MY PROJECT - B.E

8/14/2019 MY PROJECT - B.E

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GLOBAL SCHOOL OF MANAGEMENT SCIENCE

TRENDS AND

CHANGES ININDUSTRIAL POLICY ININDIA

SIDDHARATHA KAUL ( GLOBAL SCHOOL OF MANAGEMENTSCIENCE )

TO : MR. SUBHASH GUPTAThere is no other economic policy in India which has so dominantly determinedthe pattern and direction of development of the economy as the IndustrialPolicy. To a large extent, the industrial policy has reflected the socio-economicand political ideology of development. Indeed, the industrial policy resolution of1956, the fundamental principles of which reined until 1991, is described by somepeople as the Economic Constitution of India.


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Particulars Page Number

1. Meaning of Industrial Policy 5

2. General objectives of Industrial

Policy

5

3. Industrial Policy History

3.1Industrial Policy Resolution,

1948

3.2Industrial Development and

Regulation Act, 1951

3.3Hazari Report on Industrial

Licensing Policy

3.4Industrial Policy Resolution,

1956

3.5Industrial Policy Statement,

1977

3.6Industrial Policy of 1980

3.7Review of Pre 1991 Industrial

Policy

3.8New Industrial Policy of 1991

6 - 12

4. Recent Figures 12 14

5. More Liberalization to combat

Industrial slowdown

5.1 Role of NRIs

14 16

6. Different Industrial Sectors

6.1Infrastructure

16 18

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6.2Power

6.3Coal

6.4Petroleum and Natural Gas

6.5Railways

6.6Shipping

6.7Aviation

6.8Telecommunication

7. Key Industries

7.1Steel

7.2Engineering and Machine Tools

7.3Electronics

7.4Textile

7.5Role of Research and

Development

7.6Planning for Development

18 21

8. Traditional Industries DYING 21

9. Indias Pattern of Industrial

Development

21

10.Challenges for India 22

11.Reason for Industrial Slowdown 23

12.The Industrial Downturn

12.1Declining Export Values

12.2Domestic Demand

26 29

13.Larger Lessons 29 32

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14.Current Scenario 32 33

15.Role of Liberalization in Industrial

Growth

33

16.Conclusion 33 40

ABSTRACT

The Industrial Policy indicated the respective roles of public, private, joint and co operative

sectors; small, medium and large scale industries and underlined the national priorities and the

economic development strategy. It also expressed governments policy towards foreign capital

and technology, labor policy, tariff policy etc. in respect of the industrial sector. In short, the

industrial development, and thereby the economic development to a very significant extent, has

been guided, regulated and fostered by the Industrial Policy.

The following project report provides salient features of the industrial policy of India and the

recent trends and changes in the industrial sector.

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1. MEANING OF INDUSTRIAL POLICY

Industrial policy means rules, regulations, policies, principles and procedures laid down by the

government for regulating, developing and controlling industrial undertakings in the country. It

prescribes the role of public, private, joint and co-operative sectors for the development of

industries. It also indicates the role of large, medium, small and micro sector. It incorporates

monetary and fiscal policies, labor policy, tariff policy and government attitude towards foreign

capital and role to be played by multinational corporations in the development of industrial

sector.

2. GENERAL OBJECTIVES OF AN INDUSTRIAL POLICY

The following are the main objectives towards which the industrial policy works

a) Expanding the industrial base

b) Accelerating the rate of growth through industrialization

c) Increasing employability

d) Reducing regional disparity

e) Prevention of industrial pockets

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f) Encouraging competitive environment

g) Promoting balanced industrial development

h) Tie ups with other sectors of the Indian economy

i) Giving help to small enterprises

j) Encouraging the industrial research and development

1. INDUSTRIAL POLICY HISTORY

1) Industry policy resolution 1948

2) Industries ( development and regulation ) Act , 1951

3) Industrial policy resolution , 1956

4) Industrial policy statement , 1977

5) Industrial policy of 1980

6) Review of Pre 1991 Industrial policy

7) New industrial policy , 1991

3.1 INDUSTRIAL POLICY RESOLUTION 1948

The first important industrial policy statement was made in the industrial policy resolution,

1948 issued by the government of India on April 6, 1948. The resolution accepted the

importance of both private and public sectors in the industrial economy of our country. This

policy divided the industries into four broad categories :

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1) Industries where the state had its monopoly In this category

three fields of activities were specified. They were arms and ammunitions, atomic

energy and rail transport

2) Mixed sector In this category, the following six industries were specified coal ,

iron and steel, air craft manufacture, ship building, manufacture of telephones telegraphs

and wireless apparatus and mineral oils. New undertakings in this category were to be set

up by the state but existing private undertakings were allowed to continue for ten years

after which the government had to review the situation and acquire any existing

undertaking after paying compensation on a fair and adequate basis.

