India Table of Contents

At independence, industrialization was viewed as the engine of growth for the rest of the economy and the supplier of jobs to reduce poverty. By the early 1990s, substantial progress had been made, but industrial growth had failed to live up to expectations. Industrial production rose an average of 6.1 percent in the 1950s, 5.3 percent in the 1960s, and 4.2 percent in the 1970s. Although this increase was respectable, it was less than the rate achieved by some other developing countries and less than what the planners expected and the economy needed to bring about a large reduction in poverty. The emphasis on large-scale, capital-intensive industries created far fewer jobs than the estimated 10 million annual entrants into the labor force required. Hence unemployment and underemployment remained growing problems. In the 1980s, however, industrial production rose at an average rate of 6.6 percent. Observers believed that this increase was largely a response to economic liberalization, which led to increased investment and competition.

Government Policies

Government has played an important role in industry since independence. The government has both owned a large proportion of industrial establishments and has tightly regulated the private sector. From the late 1970s, the government sought to reduce its role, but progress remained slow throughout the 1980s. The Congress (I) government that came to power in June 1991 had a renewed commitment to cutting back the role of government, and in the mid-1990s the liberalization program made progress, although many uncertainties remained about its implementation.

The Industrial Policy Resolution of 1948 gave the government the go-ahead to build and operate key industries, which largely meant those producing capital and intermediate goods (see Early Policy Developments, this ch.). This policy partly reflected socialist ideas then current in India. It was believed that public ownership of basic industry was necessary to ensure development in the interest of the whole population. The decision also reflected the belief that private industrialists would find establishment of many of the basic industries on the scale that the country needed either unattractive or beyond their financial capabilities. Moreover, there was concern that private industrialists could enlarge their profits by dominating markets in key commodities. The industrial policy resolutions of 1948 and 1956 delineated the lines between the public and private sectors and stressed the need for a large degree of self-sufficiency in manufacturing, the basic strategy that guided industrialization until the mid-1980s.

Another early decision on industrial policy mandated that defense industries would be developed by the public sector. Building defense industries for a modern military force required the concomitant development of heavy industries, including metallurgy and machine tools. Production often started under foreign licensing, but as much as possible, design and production became Indianized. India was one of only a few developing countries to produce a variety of high-technology military equipment to supply its own needs.

Before independence there was a strong tendency for ownership or control of much of the large-scale private industrial economy to be concentrated in managing agencies, which became powerful under the British because they had access to London money markets. Through diversified investments and interlocking directorates, the individuals who controlled the managing agencies controlled much of the preindependence economy. After independence Parliament passed legislation to restrain further concentration, used the development of the stock market to induce the sale of stock in tightly held companies to the public, and applied high corporate tax rates to such companies. It also attempted to offset the monopoly effects of the managing agencies by fixing prices on a number of basic commodities, including cement, steel, and coal, and assumed considerable control of their distribution. The government eventually abolished some of the managing agencies in 1969 and the remainder in 1971. In 1970 the Monopolies and Restrictive Practices Act supplied the government with additional authority to diminish concentrations of private economic power and to restrict business practices contrary to the public interest. This act was strengthened in 1984.

Industrialization occurred in a protected environment, which led to distortions that, after the mid-1960s, contributed to the sagging industrial growth rate. Tariffs and quantitative controls largely kept foreign competition out of the domestic market, and most Indian manufacturers looked on exports only as a residual possibility. Industry paid insufficient attention to the quality of products, technological development elsewhere, and economies of scale. Management was weak in many private and public plants. Shortfalls in reaching plan goals in public enterprises, moreover, denied the rest of the industrial sector key inputs, such as coal and electricity.

In the 1980s and early 1990s, India began increasingly to remove some of the controls on industry. Nevertheless, in the mid-1990s, there were state monopolies for most energy and communications production and services, and the state dominated the steel, nonferrous metal, machine tool, shipbuilding, chemical, fertilizer, paper, and coal industries. In FY 1992, public enterprises had a turnover of Rs1.7 trillion (see table 24, Appendix). Well over 50 percent of this total was accounted for by ten enterprises, the most important of which were the oil, steel, and coal companies. Public enterprises in aggregate made a net profit after tax of 2.4 percent on capital in FY 1992, but the three oil companies earned 95 percent of these net profits. In fact, 106 of the 233 public companies sustained losses. Some analysts believed that the inefficiency of the public sector was concealed by passing on to consumers the high costs of monopoly products.

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Source: U.S. Library of Congress