The Industrial Policy Resolution of 1956

The Salient Features of the Industrial Policy Resolution on 1956 and its impact on the Industrial Sector in India

The Colonial rule led to de-industrialization in India in the 18th and 19th Centuries. This was caused by both the Industrial Revolution in Britain in the late 18th Century as well as the policies of the British Administration. India’s industry was in a very poor state at the time of Independence. The policymakers knew that a strong industrial base is necessary for achieving the goals of rapid economic growth, alleviation of poverty and achieving the status of a self-reliant economy. In this context, the Industrial Policy assumed the leading role in realization of these goals.

The Industrial Policy Resolution was passed by the Parliament of India on April 30, 1956. Prior to this resolution of 1956, the Statement of Industrial Policy, 1945 and the Industrial Policy Resolution, 1948 were passed.

Background

The Statement of Industrial Policy 1945 issued by the Planning and Development Department of the Government of India was the first comprehensive proposal for industrial development issued by the Government. The document had called for explicit Government control over 20 key industries. The Government control was with respect to both control of natural resources as well as the activities of the private sector. The Policy also divided industry into public as well as the private sector. This policy document laid down the foundation of control of the Union Government over industrial development. The policy was a deviation from the Government of India Act 1935 which had kept development of industries in the domain of the Provincial Governments (although the Act was never implemented).

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The formulation of SIP 1945 had several antecedents. The Karachi Session of the Congress in 1931 passed a resolution ‘Fundamental Rights and Economic Programme’ which called for State control of key industries. The National Planning Committee had expressed a similar opinion in 1938 advocating establishment of heavy industry, control of key industries in order to raise national income, reduce poverty and attain self-sufficiency. The Bombay Plan (“A Plan for Economic Development of India”) was no different in its philosophy and outlook.

The Industrial Policy Resolution of 1948 was passed on April 6, 1948 and it was the first official resolution on Industrial Policy. The policy reiterated the need for the State to play an active role in the development of industries. This resolution delineated areas of public and private sector investment. Government could seek investment from the private sector in industries under its control for the purpose of ‘national interest’.

Both SIP, 1945 and IPR 1948 had listed down sectors to be under the Government control. But these policy documents did not explain the rationale for keeping a particular sector under the Government control. There was no explanation of the method used to classify the industries. To implement the policy of 1948, the Industries (Development and Regulation) Act was passed in 1951. The act listed down industries called Scheduled industries for which licenses were to be obtained for establishing new enterprise, manufacturing new articles, expansion of capacity or changing of location by an existing industrial enterprise. IRDA put the responsibility of regulation, control and development of industry in the hands of the Union Government.

Exhibit: Objectives of Industrial Act, 1951

Objectives

Industrial Policy Resolution, 1956

The Industrial Policy Resolution, 1956 was passed by Indian Parliament on April 30, 1956. The Indian Parliament had declared “Socialist pattern of society” as the objective of social and economic policy. IPR, 1956 was thus more elaborate and more committed to attain a socialistic pattern of development. The objectives of the IPR, 1956 were defined as:

1. Accelerate pace of Industrialization in India
2. Development of Heavy Industry
3. Improve livelihood opportunities and living standards
4. Reduce disparities in distribution of wealth
5. Expansion of the Public sector
6. Improve cooperation with the Private sector

Exhibit: Objectives of Industrial Policy Resolution, 1956

Overview

The IPR 1956 was much more detailed and elaborate than the earlier resolutions and statements. The document explained the Government’s reasons behind the revision of IPR 1948 and was more committed to achieving the Socialist pattern of the development. The Planning Commission had already been established and the First Five Year Plan period was over in 1956. The Second Plan developed under the guidance of the economist PC Mahalanobis had laid emphasis on rapid industrialization of the economy with focus on heavy industry. This would reduce India’s dependence on imports of foreign producer goods. This was a marked deviation from the First Five Year Plan which was more focused on the Agriculture sector. The allocation of outlay to the Industrial sector increased to 20% (of the total Plan outlay) compared to 4% in the First Five Year Plan.

The IPR 1956 underscored the role of the Public Sector in industrialization and allotted all industries of “basic and strategic importance” to the public sector. Other industries which were “essential and required investments which only the State could provide” were also kept in the Public sector.

Industries were classified into 3 categories and the list of industries falling under the Public sector were larger than the IPR of 1948. The 3 categories were:

1. Industries in the exclusive responsibility of the State (basic and strategic importance)
2. Industries which would progressively become State-owned and State would take initiative to establish new enterprises.
3. Industries in the domain of the Private sector.

Exhibit: Schedule of Industries, Industrial Policy Resolution, 1956

All the new enterprises in the industries falling under Schedule A were to be set up in the Public sector. The State was supposed to play an increasing role in the establishment of new enterprises in the Schedule B industries.

The IPR 1956 considered the Public and Private sector as mutually complementary and that the growth of the Private sector is essential for industrial sector growth. The Resolution noted that it was desirable to allow the Private Sector to develop with freedom consistent with the target and objectives of the Planning. This alleviated any fear of nationalization of industries where the Private sector already had some presence.

But the Policy had adopted different strategies for these sectors. Even as new industries came up with the development of technology like electronics, they were reserved for the Public Sector as Industries of National Importance. Even though the Schedule C were open to the Private Sector, the industries were subjected to the controls under the Industrial (Development and Regulation) Act, 1951 and other regulations and legislations that restricted the role of the Private Sector.

Moreover the Private Sector was placed under the control of the Central Government which was a deviation from the IPR of 1948 which had included State Governments leading to greater concentration of power in the Center.

Impact of IPR, 1956

Political

Increased role of the Government

The biggest impact of IPR 1956 was the State’s control of the Economy. The Policy set the stage for the Government of India to play a central role in economic planning and development.

