Industrialisation What is industrialisation?

Industrialisation is the process of social and economic change that transforms a human group from an agrarian society into an industrial one. It is a part of a wider modernisation process, where social change and economic development are closely related with technological innovation, particularly with the development of large-scale energy and metallurgy production. Why do we need industrialisation? Absorbing Surplus Labour (Employment Generation): Underdeveloped countries like India are characterized by surplus labour and rapidly growing population. To absorb all the surplus labour it is essential to industrialise the country rapidly. It is the establishment of industries alone that can generate employment opportunities on an accelerated rate. Raising Income: The first important role is that industrial development provides a secure basis for a rapid growth of income. The empirical evidence suggests a close correspondence between the high level of income and industrial development. Meeting High-Income Demands: Beyond certain limits, the demands of the people are usually for industrial products alone. After having met the needs of food, income of the people are spent mostly on manufactured goods. This means the income-elasticity of demand for the manufactured goods is high and that of agricultural products is low. To meet these demands and increase the economys output underdeveloped countries need industrialization. Changing the Structure of the Economy: In order to develop the economy, underdeveloped countries need structural change through industrialization. In the process of becoming a developed economy, the share of the industrial sector should rise and that of the agricultural sector decline. Overcoming Deterioration in the Terms of Trade: Underdeveloped countries like India need industrialization to free themselves from the adverse effects of fluctuations in the prices of primary products and deterioration in their terms of trade. For economic development such countries must shake off their dependence on primary products. They should adopt import substituting and export oriented industrialization. Bringing Technological Progress: Research and Development is associated with the process of industrialization. The development of industries producing capital goods i.e., machines, equipment etc., enables a country to produce a variety of goods in large quantities and at low costs, make for technological progress and change in the outlook of the people. This results in bringing about an industrial civilization or environment for rapid progress which is necessary for any healthy economy. Industrial Development in India Pre Independence Period Despite the fact that the beginnings of modern industry in India date back to 1854 when the first cotton mill venture was floated, followed by the establishment of the first jute mill in Calcutta the next year, at the time of independence the modern large-scale industry, together with mines,

accounted for only 7 percent of the national income compared with the small-scale industry's share of 10 percent, 49 percent of agriculture and 34 percent of the construction and service sector. Cotton and jute textiles were the two main industries; there was only a sprinkling of other industries like sugar, paper, cement, steel and light consumer goods, some of which benefited from the introduction of "discriminating protection" under the infant-industries argument in the thirties. Two broad phases of this industrialization must be distinguished. Well into the twentieth century, India was virtually an open economy. The two main modern industries, cotton and jute depended for their growth essentially upon the condition of the international economy. A period of high export growth or favourable terms of trade stimulated by boom conditions in the world economy not only helped directly in stimulating industrial demand from the world market, but also indirectly. Domestic incomes rose, the domestic market expanded, public revenues also expanded and so did public spending. Higher public spending in turn had second-order effects on domestic market expansion, not-withstanding the large leakages on foreign purchases. Stagnation of market Bombay Plan After the First World War, the Great Depression exercised an overall dampening effect on industrial growth. Between 1915-18 and 1928-31, the annual average industrial growth rate came down to a mere 1.5 percent. While more of the home market was now available to domestic producers, this market itself was virtually stagnant. While the war boosted industrial profits in India and accumulation of sterling reserves, a counterpart of the tremendous amount of inflationary "forced savings" squeezed out from the Indian people by the mechanism of war finance, it was clear that a major post-war advance could only occur if a new stimulus could be provided. The Bombay Plan worked out by a group of big industrialists headed by J -R D Tata, Purushottamdas Thakurdas and G D Birla clearly showed the appreciation of this necessity and how this necessity could be met by stepping up public investment. A key principle of the Bombay Plan was that the economy could not grow without government intervention and regulation. Under the assumption that the fledgling Indian industries would not be able to compete in a free-market economy, the Plan proposed that the future government protect indigenous industries against foreign competition in local markets. Stimuli for Expansion / Spurt in Independence The stimulus for the spurt in post-independence industrialization came from two main sources: a significant extension of protection and substantial stepping up of public investment. It was argued that the strict selectivity implied by the "infant-industries" argument was wholly inadequate for a developing economy. Given the essential interdependence of industries, the thrust for industrialization called for wide-ranging protection; the infant industries argument should in fact give way to an "infant economy" argument. Widening of protection was undertaken initially through the grant of higher tariffs over a much larger area by the Tariff Commission. The introduction of planning with its emphasis on the public sector likewise highlighted the incomparably great role of public investment. The demarcation of spheres of the public and the private sector was outlined in principle in the two Industrial Policy Resolutions of 1948 and 1956. But both, especially the latter, were nebulous.