3) The field of government control Eighteen industries of national

importance were included in this category. The government did not undertake the

responsibility of developing these industries but considered them of such importance that

their regulation and direction was necessary. Some of these industries included

chemicals, sugar, paper, cement, woolen textiles etc

4) The field of private enterprise All other industries which were not

defined in the above three were left open to the private sector. However, the state could

take over any industry in this sector also if its progress was unsatisfactory.

The main thrust of this industrial policy was to pay the foundation of a mixed economy in which

both private and public enterprises would march hand in hand to accelerate the pace of industrial

development in our country. This policy also accepted the importance of small and cottage

industries as they are particularly suited for the utilization of local resources and for the creation

of employment opportunities

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3.2 INDUSTRIES (DEVELOPMENT AND REGULATION) ACT,

1951

To regulate and make the process of industrial development in the country central, an act was

passed in the parliament in October 1951 and came into existence in 1952. Its main task over

years has been to concentrate more on the regulation aspect. The main objectives of this act are

1) The regulations of industrial investment and production according to plan priorities and

targets

2) Protection of small entrepreneurs against competition from large industries

3) Prevention of monopoly and concentration of ownership of industries

4) Balanced regional development with a view to reducing disparities in the levels of

development of different regions of the economy

The provisions of this act consist of restrictive and reformative provisions

3.3 HAZARI REPORT ON INDUSTRIAL LICENSING POLICY

It mentioned that the licensing policy encouraged foreclosure of licensed capacity by influential

and powerful industrial houses who could afford to sit tight on utilized licenses. In the absence of

a policy of revocation of licenses issued, the large industrial houses prevented the entry of new

entrepreneurs while they did not fulfill the targets laid down in the plans. As a result, industrial

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licensing which was supposed to act as an instrument of industrial development became an

impediment

3.4 INDUSTRY POLICY RESOLUTION , 1956

The goal of socialistic pattern of society pressed the need for the industrial policy resolution act

of 1956. This emphasized on

1) Expansion of public sector

2) To reduce disparities in the distribution of income and wealth

3) To build up large and growing cooperative sector

4) To prevent monopolies and concentration of wealth and income in the hand so of a select

few

5) To develop heavy industries and machine making industries

6) To accelerate the growth rate and to speed up industrial development

The important provisions were

1) New classification of industries in Schedule A, B and C

2) Fair and non discriminatory treatment for the private sector

3) Encouragement to village and small enterprises

4) Removing regional disparities

5) Provision of amenities for labor

6) Attitude towards foreign capital

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3.5 INDUSTRIAL POLICY STATEMENT, 1977

In December a new policy came into existence which had the following elements

1) Development of small scale sector

2) Areas for large scale sector

3) Approach towards large business houses

4) Expanding role for the public sector

5) Approach towards foreign collaboration

6) Approach towards sick units

The industrial policy, however, was a mere extension of the industrial policy of 1956. The draw

back with this policy was that it failed to impose a ban on multinationals of Indian big business

to produce ordinary items like bread, biscuits, toffees etc which should have been actually

reserved for the small sector

3.6 INDUSTRIAL POLICY OF 1980

This was announced by congress in July 1980. It contained the following measures for industrial

development

1) Effective operational management of the public sector

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2) Integrating industrial development in the private sector

3) Redefining of small units

4) Promotion of industries in rural India

5) Removal of regional imbalances

6) Regularization of unauthorized excess capacity in the private sector

7) Automatic expansion of all industries specified in the 1st schedule of 1951 IDRA

8) Merger of sick units healthy units capable of restoring their viability

The major thrust of the 1980 policy was to regularize the excess capacity installed over and

above the licensed capacity. Not only that, the government also allowed the automatic expansion

of capacity to all industries

3.7 REVIEW OF PRE 1991 INDUSTRIAL POLICY

It dealt with licensing and underutilization of capacity, licensing and concentration of economic

power, discretionary powers of licensing authorities, reduction of regional inequalities and

imbalances, to curb the delay in processing of applications

Due to failure of the industrial licensing policy in achieving the objectives, government of India

announced a number of liberalization measures in the policy announced in 1970, 1973 and 1978.

