmir, Himachal Pradesh and Uttarakhand (outlay 2020-21: Rs. 175 crores), the Refund of Central and Integrated GST to Industrial Units in North Eastern Region and Himalayan States (outlay 2020-21: Rs. 1716 crore) and North East Industrial Development Scheme (outlay 2020-21: Rs. 100 crores) are the subsidy-based programmes which are currently being run.  

Programmes to support infrastructure and ease of doing business were also initiated. Industrial Infrastructure Up-gradation Scheme of DPIIT falls in this category. Specific Ministries and Departments also initiated schemes of industrial infrastructure development- textiles, food and many others.

The Government also is taking up quite a few schemes to promote start-ups and the new age enterprises. It runs a special scheme- Start Up India- to promote start-ups. It also runs a Funds of Fund scheme to contribute risk capital to the start-ups.

Government of India has set up an Invest India society to handhold the domestic and foreign investors. The re-orientation of the industrial policy and programme set up- from the command and control and licence and permits legislative and policy mindset to supportive and facilitative is complete. This is the Industrial Policy 2.0 at work.

Manufacturing Policy 2011, Industrial Corridors and Make in India

The makeover of policy focus from restraining and containing private sector in the Industrial Policy 1.0 (1947-1991) to promoting and facilitating private sector during the Industrial Policy 2.0 (1991- continuing) is best represented in the two major policy initiatives taken by the Government after the transformation IP-1991.

To enhance the share of manufacturing in GDP to 25% and to create 100 million manufacturing jobs, the Government came out with the National Manufacturing Policy in 2011. The Policy intends to create enabling policy environment, in partnership with the States and provides incentives for infrastructure development on public private partnership basis.

The Policy pioneers the concept of National Investment and Manufacturing Zones (NIMZs) for focussed cluster-based development of manufacturing on special focus sectors. The instrumentality of NIMZs is designed to create large integrated industrial townships with the state-of-the-art infrastructure. To facilitate politics free governance of these townships, these will be designated as self-governing townships. Not much progress, however, has been made in creating NIMZs.

The Government took up integrated development of industries using industrial corridors approach when the Delhi-Mumbai Industrial Corridor (DMIC) project was initiated in 2006. The DMIC is taking up development of several NIMZs and Investment Zones along with a dedicated freight corridor being created. The progress of DMIC is also quite slow. The Government has also announced many more corridors- Eastern Dedicated Corridor and three more. Eastern Corridor is backed by a dedicated freight corridor. These industrial corridors are also making progress, though at very slow pace.

The Make in India programme launched in 2014 combines strategies of new manufacturing policy, industrial corridors, cluster approach, infrastructure building, encouraging technology and foreign direct investment and ease of doing business approach to focus on 25 selected sectors. The programme seeks to create right policy environment, right infrastructure and right competitiveness for creating advantage edge for Indian industry in these selected 25 sectors. The sectoral focus has been increased to 27 sectors under what is called the Make In India (MII) 2.0. The sectoral review of policies and supportive programmes for giving boost to these 27 sectors can really help. However, if the reassessment of overall and sectoral policies does not result in this drastic change of policies and programme, the MII 2.0 may remain more of a talk shop rather than changing the ground situation materially.

INDIA NEEDS NEW INDUSTRY POLICY 3.0

Industry Policy 1.0 Largely Failed India. Indian industrial policy 1.0 (1947-1991) produced highly sub-optimal results. Industrial policy 2.0 (1991 onwards) freed up private enterprise from the fetters of licence and control and opened up manufacturing of almost all the industrial goods for the private sector to get in. It also allowed Indian industry to freely import technology and also foreign capital. Indian industry grew at much higher rate of about 8% annually during last 30 years. As Indian economy registered higher rates of growth at about 7% plus during this period, the share of manufacturing has gone up to only about 17%.

The ambition of the policy makers is to raise share of manufacturing to 25% of GDP is reflected in the major policy announcements- Manufacturing Policy 2011 and Make in India Policy 2014. The share of manufacturing in GDP, however, is proving quite sticky at around 16-17%. It is not moving. Obviously, there is something fundamentally wrong which is not allowing the ambition of Indian policy makers to succeed.

Production of goods or manufacturing was largely in what is described as Industry 1.0 when India got independence- production of goods in factories using machines run on steam power. Over last 75 years, the industry has progressed from Industry 1.0 to Industry 4.0. Industry 2.0 represented mass production of massive mechanisation of manufacturing process using electricity as the primary energy source. Computerisation of processes got introduced in Industry 3.0. The current Industry 4.0 has made manufacturing factories smart by virtually digitalisation of entire production process. The 3-D printing represents the culmination of Industry 4.0.

