Industrial Development in India : Post-Independence
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Industrial Development in India : Post-Independence

June 7, 2024

1. Historical Overview of Industrial Development in India

Public Sector Dominance (1947-1991)

Post-independence, India adopted a socialist-inspired mixed economy. The state took on a significant role in economic activities to drive the country’s development. This period can be broken down into several key policies and events:

  • Industrial Policy Resolution of 1948 and 1956: These resolutions laid the foundation for India’s industrial strategy. The 1956 resolution particularly emphasized the importance of the public sector in developing critical industries. It categorized industries into three schedules:
  • Schedule A: Exclusively reserved for the state, including industries like defense, atomic energy, and railways.
  • Schedule B: State-owned but allowed private sector participation.
  • Schedule C: Open to the private sector with government encouragement.
  • Five-Year Plans: The Five-Year Plans, starting with the First Plan (1951-1956), focused on building a strong industrial base. The Second Five-Year Plan (1956-1961), influenced by the Mahalanobis model, emphasized heavy industries. Subsequent plans continued to support the growth of public sector enterprises (PSEs) in sectors like steel (e.g., Bhilai, Rourkela, and Durgapur steel plants), mining, and heavy machinery.
  • Import Substitution Industrialization (ISI): To reduce dependency on imports, the government implemented high tariffs and import restrictions to protect nascent domestic industries. This policy aimed to foster self-sufficiency but often led to inefficiencies due to lack of competition.
  • Public Sector Enterprises (PSEs): PSEs were established across various sectors. By 1991, there were about 240 PSEs, employing over 19 million people and contributing significantly to the GDP.

Liberalization and Globalization (1991-Present)

The economic crisis of 1991, characterized by a severe balance of payments problem, led India to adopt a series of liberalization measures. The key components and impacts of this era include:

  • New Industrial Policy of 1991: This policy aimed to reduce government control over industries and encourage private investment. Key features included:
  • Abolition of industrial licensing for most sectors.
  • Reduction in the number of industries reserved for the public sector.
  • Disinvestment in public sector enterprises.
  • Liberalization of foreign direct investment (FDI) policies.
  • Trade Liberalization: Tariff barriers were reduced, and quantitative restrictions on imports were lifted, integrating India into the global economy. This led to a surge in imports and exports, with trade as a percentage of GDP increasing from 15% in 1991 to over 40% in recent years.
  • FDI Inflows: The liberalization of FDI policies attracted significant foreign investment. From a mere $132 million in 1991, FDI inflows grew to $50 billion in 2020-21.
  • Privatization and Disinvestment: The government initiated the process of privatizing non-strategic PSEs. Companies like BALCO, VSNL, and Maruti Suzuki saw strategic disinvestment. The privatization drive continues, with recent disinvestments including Air India and BPCL.

2. Role of Major Industries in Economic Growth

Key industries have been instrumental in driving India’s economic growth:

  • Textile Industry: Employing over 45 million people, the textile industry contributes about 7% to the industrial output and 2% to the GDP. It accounts for 15% of total exports, making it a crucial sector for foreign exchange earnings.
  • Automobile Industry: India is the fourth-largest automobile market globally, with annual production of over 26 million vehicles in 2019-20. The industry contributes 7.1% to the GDP and employs about 32 million people, directly and indirectly.
  • Information Technology (IT): The IT sector has been a cornerstone of India’s economic transformation. Contributing around 8% to the GDP, it employs over 4 million professionals. IT exports, primarily software services, amounted to $150 billion in 2020.
  • Pharmaceutical Industry: As one of the largest producers of generic drugs globally, the pharmaceutical sector contributes about 2% to the GDP and provides direct employment to around 2.7 million people. Exports from this sector were valued at $24.4 billion in 2020-21.

3. Challenges Faced by the Industrial Sector

Despite the growth, India’s industrial sector faces several significant challenges:

  • Infrastructure Deficiencies: Inadequate infrastructure, particularly in transportation and power, remains a major bottleneck. The World Bank estimates that infrastructure deficits reduce India’s GDP growth by 1-2% annually.
  • Regulatory Hurdles: Complex regulatory frameworks and bureaucratic inefficiencies often deter investment. The World Bank’s Ease of Doing Business Index ranks India 63rd out of 190 countries, highlighting areas needing improvement.
  • Skill Gaps: The mismatch between the skills produced by the education system and those required by industries leads to high unemployment rates among graduates. Reports suggest that only 25% of Indian engineers are employable in the IT sector without additional training.
  • Access to Finance: SMEs, which form the backbone of the industrial sector, often face difficulties in securing adequate financing. According to the International Finance Corporation (IFC), the credit gap for MSMEs in India is around $230 billion.
  • Environmental Concerns: Industrial activities contribute significantly to pollution and environmental degradation. India ranks 168th out of 180 countries in the Environmental Performance Index 2020, underscoring the need for sustainable practices.

4. Future Prospects and Policy Recommendations

To ensure sustainable industrial growth, India needs to implement strategic policy interventions:

  • Infrastructure Development: Significant investments are required to modernize and expand infrastructure. The National Infrastructure Pipeline (NIP) aims to invest over $1.4 trillion by 2025 to improve logistics, transportation, and energy sectors.
  • Ease of Doing Business: Streamlining regulatory procedures, enhancing transparency, and ensuring the swift implementation of reforms are essential. Initiatives like the Insolvency and Bankruptcy Code (IBC) and the Goods and Services Tax (GST) are steps in the right direction.
  • Skill Development: Strengthening vocational training programs and fostering industry-academia collaboration can bridge the skill gap. The Pradhan Mantri Kaushal Vikas Yojana (PMKVY) aims to train over 10 million youth by 2022.
  • Innovation and R&D: Promoting innovation through increased funding for research and development is crucial. The government’s Atal Innovation Mission (AIM) supports startups and tech-driven industries.
  • Environmental Sustainability: Implementing stringent environmental regulations and promoting green technologies can balance industrial growth with ecological preservation. Initiatives like the National Clean Energy Fund (NCEF) support the development of renewable energy.

Conclusion

India’s industrial sector has evolved significantly since independence, transitioning from a state-controlled model to a liberalized economy integrated with global markets. While challenges persist, strategic policy interventions focusing on infrastructure, regulatory reforms, skill development, innovation, and sustainability can harness the sector’s potential, driving economic growth and development. Addressing these issues can pave the way for a robust industrial future, supporting sustainable and inclusive growth.