In 1980 the government came forward with an industrial policy statement which served as a

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guideline to various liberalization measures undertaken throughout 1980s. Some of these

measures were

1) Exemption from licensing

2) Relaxation to MRTP act following companies and FERA complying industries

3) Relicensing

4) Re-endorsement of capacity with view to improve capacity

5) Broad banding of industries i.e. their classification

6) Minimum economic scales of operation that was introduced in 1986 which encouraged

realization of economies of scale by expansion of existing installed capacities of

undertakings to minimum economic levels of operations

7) Development of backward areas

8) Incentives for export production

9) Enhancement of investment limit for SSI units and ancillary units

3.8 NEW INDUSTRIAL POLICY OF 1991

Making a sharp departure from industrial policy resolution 1956, the government led by P.V

Narsimha Rao announced a new industrial policy on July 24, 1991. The basic philosophy of the

new policy has been summed up as continuity with change

Its main objectives were

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1) To consolidate the strengths built up during the earlier decades of economic planning and

to build on the gains already made

2) To correct the distortions that may have crept in the industrial structure as it had

developed over the last 4 decades

3) To maintain a sustained growth in the productivity and gainful employment

4) To attain international competitiveness

The pursuit of these objectives were tempered by

a) The need to preserve the environment

b) The need to ensure the efficient use of available resources

The merits of this new policy are discussed below

1) Some processes required less clearance from government which reduced the project time

and thereby the project cost

2) The changes in respect of foreign investment and foreign technology agreements are also

designed to attract capital, technology and managerial expertise from abroad

3) Some changes regarding public sector enhanced allocative efficiency

4) The 1991 policy was welcome because it took the bold decision to end the license-permit

raj and save the entrepreneurs from the clutches of the bureaucracy of the country to start

an undertaking

However, there are some disadvantages to it too. They are

1) The performance of capital goods sector was not as big as thought

2) Fear of threat from foreign competition is huge

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3) The danger of business colonalizations

4) A misplaced faith in foreign investments

5) The policy changes in the MRTP Act have not been very effective

1. RECENT FIGURES

Industrial production had grown by 4.2 per cent in 1997-98. This is composed of a growth rate

of 4.9 per cent in mining, 3.6 per cent in manufacturing and 6.8 per cent in electricity. As per

the use-based classification, intermediate goods and basic goods grew at 6.9 per cent and 7.0

per cent respectively, whereas consumer goods registered growth rate of 4.6 per cent and

capital goods suffered a decline of 4 per cent. Thus, the decline in investment was thought to

be an important factor in the continuing industrial slowdown

Mining was badly hampered by the poor performance of crude oil (-6.5 per cent) and hydro-

electricity generation, which registered negative growth (-5.4 per cent)

Thermal power (including nuclear) also recorded lower growth of 5.9 per cent

Deceleration in industrial growth could be attributed to several factors. One of the most

important is the decline in investment as shown by the decline in capital goods production and

the fall in the value of imports of capital goods. Among the reasons for reduced investment are

domestic and international uncertainty and reduced confidence, and a somewhat lackluster

capital market, which made it difficult to raise equity.

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2. MORE LIBRALIZATION TO COMBAT INDUSTRIAL

SLOWDOWN

Given the background of slowing industrial growth we should focus on cutting personal and

corporate income tax rates across the board. The credit policy (of April 1997) reduced the

Bank Rate, abolished the statutory liquidity ratio (SLR) on inter-bank deposit and reduced

the cash reserve ratio (CRR). The resultant easing of monetary conditions was reflected in a

reduction in nominal interest rates. The RBI has also re-introduced bridge loans to

companies against expected equity flows/public issues for propping up the capital markets.

The corporate sector has also been allowed free access to GDR/ECB windows to obtain

finance at globally competitive rates.

During 1997-98, the number of industries subject to industrial licensing was reduced from

14 to 9. The investment limit on plant and machinery in the small-scale sector was enhanced

to Rs. 3 crore from Rs.60 lakh/75 lakh for small scale industrial undertakings/ ancillary

industrial undertakings. The limit for tiny sector was correspondingly raised to Rs.25 lakh

from Rs.5 lakh.

5.1 ROLE OF NRIS

The government acknowledges the great role that the vast number of Indians living and working

abroad, the Non-Resident Indians, who can play in accelerating the pace of development in the

country. In the 1980s, the NRIs contribution through their remittances was instrumental to a

large extent in stabilizing the balance of payment situation. Several initiatives have been taken to

attract NRI investments - in industry, shares and debentures. The NRIs are allowed 100%

investment in 34 priority and infrastructure facilities on non-repatriation basis. Approval is given

automatically on investment in certain technical collaborations. They can buy Indian

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Development Bonds and acquire or transfer any property in India without waiting for

government approval.

