Indias Industrialization since Independence

Industrialization policy up to 1991

The overwhelming focus on the role of a strong government policy Followed a heavy-industry based industrialization pattern Major component of the regulatory policy framework A private entrepreneur would require a license to manufacture many products The process of applying and obtaining one was the most cumbersome

 The licensing Raj created barriers to entry of new firms and tended to protect the established ones from new competition The regulatory powers enabled government to take over private firms under certain contexts and also exercise price controls on outputs The 1956 industrial policy resolution initiated a strategy to employ state-led investments in the capital goods Seventeen key industries were reserved only for the public sector

 The primary objectives were to increase growth rate of industry, reducing regional disparities, and generating employment There was a total lack of emphasis on cost efficiency or export performance Bias against large private firms got accentuated in 1967 when production of several items were reserved exclusively for small-scale sector The MRTP act of 1970 regulated the expansion of large industrial houses Another overriding objective of the industrial policy was the focus on self-reliance interpreted as export substitution stemming from the export pessimism cultivated by most developing countries

 The exchange rate remained fixed until the devaluation of rupee in 1966 1973 Foreign Exchange and regulation Act (FERA) All new capital issues were to be authorized and priced by the Controller of Capital Issues. These appeared to be severely under-priced and tended to increase the cost of equity Restructuring or exit of unprofitable private firms were prevented by the willingness of the government to take them over and continue to run them without restructuring

Winds of Change
The over-restrictive and self-defeating nature of regulatory framework gained momentum during the sixties and early seventies A mild trend of deregulation commenced in 1982 when Indira Gandhi called it the Productivity Year when capacities were allowed to be endorsed up to 133% and cement and fertilizer industries were decontrolled The scope of FERA companies were widened and NRIs were given special facilities for investing in Indian industries

 Liberalization of industrial controls in 1985 and 1986 during Rajiv Gandhis regime Controls in Industrial licenses were relaxed for firms with less than Rs. 5 crores assets (raised to 15 crores in 1988) Definition of MRTP firms was relaxed to assets exceeding Rs. 100 crores the new policy permitted firms to diversify their product mix without seeking prior approval of the government Relaxation in the case of a large number of items from quantitative controls on imports

 A long term fiscal policy was announced in an effort to provide stability to tax policy In 1988 the government announced that it will no nationalize sick industries and will close down unviable public sector units