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Industrial Economy

RAS/RTS Prelims and Mains Exam Preparation

Under Industrial Policy, keeping in view the priorities of the country and its economic development, the roles of the public and private sectors are clearly decided.

Under the New Industrial Policy, the industries have been freed to a large extent from the licenses and other controls. In order to encourage modernisation, stress has been laid upon the use of latest technology.

A great reduction has been effected in the role of the public sector.  Efforts have been made to encourage foreign investment. Investment decision by companies has been facilitated by ending restrictions imposed by the MRTP Act. Similarly, Foreign Exchange Regulation Act (FERA) has been replaced with Foreign Exchange Management Act (FEMA).

Some important points of the New Industrial Policy are as follows:

Abolition of Licensing

Before the advent of the New Industrial Policy, the Indian industries were operating under strict licensing system. Now, most industries have been freed from licensing and other restrictions.

Freedom to Import Technology

The use of latest technology has been given prominence in the New Industrial Policy. Therefore, foreign technological collaboration has been allowed.

Contraction of Public Sector

A policy of not expanding unprofitable industrial units in the public sector has been adopted. Apart from this, the government is following the course of disinvestment in such public sector undertaking.


MRTP Restrictions Removed

Monopolies and Restrictive Trade Practices Act has been done away with. Now the companies do not need to seek government permission to issue shares, extend their area of operation and establish a new unit.

FERA Restrictions Removed

Foreign Exchange Regulation Act (FERA) has been replaced by Foreign Exchange Management Act (FEMA). It regulates the foreign transactions. These transactions have now become simpler.

Public sector has played an important role in achieving industrial self reliance. Iron and steel, railway equipment, petroleum, coal and fertilizer industries, have been developed in this sector. These industries were established in industrially backward regions. During the seventh five year plan an emphasis was laid on high technology, high value addition and knowledge based industries like electronics, advanced machine tools and telecommunications.

After independence, systematic industrial planning under different five year plans helped in establishing a large number of heavy and medium industries. The main thrust of the industrial policy was to remove regional imbalances and to introduce diversification of industries. Indigenous capabilities were developed to achieve self sufficiency. It is due to these efforts that India has been able to develop in the field of industry.

The Industrial Policy Resolution 1956 classified industries into three categories with respect to the role played by the State –

  • The first category (Schedule A) included industries whose future development would be the exclusive responsibility of the State
  • The second (Schedule B) category included Enterprises whose initiatives of development would principally be driven by the State but private participation would also be allowed to supplement the efforts of the State
  • And, the third category included the remaining industries, which were left to the private sector

After Reforms of 1991, the main focus was:
i) reduction in the number of industries reserved for public sector from 17 to 8 (reduced still further to 3) and the introduction of selective competition in the reserved area;
ii) the disinvestment of shares of a select set of public enterprises in order to raise resources and to encourage wider
iii) participation of general public and workers in the ownership of public sector enterprises;
iv) the policy towards sick public enterprises to be the same as that for the private sector; and
v) an improvement of performance through MoU (memorandum of understanding) system by which managements are to be granted greater autonomy but held accountable for specified results.

Privatization transfer the ownership of public enterprises to private capital, opening of more industrial areas to private capital and enterprise. The main aim of privatisation is to make use of privately owned resources for collective welfare of the people.

Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization.
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
• State owned enterprises usually are outdone by the private enterprises competitively. When compared the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization can provide the necessary impetus to the underperforming PSUs .
• Privatization brings about radical structural changes providing momentum in the competitive sectors .
• Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
• Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits and debts .
• The net transfer to the State owned Enterprises is lowered through privatization .
• Helps in escalating the performance benchmarks of the industry in general .
• Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees .
• Privatized enterprises provide better and prompt services to the customers and help in improving the overall infrastructure of the country.

Privatization in spite of the numerous benefits it provides to the state owned enterprises, there is the other side to it as well. Here are the prominent disadvantages of privatization:
• Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector and stakeholders do not get the complete information about the functionality of the enterprise .
• Privatization has provided the unnecessary support to the corruption and illegitimate ways of accomplishments of licenses and business deals

• Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc..
• Privatization results in high employee turnover and a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices .
• There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise .
• Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation effects common man.

Disinvestment of a percentage of shares owned by the Government in public undertakings emerged as a policy option in the wake of economic liberalisation and structural reforms launched in 1991. Initially, it was not conceived as privatisation of existing undertakings but as limited sales of equity with the objective of raising some resources to reduce budgetary gaps and providing market discipline to the performance of public enterprises in general.

The Indian Government had undertaken industrial policy reforms since 1980, but the most radical reforms have occurred since 1991, after the severe economic crisis in fiscal year 1990-91. These reforms mainly aimed at enhancing the efficiency and international competitiveness in Indian industry. Growth in the industrial sector is one of the vital figures that affect the Gross Domestic Product (GDP) in India.

India’s industrial policy of 1991 towards liberalisation, deregulation, market orientation has been hailed as ushering in a new era of freedom from government controls, licence raj and red carpetism and one which promises greater prosperity for the Indian people.

Objectives of the Industrial Policy of the Government are –

  • to maintain a sustained growth in productivity;
  • to enhance gainful employment;
  • to achieve optimal utilisation of human resources;
  • to attain international competitiveness and
  • to transform India into a major partner and player in the global arena.

Department of Industrial Policy & Promotion is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. While individual Administrative Ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, Department of Industrial Policy & Promotion is responsible for the overall Industrial Policy.

Merits of the Industrial policy :

1.To raise the level of industrial efficiency, time consuming hurdles of regulations, licenses and restrictions would either be done away with or made industry friendly. Inflow of FDI and foreign technology transfers would be encouraged.
2.Additions to the supply of investible resources and technology would result in increased industrial production and productivity.
3.With the abolition of licensing system in most industries except 5, the wave of liberalization would boost the entrepreneurial skills in the economy.
4.Pruning/de reservatioin of Industries for the public sector would boost professionalism in this secotr. Increased autonomy would usher in dynamism for the betterment.
5.NIP-1991 made a special mention about the role and importance of small scale industries. The state would initiate measures to promote and strengthen small, tiny and village industries, which have large potential to deal with the problems like unemployment, regional disparities, income inequalities and inflation.
6.As the government of the country is obliged to protect the interest of workers, this policy would lay special emphasis to enhance the welfare and upgrade the economic and social status of the worker. To ensure long-lasting and cordial relations between the workers and the management, they (workers) would participate in the management decisions of the enterprises.

MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

MSMEs faces a number of problems such as:-

a) Absence of adequate and timely banking finance.

b) Limited capital and knowledge, non-availability of suitable technology.

c) Low production capacity.

d) High cost of credit.

e) Ineffective marketing strategy.

f) Lack of skilled man power for manufacturing, services, marketing etc.

g) Lack of access to global markets.

h) Constraints on modernization of expansion.

i)  Non availability of skilled labour at affordable cost

j)  Follow up with various government agencies to resolve problems due to lack of man power and knowledge etc.

The schemes/ programmes undertaken by the Government and its organizations seek to facilitate/provide:

i) adequate flow of credit from financial institutions/banks;

ii) support for technology upgradation and modernization;

iii) integrated infrastructural facilities;

iv) modern testing facilities and quality certification;

v) access to modern management practices;

vi) entrepreneurship development and skill upgradation through appropriate training facilities;

vii) support for product development, design intervention and packaging;

viii) welfare of artisans and workers;

ix) assistance for better access to domestic and export markets and

x) cluster-wise measures to promote capacity-building and empowerment of the units and their collectives.

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