3. DIFFERENT INDUSTRIAL SECTORS

6.1 Infrastructure

In view of their crucial importance, power, transport and other infrastructure industries are

owned by the State. As a result of special attention given to the area in recent years, the

infrastructure industries have been growing at the rate of 9 to 10 per cent annually.

6.2 Power

The generation of power has increased impressively in recent years. In 1990-51, India generated

6.6 billion-kilowatt hour of electricity, in 1995-96 the figure was 380.1 billion-kilowatt hour.

The installed capacity, which was 1400 MW at Independence in 1947, has crossed 83,288 MW

6.3 Coal

Coal is the primary source for power generation in India. The country has huge reserves of coal

approximately 197 billion tons. A sufficient amount of lignite (brown coal used in thermal power

stations) is also available in places like Niveyyli in Kerela and reserves in the chotta Nagpur

plateau. The government now welcomes private investment in the coal sector, allowing

companies to operate captive mines.

6.4 Petroleum and Natural Gas

The recent exploration and production activities in the country have led to a dramatic increase in

the output of oil. The country currently produces significant amount of crude oil, two thirds of

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which is from offshore areas, and imports a certain amount. Natural gas production has also

increased substantially in recent years. Natural gas is rapidly becoming an important source of

energy and feedstock for major industries.

6.5 Railways

With a total route length of 63,000 Kms and a fleet of 7000 passenger and 4000 goods trains, the

Indian Railways is the second largest network in the world. It carries more than 4000 million

passengers per year and transports over 382 million tons of freight every year. It is well equipped

to meet its demands for locomotives, coaches and other components.

Lately, the Railways have launched a massive gauge conversion drive as about a third of the

track is meter or narrow gauge. With improvement in tracks, plans are afoot to introduce faster

trains. Very soon, certain prestigious long distance trains will be running at 160 Kms per hour.

The Railways have already started a scheme to privatize several services that will include

maintenance of railway stations, meals, drinking water and cleaning of trains.

6.6 Shipping

The natural advantage of a vast coastline requires India to use sea transport for the bulk of cargo

transport. Following the policy of liberalization, the Indian shipping industry, major ports, as

also national highways and water transport have been throw open to the private sector. India is

also among the few countries that offer fair and free competition to all shipping companies for

obtaining cargo. There is no cargo reservation policy in India.

6.7 Aviation

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India has an aviation infrastructure, which caters to every aspect of this industry. Hindustan

Aeronautics Limited (HAL) is India's gigantic aeronautical organization and one of the major

aerospace complexes in the world.

Pawan Hans, a helicopter service, provides services in difficult terrain.

The Government has adopted a liberal civil aviation policy with a view to improving domestic

services. Many private airlines are already operating in the country.

6.8 Telecommunications

With rapid advances in technology, India now uses digital technology in telecommunications,

which derives advantage from its ability to interface with computers. The present strategy

focuses on a balanced growth of the network rapid modernization, a quantum jump in key

technologies, increased productivity, and innovation in organization and management. Moving

towards self-reliance, besides establishing indigenous R&D in digital technology, India has

established manufacturing capabilities in both the Government and private sectors.

The private sector is expected to play a major role in the future growth of telephone services in

India after the opening of the economy.

4. KEY INDUSTRIES

7.1 Steel

The iron and steel industry in India is over 122 years old. However, a concerted effort to

increase the steel output was made only in the early years of planning. Three integrated steel

plants were set up at Bhilai, Durgapur and Rourkela. Later two more steel plants, at Bokaro and

Vishakhapatanam, were set up. Private sector plants, of which the Tata Iron and Steel Company

(TISCO) is the biggest, have been allowed to raise their capacity. The Steel Authority of India

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(SAIL), which manages the public sector plants, has undertaken a Rs. 40,500 crore program to

modernize them. TISCO and a large number of mini steel plants in the country contribute about

40% of the steel production in the country. The Government has given a push to sponge iron

plants to meet the secondary sector's requirement of steel scrap.

7.2 Engineering and Machine Tools

Among the Third World countries, India is a major exporter of heavy and light engineering

goods, producing a wide range of items. The bulk of capital goods required for power projects,

fertilizer, cement, steel and petrochemical plants and mining equipment are made in India. The

country also makes construction machinery, equipment for irrigation projects, diesel engines,

tractors, transport vehicles, cotton textile and sugar mill machinery. The engineering industry has

shown its capacity to manufacture large-size plants and equipment for various sectors like power,

fertilizer and cement. Lately, air pollution control equipment is also being made in the country.

