Industrial Policy in India: Post 1991 Reforms, Period

New Industrial Policy, 1991

In the backdrop of severe Balance of Payment Crisis of 1991, the Government in continuation of the measured announced during the 1980s announced a New Industrial Policy on July 24, 1991.

The new industrial policy was a major structural break for the Indian economy. The policy has deregulated the Industrial sector in a substantial manner. The major aims of the new policy were; to carry forward the gains already made in the industrial sector; Correct the existing market distortion from the industrial sector; to provide gainful and productive employment; to attain global competitiveness.

The Government announced series of Initiative in respect of the following areas:

Abolishment of Industrial Licensing

Role of Public Sector Reduced Substantially

Entry of Foreign Firms and Investments

Other Important Liberalisation Measures

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Objectives of the National Manufacturing Policy

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones(NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).
4. No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).
5. The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.
8. The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.
10. Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;

• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;

• Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;

• Strengthening IPR infrastructure to nurture innovation; and

• Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

What more should be done to make India an attractive destination for Global Firms?

The Sectors: