India’s Industrial Development

1 January 2017

The British regarded India as source of supply of raw materials and market for British manufacturers and hence, at the time of Independence, India was industrially an underdeveloped economy. 2. The poor industrial sector was domintaed by consumer goods industries like cotton textile, jute, sugar, salt, paper, soap, etc. 3. Industries producing intermediate goods like steel, coal, cement, alcohol, power, non-ferrous metals were poorly established in terms of productive capacity.

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Capital goods industries hardly made their presence felt. . In the post independence period, India embarked upon industrial development under the five year plans. The major changes during the pre-reform period can be analyzed by diving the period into three phases: A. Phase 1 (1951-1965) Establishing Industrial Base During the first five year plan, which was based on Harrod Domar’s model, only 2. 8 percent of the total investment was made in ‘Industry and Minerals’ as the agricultural sector was hit hardest by the partition of India and needed more investment.

Industries like Indian Telephones and Indian Cables were set up. Penicillin factories were established. During the second five year plan, which was based on Mahalnobis model, a whooping 20. 1% of the total investment was made in Industry and Minerals. The second five year plan focused on establishing basic and capital goods industries on a large scale. Three major steel plans of one million tonnes capacity were started at Bhillai, Durgapur and Rourkela. The third five year plan focused on expansion of heavy industries and also invested 20. % of the total investment in Industry and Minerals.

The average growth rate of industrial SECTOR during this phase was more than 7% per annum and of basic and heavy(capital goods) industries was more than 10% per annum. B. Phase 2 (1966-1974) Slow growth The average growth of industrial sector during this phase declined to 5% per annum. The slow growth was attributed to inadequate investment in infrastructure sectors such as power and transportation, acts like MRTP( Monopolies and Restricted Trade Policies) and FERA ( Foreign Exchange

Regulation Act), wars with Pakistan in 1965 and 1971 , draughts in 1965-66 , oil crisis in 1973 and slow growth in agricultural sector. [Post independence, many new and big firms had entered the Indian market. They had little competition and they were trying to monopolize the market. The Government of India understood the intentions of such firms. In order to safeguard the rights of consumers, Government of India passed the MRTP bill. The bill was passed and the Monopolies and Restrictive Trade Practices Act, 1969, came into existence.

Through this law, the MRTP commission has the power to stop all businesses that create barrier for the scope of competition in Indian economy. The MRTP Act, 1969, aims at preventing economic power concentration in order to avoid damage. The act also provides for probation of monopolistic, unfair and restrictive trade practices. The law controls the monopolies and protects consumer interest. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency.

The purpose of the act, inter alia, was to “regulate certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of foreign exchange resources of the country”. Coca-Cola was India’s leading soft drink until 1977 when it left India after a new government ordered the company to turn over its secret formula for Coca-Cola and dilute its stake in its Indian unit as required by the Foreign Exchange Regulation Act (FERA).

In 1993, the company (along with PepsiCo) returned after the introduction of India’s Liberalization policy. FERA was repealed in 1999 by the government of Atal Bihari Vajpayee and replaced by the Foreign Exchange Management Act, which liberalised foreign exchange controls and restrictions on foreign investment. ] C. Phase 3 (1975-1990) Economic Recovery The industrial sector recovered during this period due to Increase in investment specially in the public setor, that too in infrastructure. Liberalization of import of foreign technology Extension of broad banding

Increase in fiscal Incentives[Fiscal incentives are no taxes given to new companies for the first 5 years] Increase in licensed capacity scheme. [Process industries have an initial licensed capacity sanctioned by the government. Capacity of a facility is its limiting capability to produce an output over a period of time. Thus the annual capacity of a 2 wheeler firm is say 7lacs scoters annually. It means the production is limited to this productive capability over a period of one year. ] The rate of industrial growth increased and reached it’s peak value of 8. % during the seventh five year plan. (1985-1990).

The Government of India accounced the New Industrial Policy in 1991 in which a number of liberalization measures were taken; such as Scrapping of the licensing system Dilution of the role of public sector Encouragement of private investment in various fields Removal of investment ceilings for small industries Allowing foreign direct investment in various sectors, etc. This new policy led to marked growth in the capital goods sector and private sector.

However, the overall industrial growth during the Eight five year plan (1992-1997) fell to 7. 3% per annum and even more during the Ninth five year plan (1998-2002) to 4. 6% per annum. The decline in growth rate inspite of the liberalization of industrial policy was attributed to poor infrastructure, inadequate investment in agriculture, external competition and sluggish growth in exports. Industrial growth rate picked up during the tenth five year plan(2002-2007) to 8. 3 per cent per annum mainly due to growth of infrastructure, capital and consumer goods industries and heavy FDI.

There was a downward trend in the next 2 years(2008-09) due to persistent rise in oil and metal’s prices. The global financial crisis of 2008-09 hit India’s Industrial sector hard and its growth rate fell to 2. 8% in 2008-09. The industrial growth started recovering in 2009-10 mainly due to increasing growth in consumer durables and intermediate goods. STRUCTURAL CHANGE IN INDUSTRIAL SECTOR Prepare from textbook. “capital goods” refers to real objects owned by individuals, organizations, or governments to be used in the production of other goods or commodities.

Capital goods include factories, machinery, tools, equipment, and various buildings which are used to produce other products for consumption. Capital goods are generally man-made, and do not include natural resources such as land or minerals, or “human capital” Intermediate goods or producer goods or semi-finished products are goods used as inputs in the production of other goods, such as partly finished goods.

En­ergy crisis has a great bearing on the industrial development and production It leads to power cut and rostering which hampers the industrial pro­duction. Most of the State Electricity Boards are running in loss and are in deplorable condition. Rail transport is overburdened while road transport is plagued with many problems. Even national highways in many places are in bad shape. Telecom­munication cfacilities are mainly confined to big cities It is necessary to invest more in transportation and communication, prevent the waste and misuse of energy and increase the use of renewable sources of energy.

Industrial productivity It is measured in terms of labour, capital and total factor productivity (TFP) According to many studies, TFP is India is very low especially when compared to industrialized countries. This can be attributed to poor material inputs and poor work culture of Indian labor force 1. Unbalanced Industrial Structure Despite all efforts India has not been able to attain self sufficiency in respect of industrial mate­rial. India is still dependent on foreign imports for transport equipments, machineries (electrical and non-electrical), iron and steel, paper, chemicals and fertilisers, plastic material etc.

This shows that import substi­tution is still a distant goal for the country. 2. Low Demand There is low demand for industrial products in the country due to low consumption level, weak purchasing power and poor standard of living. The domestic market is chronically underdeveloped through lack of enthusiasm generated by the middle and upper class segment who do not wish to raise their standard and improve their living conditions. 3. Regional Concentration In India most of the industries are located in few selected areas leaving out vast expanse of the country devoid of industrial establishments.

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