Industrial Policy in India

Industrial Policy refers to the strategies adopted by the government for industrial development in the country. The government of India introduced its first industrial policy in 1948. The industrial ecosystem of the country has evolved since then.

Recently, the government announced its plan to introduce a new industrial policy. It will replace the 27-year-old existing policy. Its main aim will be to create jobs over the next two decades, promote foreign technology transfer and attract 100 billion dollars FDI annually.

Evolution of Industrial Policy in India

The industrial policy at the time of independence was at a nascent stage. Over the years, the government has played a major role in laying and implementing industrial policies. Some of the important phases in the evolution of Industrial Policy are as follows:

1. Industry Policy Resolution, 1948

• The state must play an active role in the development of industries.
• The policy stressed on developing a socialistic pattern of society.
• It thus led to the foundation of state-led industrialisation.
• State control in almost every sector hampered the growth of the private sector. It ultimately proved to be a major roadblock in industrial expansion.

2. Industry Policy Resolution, 1956

• It emphasised the need to expand the public sector (in line with the Mahalanobis Strategy of the 2nd Five-Year Plan).
• Mahalanobis Strategy focussed on investing in basic heavy industries for a rapid long-term rate of growth.
• It encouraged the separation of ownership and management in private industries and prevent the rise of private monopolies.
• It also focussed on building up a large and growing cooperative sector.
• Barriers to entry for private industries hampered domestic competition. Thus, it lowered the productivity of the Indian industries.

3. Industrial Policy, 1977

• Emphasis was placed on the development of small-scale industries.
• It further prescribed certain areas for large-scale industries, like- capital goods, high-tech industries etc.
• It expanded the role of the public sector by including essential consumer goods within its ambit.
• The policy failed to restrict the big companies to produce ordinary items, like footwear, bread biscuits etc. (which are produced by the small-scale industries).
• The policy also hampered the growth of large industrial houses.

4. Industrial Policy, 1980

• The policy introduced the first spurt of liberalisation by measures such as gradual price deregulation of cement and aluminium.
• The policy advocated a more capital-intensive path. In doing so, it resulted in hurting the small industries.

5. New Industrial Policy, 1991

• Industrial de-licensing
• Deregulation of the industrial sector.
• Dereservation and reforms of Public Sector Enterprises.
• Abolition of MRTP Act.
• Foreign Investment Policy
• Critics argue that it facilitated foreign investment at the cost of domestic companies.

Constraints of present Industrial Policy

1. Inadequate Infrastructure

• India lacks adequate and efficient infrastructure.
• For instance, the existing national highways constitute 2.2% of the total road network. However, they carry 40% of the total road traffic. It has led to an overstraining of NHs.
• The lack of infrastructure to support growth has resulted in inefficient logistics and a lack of competitiveness for Indian products.

2. Rigid Labour Laws

• The labour laws have been overly protective of the labour force in the formal sector. For example, as per the Industrial Disputes Act of 1947, an industrial establishment employing more than 50 persons needs to give 60 days’ notice, citing reasons for the closure, to the appropriate government before closing the industry and laying off the workers.
• This has acted as a disincentive for firms to expand and formalise the workforce. For instance, according to the fifth Employment-Unemployment Survey, 83% of the workers were self-employed/casual/contract workers.

3. Complicated business ecosystem

• Difficulty in starting a business (for instance, an entrepreneur has to fill up several forms to incorporate a business.)
• Delay in enforcing contracts (for instance, the dispute resolution process is very slow in India)
• Complicated procedures in registering property
• Difficulty in getting construction permits (for example- As per World Bank’s Ease of Doing Business report, the number of procedures to get a permit in Mumbai is 20)
• Long time is taken to resolve insolvency (As per the World Bank’s Ease of Doing Business report, India ranks 108 in resolving insolvency cases.)
• Inverted Duty Structure: It is a tax structure where the tax rate on the input materials is higher than the tax rate on finished goods. It results in domestic manufacturing industries getting less competitive against imported finished goods. It discourages local value addition. For instance – textile sector.

4. Inadequately skilled labour: According to the India Skill Report 2018, only 47 per cent of those coming out of higher educational institutions are employable. This has created a mismatch between the needs of the industry and the labour market.

5. Slow technology adoption: Indian industry has been slow in adopting new technologies. It has led to lower productivity and inefficiencies.

6. Low Productivity

• Indian industry has been slow in adopting new technologies. It has led to lower productivity and inefficiencies.
• Low productivity of Indian industries has led to low industrial growth and poor export competitiveness for India.

7. Trade Challenges

• The exporters are facing major challenges due to low demand & protectionist policies across the globe.
• For instance, India enjoyed preferential treatment on products worth $5. 6 bn under the GSP route out of the total exports of $48bn to USA in 2017-18. The GSP withdrawal will have a reasonable impact on Indian exporters.

8. Inadequate expenditure on R&D: Investments in R&D is necessary to ensure growth of the industries. However, the focus of public investments has largely been on welfare schemes. This has constrained the number of funds available for industrial development.

9. The China factor

• Thriving manufacturing sectors in the neighbourhood China has hampered the manufacturing competitiveness of India (For eg- Electronics sector).
• The industrial growth of China has been due to the following factors : large economies of scale, stable supply chain, skilled workforce at low wages and frequent currency devaluation.
• This has led to a situation where a large number of industries in India have shut down and manufacturers have become importers of Chinese products.