Unfortunately, many Indian factories- largely in the small scale- are still stuck at Industry 1.0. Many large industries have moved to Industry 2.0 and Industry 3.0 processes. Very little of Indian manufacturing works on Industry 4.0. Various policies perpetuate Indian manufacturing remaining stuck at these older levels.

Five Major Issues Holding India’s Manufacturing Growth

There are five major issues holding back India’s manufacturing growth.

First, there is considerable technological obsolescence in industry and policy preference is for not allowing the sick and non-performing industrial units to close.

Second, higher cost of land makes the capital investment non-competitive and equity is scarce.

Third, there is still lot of government and public sector in several industries distorting policy and competition.

Fourth, exclusive monopolies, distribution controls and reservations excessively raise the cost of raw materials and other input services unduly in many cases making Indian industry noncompetitive.

Fifth, misplaced preference for excessively protecting organised labour not only hurts industry but hurts labour.

Current policies ignore many of these critical issues or opt for sub-optimal solutions. Unless these issues are addressed headlong, India will not emerge as big manufacturing power.

Policies to Address Technological Obsolescence and Close Sick and Non-Performing Industrial Units

Technology is embedded in machine and machine produces goods. Technology keeps evolving which makes machines better performing in terms of cost and quality of the produce. Technology has been evolving very fast for almost every good produced- automobiles, power plants, computers, television- you name anything.

For Indian manufacturers to use the most competitive and cutting-edge technologies, two policy reforms are needed:

First, allow free import of technology. There is no advantage in restricting technology imports, including for digitalised industrialisation the so-called Industry 4.0, in the name of self-reliance or controlling expenditure on royalties etc. The Government should place no fetters on technology imports from anywhere and payment of whatever royalties or technical fees are commercially agreed upon by the private entrepreneur.

Second, Sickness need not be tolerated at all. India should be audacious enough not to provide any subsidies or other support to perpetuate sickness. The IBC should be allowed to operate normally for all industrial sick/non-competitive units- small or large- by removing the artificial props of moratorium and suspension of IBC.

Higher Cost of Land Make Capital Investment Non-Competitive and Equity is Scarce

Land was the most important and critical asset and factor of production for the agriculture system of production. Machines became the most important and critical asset and factor of production for the industrial system of production. Land is required basically to house machines and factories. Land became secondary to machines in the industrial age. Much less land is needed to produce one unit of value added in industrial system as compared to agriculture. Even in India, the value added per acre of land is 200 times in industrial system than the agriculture system.

We should free up land markets. The default classification of land as agricultural should be given up. There should not be any need to get land converted from agriculture to non-agriculture from the revenue administration.

The governments, both the central and states, along with their public sector entities, are sitting on lot of land. These lands are used most unimaginatively and least creatively. Each government should create a single land management corporation by transferring all the land owned by the government and the public sector to these land management corporations. These land management corporations can manage the land as an asset management company for deploying the land assets in most productive manner which will not only give better returns to government but would make land available for industrialisation, urbanisation and infrastructure creation at very economical prices to build their competitiveness.  

Lot of Government in Industry Distorts Policy and Competition

Repeal IDRA-51

The IDRA-91 is now used essentially for two purposes. First, it prevents the States to institute licence and control systems. Second, there are still four industries- electronic aerospace and defence equipment, specified hazardous chemicals, industrial explosives, tobacco products like cigars, cigarettes and distillation and brewing of alcoholic drinks- for which the licencing is mandatory. There is no reason for prescribing an industrial licence for any of these industries.

The possibility of institution of licence permit raj by the states is quite unlikely these days. States are competing of ease of doing business. Licence permit raj is antithesis of ease of doing business. If a state is to go for licence permit raj, it will become pariah for manufacturing investment. The most appropriate thing to do is to simply repeal the Industrial (Development and Regulation) Act, 1951.

Let go two industries reserved for public sector

There still remains two industries which are reserved for public sector -railway operations and atomic energy.

Monopoly of railways operation in the public sector has stunted the growth of railways in the country.  Railways carry only around 7% of passenger traffic now and the number of railways passengers are now declining in absolute numbers. Railways are also losing freight traffic steadily as well as bulk of freight traffic has shifted to road despite roads being relatively inefficient for bulk traffic. Railways have, for some time, opening up operations for private enterprise. Many container depots are managed privately. Own your container scheme allowed private sector to literally run their own containers. Recently, even passenger trains have been offered for being run by private agencies. There is no justification or need for reserving railway operations for public sector any longer.