The heavy electrical industry meets the entire domestic demand.

7.3 Electronics

The electronics industry in India has made rapid strides in recent years. The software export has

been tremendous. The Software Technology Park scheme for attracting investments has proved

successful. The relative low cost of production in India makes items made in India competitive in

the world market.

The compound growth of the computer industry has been 50% during the last five years. Almost

the entire demand for floppy disk drives, dot matrix printers, CRT terminals, keyboards, line

printers and plotters is met from indigenous production. With the availability of trained technical

manpower, computers have been identified as a major thrust area. Special emphasis has been

given to software export.

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Recognition for the Indian computer software industry has been global. Indian software

enterprises have completed projects for reputed international organizations in 43 countries.

7.4 Textiles

Textiles, the largest industry in the country employing about 20 million people, account for one

third of India's total exports. A new long-term Quota policy has been announced to boost exports

over the next 5 years.

7.5 Role of Research and Development

Research and Development activities are supported by the governments at the Center and the

states as well as by public and private sector undertakings. The Department of Scientific and

Industrial Research recognizes over 1200 in-house R & D units. About 200 research laboratories

exist in government departments and agencies. The benefits of the R & D works are reaching

various fields like industry, agriculture and commerce.

7.6 Planning for Development

The Planning Commission headed by the Prime Minister, draws up five-year plans under the

guidance of the National Development Council to ensure growth, self-reliance, modernization

and social justice. Its role has been redefined in the eighth plan document: from a centralized

planning system, India is moving towards indicative planning which will outline the priorities

and encourage a higher growth rate.

5. TRADITIONAL INDUSTRIES - DYING

Indian handicrafts have withstood competition from machines over the years. The skills are

passed on from one generation to the next. The handicraft and handloom sector is a major source

of rural employment and earns substantial foreign exchange. Traditional textiles are as popular

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abroad as they are within the country. The major export items include hand-knotted carpets, art

metal ware, hand-printed textiles and leather, wood and cane wares. However, this industrial

sector is in a sorry state.

6. INDIAS PATTERN OF INDUSTRIAL DEVELOPMENT

India seems to have followed an idiosyncratic pattern of development, certainly compared to

other fast-growing Asian economies. While the emphasis on services rather than manufacturing

has been widely noted, within manufacturing India has emphasized skill-intensive rather than

labor-intensive manufacturing, and industries with typically higher average scale. Despite recent

reforms that have removed some of the policy impediments that might have sent India down its

distinctive path, it appears unlikely that India will revert to the pattern followed by other

countries. The other significant parts that are of significant importance are -

Compared with countries at a similar level of development and size, India

has approximately the normal share of output and employment in

manufacturing

Output in services is below the norm, as is employment in services in non

tier 1 cities

Manufacturing output and employment appear to be above the norm in

industries that typically are skill intensive or have larger establishments

Average establishment size is substantially smaller than in comparable

countries

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And finally, Indian manufacturing is significantly more diversified both in

terms of output and employment than countries of comparable income and

size

7. CHALLENGES FOR INDIA

Inflation and low industrial growth - challenges for India.

An inflation rate touching 11.72 percent and the slowdown in industrial growth are the major

challenges for the Indian government. While the high inflation rate will affect the ruling party's

prospects in the coming elections, the slow industrial growth is upsetting the governments fiscal

projections.

The common man is not happy about the performance of the present government. Price rise of

almost all essential commodities has been one of the major reasons. The government is not only

alienating the common man, industrial groups and foreign investors are equally worried about

the performance of the economy. The latest on this has been the government's acceptance that the

targets set in the budget may not be achieved.

Prices of essential commodities have been on the rise for some time. Prices of commodities like

onion went up to unheard-of levels. This has greatly affected the Indian industrial sector as well.

The continued slowdown in industrial growth will affect the government's fiscal projections.

Collection of excise and customs duties will suffer on account of a slowdown in the industry.

The government is hopeful about corporate and income tax collections due to better

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administration and more people coming into the tax net. The problem is that excise and customs,

both of which are doing badly, account for over two-thirds of the revenues projected.

8. REASON FOR INDUSTRIAL SLOWDOWN

The negative growth in industry in the month of October has caused umbrage as this is the first

time in over a decade that we have actually witnessed a decline in industrial growth. Add to this

the decline in exports and the picture is quite disheartening. Several reasons have been offered

for the lower rates of growth in industry. Some of them are lower consumption levels,

investment, government expenditure, trade and so on. On the other hand, policy measures have

been invoked to redress the same.

