Industry and Trade

Economists have found that poor nations progress only with a strong industrial sector: industry offers employment that is more stable than farm work and drives modernisation and overall prosperity. For this reason the five year plans placed heavy emphasis on industry. At independence, though, the range of industries was very narrow -- largely cotton textiles and jute, with two well-run iron and steel firms (one at Jamshedpur, one at Kolkata). Clearly the industrial base had to be widened for the economy to grow.

Public and private sectors in industrial development

The central question was: what should be the roles of the government and the private sector? At independence, Indian industrialists lacked the capital for the large ventures the economy needed, and the market was too small to tempt them into major projects even if they had the capital. For these reasons the government had to take an extensive role in promoting industry. In addition, the decision to build the economy on socialist lines led to the policy of the state controlling the commanding heights of the economy, as the Second Five Year Plan put it -- meaning the government would fully control the industries vital to the economy, while private-sector policies would be complementary, with the public sector leading the way.

Industrial Policy Resolution 1956 (IPR 1956)

In line with state control of the commanding heights, the Industrial Policy Resolution of 1956 was adopted. It formed the basis of the Second Five Year Plan, which aimed to build a socialist pattern of society, and it classified industries into three categories:

1. Industries owned exclusively by the government.
2. Industries in which the private sector could supplement the public sector, but where only the government would start new units.
3. The remaining industries, left to the private sector.

Even the third, private, category was kept under state control through a system of licenses: no new industry could start, and no existing one could expand output or diversify into new products, without a government license.

Licensing served several purposes. It was used to promote industry in backward regions -- a license was easier to obtain if the unit was set up in an economically backward area, and such units were also given concessions like tax benefits and cheaper electricity, all to promote regional equality. Requiring a license even for expansion or diversification was meant to ensure that the quantity of goods produced did not exceed what the economy needed; permission to expand was granted only if the government was convinced more output was required.

Small-scale industry

In 1955 the Village and Small-Scale Industries Committee (the Karve Committee) highlighted the potential of small-scale industries for rural development. A small-scale industry is defined by a ceiling on investment in its assets -- a limit that has risen over time (a maximum of five lakh rupees in 1950, up to one crore at present). Such industries are thought to be more labour-intensive than large ones and therefore to generate more employment. Because they cannot compete with big firms, developing them required shielding them from large firms: the production of a number of products was reserved for the small-scale sector (the criterion being whether these units could actually make the goods), and they were given concessions such as lower excise duty and bank loans at lower interest rates. …