India’s Industrial Policy: 1947–2020
(Based on Research (CCS Project) by Mr. Abhilash Kumar & Mr. Anant Singhal)
The Indian industrial policy has undergone several changes and reforms through its post-independence history. India started with local capital and resources to continue the “Swadeshi” ideals of the Indian freedom struggle. Due to limited domestic capital and repulsion of foreign investment, the government carried the burden of capital investment and capacity creation.
The industrial policy 1956 divided the industry into three categories,
- Schedule A with 17 sectors reserved for the government
- Schedule B with 12 industries initially state-owned but later liberalized
- Schedule C with industries open for the private sector.
In the 1960s, the government delicensed industries based on recommendations of the Swaminathan committee under the pressure of assistance-providing global institutions like the world bank. Slower economic growth forced further deregulation and the end of import substitution policy.
In the 1980s, the government liberalized foreign capital policy. In 1981–82, an INR 5000 crores loan from the IMF led to structural adjustments demanded by the IMF and the World Bank. The government of India had to bring the New Industrial Policy in 1991 due to the Balance of Payment crisis. It led to reforms like De-reservation of the public sector industries, abolition of License Raj, Disinvestment of the Public sector to induce efficiency and competition. Liberalization allowed foreign investors to hold a majority stake in the Indian companies and draw technology transfer agreements.
Deregulation aimed to de-bureaucratize the public sector and disburden the government. The entry of MNCs led to increased competition with a fall in the prices, leading to increased demand. In addition to industrial policy, Law and order, judiciary, land laws, and infrastructure reforms were necessary for rapid growth. The selective inflow of investment left behind sectors like power, engineering, tools, and machinery. There was minimum focus on Sustainability and Environmental Impact. Despite all this, the Indian economy enjoyed sustained growth.
However, the growth was due to a boom in the service sector and a large pool of skilled workers. India jumped from an agriculture-based economy to a service-based economy, skipping the stage of a manufacturing-based economy. Hence, to boost the manufacturing sector, the Government of India brought its flagship Make in India policy in 2014. The government wanted to create an environment conducive to investments, improve the infrastructure, and open various sectors to foreign investment. Make in India aimed “to transform India into a global design and manufacturing hub.”
The policy aims to simplify the processes and ease the regulations to build new infrastructure to create a multiplier effect in the manufacturing sector. Most licensing and clearance procedures shifted online to increase speed and transparency. The impetus was on developing industrial corridors, smart cities, national investment & manufacturing zones, and strengthen the IPR regime in India. 100% FDI was allowed in the Defense, Construction, and maintenance of specified rail infrastructure to attract investment.
Despite this, the growth in the manufacturing sector has been stagnant for the last six years. Despite India improving its rank considerably in the World Bank’s Ease of Doing Business Index (EoDB) from 142nd in 2014 to 63rd in 2019, the share of manufacturing declined below 2014 levels.
The EoDB ranks the countries on parameters related to doing business. While there has been a steady rise for India in the EoDB index, it has not attracted investment due to large variation in performance across indicators. India has shown significant improvement in Resolving Insolvency, Dealing with Construction Permits, Trading Across Borders, and Starting a Business. But, in parameters of Enforcing Contracts and Registering Property, India’s score remained stagnant or deteriorated.
Reforms like enacting the Insolvency and Bankruptcy Code, implementing the GST throughout India, and reducing the permissions to get the construction permits from 33 to 17 helped improve the EoDB ranking. India also digitized the clearance procedures at the borders. India lags in ‘Enforcing Contracts’ due to judicial inefficiency and failure to protect the rights of individuals and corporations. The average time to resolve a commercial dispute in India is over four years, compared to 164 days in Singapore.
However, the EoDB index has limitations. It only measures the reforms taking place in New Delhi and Mumbai ignoring other parts of the country. Since the governments know the ranking parameters, they might improve those, neglecting the local conditions. In August 2020, the World Bank Suspended the EoDB index due to irregularities. It argued that the countries are making cosmetic changes to improve rankings without fundamental business environment changes.
An alternative to the EoDB index is the Index of Economic Freedom published by the Heritage Foundation. It uses 12 qualitative factors grouped into four broad pillars of economic freedom: Rule of Law, Government Size, Regulatory Efficiency, and Open Markets, with equal weights. India is ranked #120 with a total score of 56.5. This index has features suitable to the business environment of the Asian economies. It gives weightage to important factors like judicial effectiveness, government integrity, and labour freedom not reflected in the EoDB.
The Indian government has made several reforms to improve the business environment. However, the lack of structural reforms means minor changes on the ground. The Centre and States have to develop synergies to usher a series of structural reforms such as strengthening the legal system, bringing more labour reforms, and skilling the labor force. The manufacturing sector can leverage those to make India the export hub of the world.
Complete report: https://drive.google.com/file/d/1PFCTJFEFM-Z4_d-5fgYeiDEr95AifJ8o/view?usp=sharing
(Summarized by Mr. Rajat Gupta, Mr. Shubham Gole & Mr. Satish C.)