License Raj and Red Tapism

The policy introduced a system of licensing for the majority of industries. The purpose of the licensing system was to establish Government control over industrial development and provide it a desired direction according to the Government’s socialist agenda. Another purpose was to prevent the concentration of wealth among the elite. However the actual impact was the opposite. The policy established a strict bureaucratic control of the licensing process. The policy enabled the already established industrial houses to procure further licenses (for expansion, new industries) as they had the resources to secure finances as well as might to influence the bureaucratic decision making (red tapism). However this hampered entrepreneurship and blossoming of new enterprises. The lack of competition limited innovation and led to poor efficiency which restricted industrial growth. The impact became apparent as East Asian economies (South Korea, Japan and Taiwan) grew rapidly while India’s growth stagnated in the 1960s and 1970s.

Limited Private participation

The license raj limited the role of the private sector in industrial development. The Government PSUs evolved to play a dominant role in the industrial sector especially the heavy industries like Iron and Steel, refining, coal mining etc. As the PSUs were also marred with bureaucratic control and Government interference, it severely impacted the innovation and Indian economy remain depended upon foreing sector for technology and innovation.

Over-Regulation

The Policy could not achieve its intended outcome. The objective was to direct investment towards selected important industries, later on used to control all industries, outcome was over-regulation rather than development.

Approvals were required from multiple departments and ministries like Ministry of Industry, Chief Controller of Imports and Exports (CCI&E) of Ministry of Commerce, Controller of Capital Issues of Ministry of Finance, Directorate General of Technical Development of Ministry of Industry etc. This led to considerable delay in setting up new industrial units, hampered entrepreneurship. 836 items were restricted only to the small scale sector.

Economic

Sub-optimal outcomes

Additionally, there were restrictions on the location of industries and the decision of setting up industry was based on Government discretion rather than economic factors (raw material, infrastructure, markets etc.). This led to sub-optimal outcomes and inefficient utilization of resources.

Development Disparities

Despite Government’s efforts the regional growth in India had large disparities; for example the resource rich region of Chhota Nagpur, Jharkhand, Odisha etc. remained extremely poor. The large scale industries created under Government’s control were largely capital intensive and had limited employment generation potential. The small scale and cooperative sector remained under-developed.

Occupational Structure: Lack of Transition

Red Tapism and License Raj had limited the growth of the Industrial sector. The impact was that the occupational transition from the Primary sector to the Secondary sector that accompanies the transition from one stage of economic development to another did not happen in India. The Agriculture sector continued to bear the burden of supporting a large proportion of the population. It was only in the last decade the proportion of the population dependent on Agriculture and allied sectors fell below 50%. In developed economies the corresponding share of the population in the primary sector is below 10%. This is a significant contributor to the low per capita income and rural poverty in India.

Multiple committees set up by the Government since the 1960s had pointed out the restrictive impact of the licensing policy and failure in channelizing the investment in desired industries but the status quo prevailed.

Having witnessed very low industrial growth rates in the 1960s and 1970s, some steps were initiated for reducing the Governmental controls over the industrial sector. However it was only after the 1991 Balance of Payment Crisis and the subsequent market reforms was the industrial sector liberalized. The licensing regime was dismantled, nationalization was reversed through disinvestment and foreign investment was facilitated. There was a significant change in the economic landscape post the 1991 economic reforms with increased private participation in the secondary sector (like automobiles, Pharmaceuticals etc.), foreign capital inflow, technology transfer etc.

Growth Rates

Table: India’s Sectoral Growth Rate (Pre and Post Economic Liberalization)

Way Forward

Since 1991, the Government has undertaken significant changes in the Industrial Policy. The process began with the Statement of Industrial Policy in 1991 which set in the motion the liberalization of India’s industrial sector. The Department of Disinvestment (renamed Department of Investment and Public Asset Management in 2015) was created in December 1999 under the Ministry of Finance to oversee the process of disinvestment (or offloading the Government stake and control in Public Sector Units). Between 1991–2019 the Government had sold stakes in the PSUs to the tune of INR 4.5 Lakh Crore. The Government has gradually opened several sectors like mining, oil and gas exploration, electronics manufacturing, automobiles etc. for private and foreign participation.

The Government is also facilitating the private and foreign investment by easing the processes and regulations. India’s ranking in Ease of Doing Business is constantly improving over the years. India has established itself as the hub of Pharmaceutical manufacturing.

Yet much needs to be done for the improvement of the manufacturing sector in India. Establishing new enterprises is still a long and challenging task with acquisition of land and access to finance as the major challenges. India’s rank in Ease of Doing Business, 2020 was 63, featuring very poor in Starting a Business (136), Registering Property (154) and Enforcing Contracts (163). Though there is significant improvement (Rank 142 in 2014) significant challenges remain. The MSME sector remains crippled with structural shortcomings. Red tape and bureaucratic hurdles remain and slow down the process. New Industrial Policy should strive to address the structural challenges faced by the Industrial sector including access to infrastructure (electricity, transportation etc.), improving labor productivity by skilling, fostering research development and technology innovation, protecting Intellectual Property rights and improving access to finance to the MSME sector.

The Industrial sector supports ~26% of the (workforce as of 2020) while Primary and Tertiary sectors support 41.5% and 32.3% respectively. Till there is significant improvement in access to education and skilling, the ability of the services sector to increase its share in employment will be limited. It is thus imperative for the Industrial sector to grow and support a larger share of the population. In the absence of industrialization, India may fall into the middle income trap and as the experience with other economies shows (Brazil, Mexico etc.), countries falling into this trap fail to transition from developing to developed economies. India’s path towards a developed economy passes through industrialization. Addressing the challenges faced by the Industrial sector assumes critical significance in this regard.