Table of Contents
THE CONTEXT: India stands at a critical juncture, poised to redefine its industrial landscape amidst global economic shifts and technological disruptions. A comprehensive industrial policy framework design is required to propel India towards sustainable growth and global competitiveness.
EVOLUTION OF INDUSTRIAL POLICY IN INDIA:
1947-1980: Era of State Control and Import Substitution:
- Industries (Development and Regulation) Act of 1951 established the “license-permit raj,” requiring government approval for industrial decisions.
- Industrial Policy Resolution of 1956 divided industries into three categories – exclusively reserved for the public sector, joint public-private sector, and private sector.
- Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 aimed to prevent concentration of economic power.
- Foreign Exchange Regulation Act (FERA) of 1973 restricted foreign investment and isolated Indian industries from global competition.
1980-1991: Gradual Liberalization
- Industrial Policy Statement of 1980 emphasized the need for promoting competition and technological upgradation.
- Relaxation of licensing requirements for some industries.
- Gradual reduction in import tariffs and export subsidies.
1991-2014: Economic Liberalization and Globalization
- New Industrial Policy of 1991 abolished industrial licensing for most industries, reduced public sector monopoly, and allowed automatic approval for foreign direct investment (FDI) up to 51% in high-priority industries.
- Disinvestment of public sector enterprises.
- Significant reduction in import tariffs and removal of quantitative restrictions on imports.
- Special Economic Zones (SEZ) Act of 2005, aimed to promote exports and attract FDI.
2014-Present: Make in India and Self-Reliance
- Make in India (2014): Aimed to transform India into a global manufacturing hub.
- Startup India (2016): Focused on promoting innovation and entrepreneurship.
- Production Linked Incentive (PLI) Scheme (2020): Offers incentives to boost domestic manufacturing in key sectors.
- Atmanirbhar Bharat (Self-Reliant India) initiative (2020): Emphasizes self-reliance in various sectors.
POLICY INTERVENTIONS TO MAKE A COUNTRY AS MANUFACTURING HUB:
Focus on innovation and knowledge spillovers:
- Government intervention can foster innovation and knowledge spillovers, leading to sustained economic growth.
Promote learning and technology transfer:
- Learning and innovation as endogenous processes requiring government support.
- Successful examples include electronics and automotive manufacturing in Japan and Germany.
Address market imperfections:
- Target inefficiencies caused by information asymmetries, externalities, and public goods problems.
- Focus on sectors like R&D and infrastructure where private firms tend to underinvest.
Implement active industrial policies:
- Countries with active industrial policies tend to experience higher rates of total factor productivity growth.
- China’s strategic investments in high-tech industries serve as an example (Lin, 2012).
Avoid premature deindustrialization:
- Dani Rodrik warns against transitioning to a service-dominated economy too early.
- Fully exploit productivity gains from manufacturing before shifting focus.
Learn from successful developmental states:
- East Asian economies provide historical evidence of effective industrial policies.
- Amsden (1989) and Johnson (1982) document significant increases in GDP per capita and manufacturing value-added during periods of active state intervention.
Align economic growth with national security:
- Prioritize strategic sectors like defence manufacturing, telecommunications, and critical technologies.
- Use economic instruments to achieve geopolitical objectives and maintain strategic autonomy.
Avoid excessive bureaucracy:
- India’s post-Independence industrial policy created a system where progress was hindered by bureaucratic hurdles.
- Streamline approval processes and reduce unnecessary regulations.
Adapt to technological changes:
- Consider the impact of automation and digitalization on manufacturing.
- Develop policies that address the challenges and opportunities presented by these technological shifts.
PRESENT ISSUES WITH INDIA:
- Skill Mismatch: There is a significant gap between the skills required by industries and those possessed by the workforce. According to the India Skill Report 2018, only 47% of those coming out of higher educational institutions are employable.
- Slow Technology Adoption: Indian industries have been slow in adopting new technologies, leading to lower productivity and inefficiencies.
- Inadequate Research and Development: There is a lack of sufficient investment in R&D, which hampers innovation and technological advancement in Indian industries.
- Regional Disparities: Industrial development in India is unevenly distributed, with some states and regions lagging far behind others in terms of industrial growth and infrastructure.
- Limited Access to Credit: Many industries, especially MSMEs, face difficulties in accessing credit, which hinders their growth and expansion.
- Inadequate Infrastructure: Despite improvements, India still lacks adequate and efficient infrastructure to support rapid industrial growth.
- Inverted Duty Structure: In some sectors, the tax rate on input materials is higher than on finished goods, making domestic manufacturing less competitive against imported finished goods.
- Limited Integration with Global Value Chains: India’s participation in global value chains remains limited, affecting its competitiveness in the global market.
- Insufficient Focus on Export Promotion: While there have been efforts to boost exports, India’s industrial policy could do more to promote export-oriented manufacturing.
WAY FORWARD:
- Address the skills gap in the workforce: Expand and modernize the Industrial Training Institutes (ITIs) to align with industry needs. Implement a national apprenticeship scheme, inspired by Germany’s dual education system. Launch programs to retrain workers for emerging industries, like Singapore’s Skills Future program.
- Improve physical and digital infrastructure: Implement the National Logistics Policy to reduce logistics costs from 14% of GDP to 8% by 2030. Expand high-speed internet access through initiatives like BharatNet. Develop smart cities with efficient public transportation and green spaces.
- Regulatory Reform: Implement a nationwide single-window system for business approvals and licenses. Simplify and modernize labor laws to increase flexibility while protecting workers’ rights. Strengthen IP laws and enforcement to encourage innovation and attract foreign investment.
- Export Promotion: Implement targeted export promotion schemes for high-potential sectors. Negotiate favorable trade agreements with key partners to expand market access. Enhance product quality and compliance with international standards to improve competitiveness.
- Small and Medium Enterprise (SME) Support: Expand credit guarantee schemes and promote alternative financing options like venture capital. Provide incentives for SMEs to adopt digital technologies and automation. Promote SME clusters to enhance competitiveness and facilitate knowledge sharing.
THE CONCLUSION:
By implementing a balanced and strategic industrial policy, India can unlock its vast potential, addressing historical inefficiencies while embracing future opportunities. The success of this policy hinges on adaptive implementation, stakeholder collaboration, and a unwavering commitment to innovation and inclusive growth.
UPSC PAST YEAR QUESTIONS:
Q.1 There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development, manufacturing and exports. Recognizing this potential, the whole instrumentality of SEZs requires augmentation. Discuss the issues plaguing the success of SEZs with respect to taxation, governing laws and administration. 2015
Q.2 Industrial growth rate has lagged in the overall growth of Gross-Domestic-Product (GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy can increase the industrial growth rate? 2023
MAINS PRACTICE QUESTION:
Q.1 Evaluate the effectiveness of India’s post-1991 industrial policies in promoting manufacturing sector growth and competitiveness. What further reforms are needed to address current challenges and boost India’s industrial capabilities?
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