The purpose here is to take an impassioned view of the relationships between industrial growth

and certain variables

Tables 1 and 2 give the correlation coefficients between industrial growth rate and other

variables where the relationship was significant and not-so-significant. For a set of 18

observations (i.e., after reforms set in), a significant coefficient would be above 0.44.

Table 1 shows that the top 5 variables that have a strong correlation with industrial growth are

growth in imports, exports, GDP, level of FII and growth in bank credit. While imports and

exports are definitely linked with industry as imports are used for industrial production while

exports prospects feed back into demand stimulus for industry, the same cannot be said about FII

investments. For both FII and FDI levels, it may be said that higher industrial growth affects

these levels in terms of foreign flows into the country either in the secondary market or as

investment. Growth in the services sector can be linked inexorably with that in manufacturing as

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growth in capital issues, foreign investment and the Sensex are not associated with industrial

growth. This means that the rate of change in these variables is not correlated with the industrial

growth rate.

All these things point towards difficulties in the times to come and conjectures of this sectors

growth should logically be conservative in general.

9. THE INDUSTRIAL DOWNTURN

An assessment of industrial growth shows that the impact of liberalization is much less creditable

than otherwise assumed.

Even as Indias stock markets are staging a recovery from the depths they have mined,

disconcerting news emerges from elsewhere in the economy regarding the effects of the global

crisis. The two main channels through which the global crisis is being transmitted to India are a

decline in exports and a net outflow of foreign investment.

12.1 Declining export values

The area where the effect of the crisis is visible is capital inflows. With foreign investors having

to reduce their credit dependence and meet commitments at home, they have been booking

profits or selling assets in emerging markets to mobilize the requisite funds.

Even though there has been a sharp increase in FII inflows in recent years, there is reason to

believe that such inflows are the result of speculative allocational decisions across geographies

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on the part of investors with limited funds. Since they reflect attempts to squeeze out as much as

possible from still-tepid global markets, such flows are potentially extremely volatile.

Finally, a third disconcerting feature of the emerging economic scenario is the evidence on

industrial growth. The month-on-month annualized rate of growth of industry, as reflected by the

index of industrial production, points to a sharp deceleration and subsequent contraction of

output in the organized industrial sector.

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As Chart 1 shows, month-on-month rates, which indicated a slackening of industrial growth

during the first two quarters of 2008-09, point to significant worsening of industrial performance

leading to negative growth rates during the subsequent two quarters.

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12.2 Domestic demand

While the export decline noted above could partly explain this adverse turn, the substantial

dependence of Indian manufacturing on the domestic as opposed to the export market implies

that the fundamental problem facing the economy is a slackening of domestic demand.

Since, the beneficiaries of the Pay Commissions recommendations fall in the middle and upper-

middle class categories, it is to be expected that their windfall gains and higher salaries would be

directed towards demands for manufactures, besides luxury services. If despite that industrial

growth has been indifferent or poor other factors must have neutralized the effects of this

fortuitous stimulus.

While it is undoubtedly true that if these fortuitous stimuli had not played a role, the

manufacturing recession would have been even deeper than revealed by the extant numbers, the

element of surprise is that those stimuli have not been able to prevent the downturn.

The effects of the global recession are much stronger than expected. This in turn implies that all

earlier talk of India being decoupled from the international system was completely unfounded.

One reason is that, besides Indias integration with the global system through the exports of

manufactures that have been on the decline, the other form of integration and mechanism for

transmission of the effects of the global recession to the country is the export of services.

Even though there has been a lag in the transmission of such effects, the fact that more than 60

per cent of Indias software and IT-enabled exports are directed to US markets and that the

financial services industry there accounts for a large part of this business has meant that the

effects financial crisis and economic recession were bound to be felt sooner than later.

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The second-order effects of that impact and consequent loss of employment in services is partly

visible in the form of a contraction of industrial demand.

10.LARGER LESSONS

This experience has a larger lesson about the effects of liberalization on manufacturing growth in

India. Originally it was expected that trade and industrial policy liberalization in India would

result in a restructuring of manufacturing production that would increase Indias presence in

global markets.

Domestic firms subjected to global competition were expected to restructure and establish best-

practice capacities at internationally competitive scales, making them successful in international

markets. On the other hand, theliberalization of the rules and terms for entry of foreign firms

were expected to encourage international firms to locate in India for world market production.