Atomic Energy is a high technology sector. Absence of development of cost effective indigenous commercial atomic power generation technology, India has gone for finding global technologies for generating atomic power, considered more environment friendly than thermal power. There is no technological and commercial gain in keeping atomic energy reserved for public sector. It can also be deleted from the reserved list.

These two only remaining industries- railways operation and atomic energy- also should be deserved closing the chapter of reservation for the public sector in India.

Abolish Industry Specific Departments in the Government

The Government of India has quite a few Ministries/ Departments to dabble into industry despite ending the reservation for the public sector and abolishing the licence permit raj. Such Ministries and Departments, to name a few, are Ministry of Steel, Ministry of Heavy Industries, Ministry of Fertilisers, Department of Chemicals and Petro-Chemicals. As there is not much policy making role, these departments end up essentially controlling the public sector enterprises.

Infrastructure has emerged as the critical differentiator for industrial development. There is much bigger role for Government in infrastructure creation and development. Different industries do not need to develop infrastructure in isolation. 

The industry specific Ministries and Departments should be disbanded. They serve no great purpose. The industrial policy and industrial infrastructure development and coordination work should be housed in one single Department of Industrial Policy and Infrastructure Development. This re-organised Department should be tasked with two specific goals to achieve in next 10 years- a. craft industrial policy and programme (with no direct fiscal support) to raise India’s manufacturing GDP to $2.5 trillion and b. raise India’s manufacturing exports to 20% of India’s manufacturing GDP i.e. $500 billion.

Monopolies, Reservations and Distribution Controls Make Industry Inefficient and Noncompetitive

Reservation of basic industries, heavy industries and utilities for the public sector and nationalisation of private enterprises during Industry Policy 1.0 created public sector monopolies in several industrial sectors. SAIL, NMDC, NTPC, Air India, ONGC, Coal India, DoT/BSNL and many others represented virtual monopolies during this period (1950-1990). There were quite a few monopolies in the financial sector- LIC, GIC and the PSBs put together. The Public Sector monopolies were protected not only from domestic competition but also international competition by raising tariff walls to astronomical levels. These monopolies produced shoddy products at much higher costs compared to global cost of products.

Power distribution is still effectively a public sector monopoly. While the States might have created 50-60 odd companies in power distribution business in the country and some areas might have seen privatisation of power, over 90% of power is still supplied through state entities. Fertiliser industry also operates on concessional/cheaper gas being supplied to public sector fertiliser entities. The Government is investing from budgetary resources still in propping up high cost fertiliser producing units. Petroleum products- diesel and petrol- distribution is also a virtual monopoly leading to a weird policy being followed in pricing of diesel and petrol in the country. Railways at the central level and bus transport at the state level, in many states, operate as monopolies still.

The Government should reorganise all the remaining industries and businesses which operate as monopolies or virtual monopolies to bring in effective private enterprises and make these run as real competitive businesses in the country.    

Preference for Excessively Protecting Organised Labour Hurts Industry and Labour Both

Labour working with technology- tools, machines and equipment- produce goods. Even the most automatic industrial processes would have some workmen and supervisory personnel watching out and controlling the industrial process. The mix of labour and machine differ from industry to industry. In highly technology and machine intensive production processes (usually referred as capital intensive), the proportion of labour employed is much smaller. In distribution and highly customised processes, the proportion of labour is much higher.

No technology confers permanent advantage. No industry can hope to remain the leader for always. Evolution of new technologies and products can make highly successful business go bust. Life long employment and post retirement pensions run counter to these business realities. The factory has also evolved and modernised over last two centuries of industrial era. The working conditions, most notably in the large industry where most of the labour laws apply, have improved massively.

The relationship of industry and labour has to be developed taking note of these realities and be fair both to the enterprise and workers. The Factories Act need to be modernised. Most of the labour laws need to reviewed for being modernised. The Industry has to get the freedom to hiring and retaining the workers most suited for the technology used for the production.

The Government is the arbiter between industry and labour as per the laws enacted for the protection of labour. The understanding of the Government of the business and technology is not quite great. Failure of public sector in many cases prove this. The provisions like in the Industrial Disputes Act for seeking Government’s approval before closing a factory if more than 100 workers are employed are simply unworkable. As the government knows the business no better than the industry, what consideration would allow the government to decide to give permission to close. More often than not, this becomes a political football. As the number of workers are larger, either the government refuses permission or keeps it pending for ages.

