India was likely the first non-communist emerging nation to implement a comprehensive industrial policy in the years following World War II. In the period that ensued, India went through two major industrial policy phases: the 1950-1980 phase marked by licensing, import substitution and nationalization, and the period post- 1991 economic crisis which paved the way for the new industrial policy focusing more on FDI and delicensing. Since then, there have been a multitude of new developments, like climate change and rising dependence on China for raw materials(rise of China), that have influenced how India takes forth its industrial sector. Along with ensuring sustainable development, India also had to ensure that its MSME sector flourishes in face of growing competition. Since the Covid-19 pandemic has highlighted the need to have a robust manufacturing base in place and decrease reliance on imports, it is important for India to revisit its industrial policy. In this given context, this paper aims to analyse the current industrial policy of India by first understanding and analysing the historical industrial policies that were undertaken post independence. The paper then delves into the current industrial policy that is followed in India which has manufacturing, incentivisation, and climate change as its key focus areas. In doing so, this paper also highlights the policy challenges that India faces as it drives towards a new industrial policy. Additionally, this paper seeks to draw lessons for India from East Asian economies that have successfully implemented their industrial policies. Finally, this paper suggests policy measures that might be incorporated while devising a new Industrial Policy for new India.
Few economic measures are met with the same vehement resistance from economists as industrial policy. Even when they appear to be philosophically antagonistic to it, government across the globe use it extensively. Government have become more conscious of industrial policy as they address several issues, including the green transition, supply chain resilience, the difficulty of finding good jobs, and geopolitical competition with China. As a result, the importance of industrial policy has increased significantly in recent years.
Defining Industrial Policy
Despite frequent discussions, industrial policy is rarely stated explicitly. We define industrial policies as those governmental initiatives that specifically aim to change the composition of economic activity in order to advance a social objective. Typically, the objective is to promote economic growth, productivity, and innovation. However, it could also be to encourage exports, import substitution, well-paying jobs, underdeveloped regions, or climate change. Hence, in certain contexts, (settings ,) what are referred to as regional policies, place-based policies, or innovation policies overlap with industrial policies. Industrial policies are frequently referred to as productive development policies or structural transformation policies in developing countries, in part because the term “industrial policy” has come to have a negative connotation as well as to reflect the fact that similar policies must be implemented for a wider range of developmental challenges that go beyond industrialization. In more recent times, industrial policy has also been referred to as a procedure that entails ‘conversation’ between the public and private sectors in order to produce data for identifying and removing legally enforceable development restrictions.
Industrial policies can take many different shapes, but they always encourage private-sector actors—firms, entrepreneurs, and investors—to act in ways that are compatible with the intended course of structural change. The most visible forms of industrial policy are subsidies, which are given to certain exports, investments, R&D projects, etc. However, the range extends from import protection to exemptions from particular restrictions to public funding of vital inputs like land or training. Since government attention is in short supply, industrial policy also refers to public-private partnerships like deliberation councils or business-government roundtables that aim to ease the limitations encountered by particular industries or groupings of businesses.
Historical evolution of India’s industrial policy
India experienced ‘deindustrialization’ in the nineteenth century as a result of colonial free trade policies that made it difficult for the country’s indigenous handcraft industries to compete with machine-manufactured imported goods. Later in the century, more contemporary cotton and jute mills were built, and in 1911 the Tata Iron and Steel Company started operations. In the years between the two world wars, many industries grew, notably after 1923, when the colonial administration started enforcing minor import taxes, mostly to raise money. Yet by 1951, only 2% of the labour force in the newly independent nation was employed in modern (mechanised) industry, and manufacturing accounted for only approximately 14% of the nation’s income. The processing of agricultural raw materials (cotton and jute textiles, paper, sugar, vegetable oils) or minerals (iron and steel, cement) formed the foundation of the modern manufacturing industry. These sectors were all dependent on foreign tools and machinery. Almost no capital goods were manufactured domestically, with the exception of a small amount of textile machinery and railway engines. It is necessary to understand the government of independent India’s policies in this context.
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