Together this was expected to make global rather than domestic demand the principal stimulus

for manufacturing growth. Indeed, this is what happened in the Chinese case.

In India, on the other hand, while liberalization did change the sources and pattern of growth,

this was not because of a shift in favor of an export-based stimulus, but because of the expansion

of new sources of credit-financed consumption that widened the demand and market for

manufactures goods. What the current crisis has done is to challenge the sustainability of that

form of growth.

In the event, if we undertake a medium- or long-term assessment of industrial growth, the impact

of liberalization seems much less creditable than otherwise assumed. It is well known that after

the balance of payments crisis of 1991 and the import-compression influenced contraction of

manufacturing production in the early 1990s, the recovery of industrial growth began in 1993-94.

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That is the year which constitutes the base for the revised series of Indices of Industrial

Production that is still in use. We therefore have a consistent data set on trends in industrial

production as revealed by this lead indicator since 1994-95.

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Examining the month-on-month growth rate since April 1994-95 (Chart 2), we find that industry

experienced a mini-boom during 1993-94 to 1995-96 when month-on-month growth rates went

as high as 18 per cent.

However, 1996-97 witnessed a sharp downturn in industrial performance, after which industrial

growth remained indifferent or poor for a long period stretching till the middle of 2003. A

second boom occurred thereafter lasting till the end of 2006, when once again month-on-month

manufacturing growth exceeded 17 per cent, though it was still short of the previous September

1995 peak. Starting early 2007, however, we have been once again witnessing a downturn, with

rates now touching the negative lows we observe for March 2009.

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In sum, if we take a long view, industrial and manufacturing growth rates have not been

spectacular or even excessively creditable during the years of liberalization or economic

reform. That period has largely seen indifferent or poor industrial performance broken by two

short booms. This comes through quite clearly also from the year-on-year growth rates recorded

since 1994-95 as revealed by the annual IIP figures (Chart 3).

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This is not because liberalization did not influence the sources and patterns of growth. It did. But

its ability to trigger high growth was sporadic and limited because such growth clearly came

from sources which were not sustainable.

11.CURRENT SCENARIO

Despite the current economic slowdown and a downsizing of Indias GDP from 9% to 7.1%,

India still remains one of the fastest growing economies in the world, just a step behind China

The reason is given to its strong service exports backed by robust and ever increasing domestic

consumption. Add to it the long term principles like strong industrial environment, growth in

exports and increasing local demand have led the Indian economy to gain great grounds, thereby

increasing the scope for future industrial growth. This is further backed by the Indian advantage

of lower cost of production and superior amendments in our framework such as subsidies,

incentives, single window clearances, investor friendly policies. This gives a brighter picture for

the manufacturing and industrial scenario in India. Whets undeniable is the increased focus on

the manufacturing sector since the projected growth is stipulated to be an average of 9% during

the 11th five year plan ( 2007 2012 ). Like the manufacturing industry, real estate has also hit

the jackpot with average rental growth reaching around 25-30% in key areas. The major growth

drivers for industries in India are

Economic growth

Infrastructure development

Government initiatives

Outsourced manufacturing

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Increased multinational presence

Further liberalization

12.ROLE OF LIBRALIZATION IN INDUSTRIAL GROWTH

India has experienced a change from regulated economic development to a competitive one. The

main aim of liberalization is of openness and removing hindrances for exports so that growth can

be astronomic. During the post liberalization period domestic demand expansion and export

expansion. However, import substitution to output growth reduced.

The analysis reveals that at the aggregate level of manufacturing industry, domestic demand

expansion has been the dominant source of output growth, followed by export expansion during

both pre-liberalization period and post-liberalization period. But the contribution of both

domestic demand expansion and export expansion has increased during post-liberalization period

as compared to pre-liberalization period. On the other hand, contribution of both import

substitution and intermediate demand to output growth has become negative during post

liberalization period as compared to positive contribution during pre-liberalization period. At

disaggregate level also; increase in output of Indian manufacturing industries has been driven

mainly by domestic demand expansion during both the periods.

13.CONCLUSION

One must now, after all these discussions think, as to how the Industrial growth been projected.