Besides amending the labour laws taking more realities on board, it would also be necessary that the Government stops being the arbiter between the industry and labour. Most part of the relationship between the employer and labour should be left to be determined by the two parties themselves. The safety and working conditions part should be left to the expert supervisory bodies and if there are contractual disputes, let the courts adjudicate matter.

CONCLUSION

India was such a predominantly agricultural and a low-income stagnant economy at the dawn of independence. Some industrialisation in the form of consumer industries- sugar, cotton and jute mostly- had taken place contributing about 6% of India’s low GDP. Rightly, rapid industrialisation was decided as the goal of economic development policy. Unfortunately, we got the policy combination for enterprise, technology and workers quite wrong, misinformed by the evocative socialist pattern of society, public sector dominance of industry and ignoring development of efficient workers.

The result was massive but grossly inadequate investment in industrialisation and inefficient and non-competitive development of industries. Instead of generating high growth of GDP, we got low, unstable and lop-sided growth of industry. The crisis of 1991 was the consequence of the faulty industrial policies with respect to all the three key pivots- enterprise, technology and labour policies.

The 1991 reforms made good but partial course correction. The private enterprise was unleased though it kept facing discriminatory treatment vis-à-vis public sector. Technology options, including from foreign markets, were opened up. Labour reforms, however, were totally ignored in first 25 years of 1991 reforms. These significant, though partial, reforms made considerable difference. India’s industrial growth took off. India clocked decent growth rate of over 8% during the three decades of 1990s-2010s.

Digital technologies or digitalisation started changing the world economies from 1990s. Industrial technologies made machines do manual job better than blue collar workers.  Digital technologies use software to do mental job better than white collar/ services providing workers. Industrialisation made agricultural economies grow prosperous. Digitalisation is making industrial economies grow prosperous. Those countries which missed industrialisation or inadequately industrialised themselves remained poor. The countries which miss digitalisation or inadequately digitise them will remain poor in post industrialisation world.

The time now is not to keep confined to industrialisation, but to aggressively adopt digitalisation. India needs an industrial policy to remedy the weaknesses of the industrial policies adopted since 1991, including taking up labour reforms. More than this, India needs a new digitalisation policy to take India into a high growth orbit. Growth at 10% plus is possible only if we have a functional industrial policy and a proactive and efficient digitalisation policy.

India’s experiment for industrialisation by betting on the public sector (reservations of most high technology, basic and capital intensive industries for public sector and directing a very good chunk of scarce financial resources in building national capital in the public sector) and diminution of private sector (exclusion from several industrial sector, subjugation through licence and control raj and nationalisation) (Industrial Policy 1.0) proved quite unsuccessful. Indian manufacturing grew quite slowly compared to other countries. Capital use also became extremely inefficient (ICOR in sixth plan more than doubled the ICOR in first plan). India was a pale shadow of industrialised nations not only in the industrialised world but even in the emerging market economies.

Industrial Policy reforms from 1991 (Industrial Policy 2.00 reversed the policy of socialist control, excessive preference for public sector and protection from foreign technology and companies and control of private sector. These reforms unleashed the sleeping elephant. Last thirty years have witnessed large scale industrialisation of India and India emerging as exporter of industrial goods.

The reforms of Industrial Policy 2.0 seem to run its course by now. A lot of areas still have monopolistic situation widely seen during 1947-1991- electricity, distribution of petroleum products, fertilisers, railways and the like. India has to take advantage of globally best available technologies to produce for not only India but to make meaningful inroads in global markets. This calls for Industrial Policy 3.0 built around five principles- a. technological excellence instead of technological obsolescence and no policy preference for sick and non-performing industrial undertakings, b. making land cost a small component of capital investment and turn land into equity in place of unsustainable liability, c. getting the government and public sector out of industries and businesses, d. eliminating remaining monopolies, distribution controls and reservations and e. ridding the policy of misplaced preference for excessively protecting organised labour to make industrial enterprises happy places for both industry and labour.

The industrial policy 3.0 can usher India to achieve the goal of 25% GDP from manufacturing set in the manufacturing policy 2011 and make India a global factory to realise the mission of Make in India.

SUBHASH CHANDRA GARG

NEW DELHI 25/06/2020

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