10. Populist government policies

• India competes for foreign investment with other developing countries.
• However, the tax rates in India are higher than in many Asian countries. Now the populist government policies such as a rise in job quota(Recent 75 % reservation for locals in the private sector by the Andhra Pradesh government) will disincentivise foreign investment.

Need for New Industrial Policy

A coherent industrial policy enables the government to deal with emerging challenges. The advent of new technologies and changing labour market further make the ecosystem dynamic. Therefore, several structural and non-structural factors make the adoption of a new industrial policy necessary.

Structural Factors

1. Spurring Manufacturing Growth

• Manufacturing growth is necessary to generate economies of scale (Economies of scale refer to the benefits accrued by the industries due to increased production and lowering of costs).
• It would help to embody technological progress and generate forward and backward linkages.
• Manufacturing growth will also have positive spillover effects on the economy and act as an engine of economic growth.

2. Human Capital Formation

• Adequate human capital to support the industrial sector is the need of the hour.
• For instance, the growth of East Asian Countries was facilitated by investments in human capital complementing industrial policy.

3. Generate Complementarities

• India is a capital-scarce country. Industrial Policy can help generate coordination between the limited investments across sectors and avoid competing investments.
• For instance, the lack of complementary investments in the telecom sector (such as-in electronic hardware manufacturing) slowed profits. It finally resulted in stagnation in the growth of the sector and hampered penetration in unserved rural areas.

4. Ensure optimum scale of Industrial Capacity

• A coherent industrial policy will ensure that the industrial capacity is as close to the minimum efficient scale possible. Excess capacity leads to price wars, lower profits for companies and inefficient competition. While lack of adequate capacity leads to a lack of scaling up of small firms.
• For instance, the reservation of products exclusively for production in smallscale and cottage industries in the Industrial Policy Resolution of 1956 disincentivized firms to upscale. This was known as the ‘Missing-Middle Phenomenon’. It resulted in a total of 836 products being produced by small-scale industries without scaling up.

5. Raise Exports

• Generating Economies of Scale and improving product competitiveness will enable a rise in exports and act as a driver for export-led growth.

Non-Structural Factors

1. Generate Employment: The potential workforce of India is expected to rise from 8.85 mn to 1.08 bn in 20 years. The expected demand for jobs can be catered to through a new industrial policy.

2. Promote Innovation: An Industrial Policy is needed to take into account the demands of the Fourth Industrial Revolution, such as -the Internet of Things, Artificial Intelligence, Robotics etc.

3. Complement “Make in India”: The Policy would facilitate Make in India by complementing it to generate jobs and increase exports of the manufacturing sector.

4. Optimum Resource Allocation: The new Industrial Policy should focus on resource efficiency and reduce wasteful usage of resources.

5. Ensure ‘Ease of Doing Business’ : A coherent industrial policy would lead to an increase in the Ease of Doing Business rankings and promote foreign investments. For instance, India has been lagging in contract enforcement in the World Bank rankings. An enabling regulatory ecosystem would lead to better contract enforcement.

Way Forward

1. Clear vision and Strategic Objectives

• Strategic objectives, measurable outcomes and a time frame should be described in the policy.
• The policy should delineate the sectoral objectives along with the broad policy framework.

2. Establishing global linkages

• India needs to strengthen global linkages. It can strive to achieve it by- creating global brands out of India, promoting value-addition, etc.
• Brand building of Indian SMEs should be given priority. For instance, China’s policy of supporting domestic firms led to the emergence of global giants like the Lenovo Computers.

3. Industrial Competitiveness

• Reducing the cost of infrastructure, such as power, and logistics; Logistics was granted infrastructure status in 2018. This will certainly aid industrial growth.
• Easing compliance burden; (for example, e-Sanchit has allowed traders to file documents electronically. It has eased trading across borders.)
• Improving labour productivity.

4. Skills and Employability for the future

• Creation of more jobs, jobs to employ the surplus labour moving out of the primary sector in coming years etc. It should be backed by robust data systems. For example, The Labour Market Information System (LMIS) is important for identifying skill shortages, training needs and employment created.
• Analysing the effect of automation on employment and undertaking to skill accordingly.

5. Preparing for the Fourth Industrial Revolution

• The fourth industrial revolution is driven by digital technologies. India must equip itself with adequate human capital to take advantage of emerging technologies such as artificial intelligence, robotics, nanotechnology etc.
• The broad framework can be derived from NITI Aayog’s Strategy for Artificial Intelligence report.

6. Technology and Innovation

• Education and R & D, which are working in silos, have to be aligned with industry needs.
• The issue of academia-research institutions-industry linkages needs to be strengthened. For instance, steps like Mentor India Initiative will go a long way in catering to the needs.

7. Manufacturing & MSME

• Improving formalization of the economy.
• Reforming archaic labour laws. (For example, the government has proposed four labour codes to replace a plethora of labour laws.)
• Reducing red-tapism by digitizing the processes.

8. A liberal IPR regime

• A common grievance of the industry regarding India’s IPR regime has been that it does not support innovation creation.
• The new industrial policy can address this by creating an IPR regime where the innovator, academia and industry become stakeholders in the complete process. This would ensure that all are getting value for IPR creation.