One must realize that India is the 2nd most populated country in the world and that gives India a

huge plus in terms of resources ( human ) and the market available. Also, its evident that despite

having a huge service sector which is successful, India is struggling when it comes to the

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industrial sector. In a nutshell, it is poorly performing. Add to this, a very strong financial

institutions and there are so many questions that are left unanswered. Most prominent being the

reason why the industrial sector and its development has taken a back seat. When we compare it

to China, Indias GDP growth rate for 2009 as given by world bank is 7.09 (annual change) as

compared to China which has the same factor lined up at 9 %. Therefore, Indias greatest

obstacle to its growth has been is its poor industrial growth. It should be taken into consideration

that Indias service sector growth cant substitute for industrial growth indefinitely. Indias large

and ever growing population needs industrial jobs to raise living standards and increase the state

the industrial sector is in. One must also note that these service sector jobs requiring extensive

education affect too few people. The following graph reveals output per worker growth

(expected and actual ) in India between 1960 and 1992.

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This leads to the following conclusions

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a) Inefficiencies that India faced was a common trend. That means such result was faced by

most of the countries.

b) Inefficiencies in central planning were offset by resource mobilization keeping into mind

that India has always had a very high savings rate.

c) Inefficiencies were detrimental and prevent India from achieving a higher growth path,

talking both in economical as well as Industrial sense.

The pro market amendments of the 1990s reduced tariffs, reformed monetary systems,

removed licensing etc which brought about industrial growth rate acceleration to 5-6% along

with poverty reduction and emergency of IT sector and outsourcing. However, the pro market

approach only led to Indian growth on a whole but not the industrial sector in particular. Also,

the following things happened

1) The services grew but not the industry.

2) Realization that Indias economic structure does not support the industry pattern or the

agricultural dominance but the service sector. This is very clearly evident in the data

below

Services 40% 60.7% 78.6%

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Industry 48.1% 19.3% 20.4%

Agriculture 11.9% 19.9% 0.9%

China India USA

(Percentage of GDP)

Indias pathway to growth in the industrial sector can be formulated in the following manner

a) India should follow a dual track growth. This means growth in industrial sector in inland

states alongside continued service sector expansion

b) Investing in public infrastructure and focus on aiding industries

c) Pruning the industrial and labor laws related esp. to manufacturing by encouraging

industries to achieve economies of scale

d) Gradually wean India of all import substitution policies to force the domestic industry

to become competitive in the international market

e) To stop thinking that its corruption that is hampering the Indian industrial growth. This is

because India comes nowhere close to other industrially developed countries when it

comes to high corruption levels.

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f) The central banks move to allow the rupee to gain a nine-year high has also made

exports less competitive. The people behind this should give it a rethink for the benefit

of the industrial sector.

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4) IMF Working Paper , WP/06/22 , Indias pattern of development : What happened , What

follows ? by Kalpana Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramaniam and

Ioannis Tokatlidis

5) World Bank Policy Research Working Paper No. 3476 by Inessa Love and

Maria Soledad Martinez Peria6) The pattern and causes of industrial growth in India by Kaushik Basu

and Annemie Maertens

7) Indias pattern of development by Amol Agarwal

8) Tracing pattern in industrial growth by Madan Sabnavis

9) Acharya, Shankar (2007), Indias growth : past performance and

future prospects, paper for presentation at the eighth annual global

development conference of the global development network

10)Balakrishnan, Pulapre and M Suresh Babu (2003) Growth and

development of Indian industries in 1990

11)Nagaraj R. (2003), Industrial policy and performance since 1980 :

which way now? economic and political weekly, vol. 38 , number 35,

aug 30

12)www.Scribd.com

13)http://dipp.nic.in/

14)http://dhi.nic.in/

15)www.indiaonestop.com/economy-macro-industry

16)www.nber.org/papers/w12023

17)www.suite101.com/article.cfm/business_in_india/12663

18)madansabnavis.blogspot.com/.../tracing-patterns-in-industrial-growth.html

19)www.blonnet.com/2009/05/19/stories/2009051950070900.htm
http://tmp/svbe5.tmp/javascript:WinOpen(561341);http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=161008http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=161008http://www.scribd.com/http://dipp.nic.in/http://dhi.nic.in/http://www.indiaonestop.com/economy-macro-industryhttp://www.nber.org/papers/w12023http://www.suite101.com/article.cfm/business_in_india/12663http://www.blonnet.com/2009/05/19/stories/2009051950070900.htmhttp://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=161008http://www.scribd.com/http://dipp.nic.in/http://dhi.nic.in/http://www.indiaonestop.com/economy-macro-industryhttp://www.nber.org/papers/w12023http://www.suite101.com/article.cfm/business_in_india/12663http://www.blonnet.com/2009/05/19/stories/2009051950070900.htmhttp://tmp/svbe5.tmp/javascript:WinOpen(561341);

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