ECONOMICS XII

Class No. 8: Unit 6 (chapter 2: Indian Economy 1950–1990)

Recapitulation (What we studied): Green revolution.

Objective:
After the class/ content you will become familiar with public and private sectors in Indian industrial
development, industrial policy resolution 1956 and its impact (30 Min)

Public and Private Sectors in Indian Industrial Development:

After Independence state had to play an extensive role in promoting the industrial sector because:
(1) Indian industrialists did not have the capital to undertake investment in industrial ventures.
(2) Indian market was not big enough to encourage industrialists to undertake major projects.

India developed the economy on socialist lines. India focused on the policy to control and command the
economy. This can be seen from second five year plan.

Indian policy framework was based on following criteria: (2nd Five year plan)
(Note: The first plan mainly focused on agriculture and improving food grain)

(i) The state would have complete control of those industries that were vital for the economy.
(ii) Private sector would have to be complementary to the public sector, where public sector will lead the
way.

Additional Information:
Before Industrial Policy Resolution (IPR), 1956 (IPR), the Industrial (Department and Regulation)
Act of IDR Act of 1951 had been enacted. This act empowered the Government of India to regulate the
pattern of Industrial development through licensing. This was the arrival of License Raj in India.

Why there was a system of licenses?

No new industry was allowed unless a license was obtained from the government. This is due to following
reason

(1) To promote regional equality.

(i) This policy was used for promoting industry in backward regions.
(It was easier to obtain a license if the industrial unit was established in an economically backward area.)

(ii) In addition, such units were given certain concessions such as tax benefits and electricity at a lower
tariff. The purpose of this policy was to promote regional equality.

(2) Basis for a socialist pattern of society

Through license, government ensures that the quantity of goods produced was not more than what the
economy required. License to expand production was given only if the government was convinced that
the economy required a larger quantity of goods.

Industrial Policy Resolution (IPR), 1956.

This resolution was the basis of the Second Five Year Plan, the plan which tried to build the basis for a
socialist pattern of society.

This resolution classified industries into three categories.

(i) First Category (Schedule A) is industries which would be exclusively owned by the state.
(Coal & Lignite, Mining & processing of key minerals, Railways and Air Transport, Aircraft & ship
building; Telephones, Telegraphs and wireless except radio sets, Electricity generation and distribution.)

(ii) Second Category (Schedule B) is industries in which the private sector could supplement the efforts of
the state sector, with the state taking the sole responsibility for starting new units.
(Ferro alloys, steel tools, raw material needed for manufacturing of drugs, dyes and plastics, essential
drugs and antibiotics, fertilizers, synthetic rubber, chemical pulp, road and sea transport.)

(iii) Third category contained all the remaining industries and it was expected that private sector would
initiate development of these industries but they would remain open for the State as well.

Although there was a category of industries left to the private sector (third category mentioned above) the
sector was kept under state control through a system of licenses.

Small-Scale Industry:
(1) In 1955, Karve committee was constituted by planning commission for aiming the growth and
development of small-scale industries
(2) Noted the possibility of using small-scale industries for promoting rural development.

A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a
unit.
In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakh (at present
the maximum investment allowed is rupees one crore)
It is believed that small-scale industries are more ‘labour intensive’, therefore, generate more employment.
But these

‘The production of a number of products was reserved for the small-scale industry.’ Why?

Big firms can produce goods in large scale and can decrease their cost of production. Thus, they can sale
product at cheaper rate and SSI will not be able to compete with them. . They were also given concessions
such as lower excise duty and bank loans at lower interest rates.

Effect of Policies on Industrial Development:

(i) The achievements of India’s industrial sector during the first seven plans are impressive indeed.
(ii) The rise in the industry’s share in GDP is an important indicator of development.
(The proportion of GDP contributed by the industrial sector increased from 11.8% in 1950-51 to 24.6% in 1990-91)
(iii) There was 6% of annual growth rate of the industrial sector.
(iv) Industrial sector became well diversified by 1990 and not confined to cotton textile and Jute
(v) The promotion of SSI gave opportunities to those people who did not have the capital to start large
firms to get into business.
(vi) Protection from foreign competition enabled the development of indigenous industries electronics
and automobile sectors.

Try These: (10 min)

(i) Why was public sector given a leading role in industrial development during the planning period?
(ii) Though public sector is very essential for industries, many public sector undertakings incur huge losses
and are a drain on the economy’s resources. Discuss the usefulness of public sector undertakings in the
light of this fact.
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