Industry: features, problems and policies

The essentials

At independence India's industrial base was small and lacked capital goods industries. Private industrialists did not have the capital or the market to invest in large projects, so the state took a leading role in industrial development. The Industrial Policy Resolution of 1956 (IPR 1956), which went with the Second Five Year Plan, set out this approach.

Industrial Policy Resolution 1956

• Industries were divided into three categories. The first was exclusively owned by the state. The second had industries that the state would progressively establish, with the private sector supplementing its efforts. The third comprised the remaining industries, left to the private sector.
• The private sector was controlled through industrial licensing: a licence was needed to start a new firm or to expand output.
• Licences were made easier for industries in backward regions to promote regional equality.
• The aim was also to prevent the concentration of economic power.

Small-scale industry

• Small-scale industries (SSI) are defined by the maximum value of investment in their assets; the limit has changed over time.
• The Village and Small-Scale Industries Committee (Karve Committee, 1955) suggested using small industry for rural development.
• Small industries are more labour-intensive, so they create more employment.
• A number of products were reserved for small-scale industry, and they got concessions such as lower excise duty and bank loans at lower interest rates, to protect them from large firms.

Key points

• Successes: a diversified industrial base, growth of capital goods industries.
• Problems: many public sector enterprises incurred losses; licensing created delays and corruption (often called the "licence-permit raj"), and protection reduced pressure to improve quality.

Common mistakes

• Thinking all industry was reserved for the state under IPR 1956; private firms worked in the second and third categories.