The actual demarcation that emerged was roughly as follows: spheres involving large-scale, lumpy, high-risk, capital investment, for example, overheads and basic and heavy industries, were to be developed by the public sector. Public investment, therefore, was effectively to play a dual role: it was to eliminate to some extent the serious gaps in the production structure which the private sector would have been reluctant to overcome on its own and to provide a stimulus to private investment by extending the markets of private industrialists directly and indirectly. The framework under which post-independence industrialization occurred, therefore, was approximately as follows: in a regime with heavy all round protection and import control the government was to spearhead investment in crucial high-risk sectors while making finance available to the private sector to take advantage of opportunities opened up as a consequence of its own investment and its protectionist policy. The logic of this frame-work implied that public investment could not be financed by a heavy reliance on taxation of property incomes, since that would have destroyed private incentives and hence undermined the very basis of the "mixed economy". It was inherent in the situation therefore that this stepping up of public investment should have been financed largely from three other sources-foreign aid, indirect taxation and deficit financing, the latter defined narrowly to include only borrowings from the Reserve Bank. The additional tax revenue mobilized in both second and third plans came largely from indirect taxes. Since the impact of indirect taxes and deficit financing tends largely to be a regressive one, markets for mass consumption goods did not increase to any substantial extent in the course of the industrialization process itself. And this tended to reinforce the reliance upon protection and public investment as stimuli for industrialization, giving it a "top-heavy" character. Aftermath of the Strategy This strategy, nevertheless, produced an unprecedented spurt in industrialization. Between 1951 and 1965, the index of industrial production registered an average growth rate of about seven percent per annum, a rate which was higher than anything recorded over a comparable length of time in the past, and which was respectable by the standards of capitalist countries. Within the industrial sector there was a relative shift of position: older industries like cotton textiles and jute textiles declined in importance, while newer ones like basic metals, engineering, rubber, chemicals and pharmaceuticals became prominent. We may note four other important but related features of this process. First, growth was accompanied by a considerable increase in the country's indebtedness. Total external assistance upto end of first 5 year plan - Rs 196.6 crores. Total external assistance upto end of third 5 year plan - Rs 6199.4 crores. The entire industrialization drive however impressive was indeed very far from being financially self-reliant. Second, alongside external financial assistance, technological dependence also increased during this drive and with it the role of the multinationals. The new private foreign capital which entered particularly during the Second and Third Plan years went into technologically intensive areas and produced mainly for the domestic market which was cordoned off by high protective barriers. The typical foreign entrant was a giant multinational and the typical form of its operation was through

joint-ventures with Indian partners, in a majority of cases, holding minority shares. The actual flow of investment into India was small and the outflow on account of royalties, technical fees, dividends and capital repatriation more than matched the inflow so that the overall balance of payments effect of private foreign investment was negative. The extent of foreign control over the Indian private corporate sector ("foreign-controlled rupee companies" Reserve Bank) was 25.86 percent at end of March 1961 and 30.57 percent at end of March 1965. If control were defined to include technological control also even when the proportion of shares held is low, the extent of such control in 1967-68 would have been around 40 per-cent of the entire private corporate sector. From the point of view of Indian businessmen who never bothered much about developing indigenous technology or financing indigenous research, foreign technology became essential for cashing in on the growing and protected domestic market. The third important feature of this industrialization drive has been its virtually negligible impact on either the unemployment situation or the sectorial distribution of the workforce. The annual compound growth rate of factory employment was 1.7 per-cent during the First Plan, 3.9 percent during the Second Plan and 5.7 percent during the Third Plan, which has been followed by a more or less secular stagnation. This growing urban unemployment has occurred in a situation where the distribution of the workforce between industry and the other sectors has remained unchanged. The fourth feature is that the industrial upsurge was accompanied by a virtual stagnation in real wages. The second war meant a considerable erosion of real wages of industrial workers; so that the 1951 level was perhaps below the 1939 level. On the whole, therefore, the current level of real earnings may not be much higher than in 1939. This is not to say that with changing industrial composition and the creation of many more skilled jobs, opportunities have not been opened up or utilized but the picture of stagnation remains roughly valid for any particular category of workers, especially unskilled workers. Most of the features discussed, namely, marginal changes in the employment pattern, growing unemployment, stagnant real wages, almost complete technological parasitism and growing indebtedness to foreign countries are features which derive essentially from the very strategy of industrialization pursued in India. Context to the 1990s crisis In the 1980s, the GDP was revived and the country witnessed industrial growth from the period of stagnation in 1960s and 1970s. The revival of growth originated from an expansionary programme of public expenditure. The government introduced the IRDP (Integrated Rural Development Programme) which aimed at providing self-employment to the rural poor through acquisition of productive assets or appropriate skills that would generate additional income on a sustained basis to enable them to cross the poverty line. The end result was expenditure led, import dependent middle class consumption boom. By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance

three weeks worth of imports. The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid-eighties, India started having balance of payments problems. Precipitated by the Gulf War, Indias oil import bill swelled, exports slumped, credit dried up and investors took their money out. Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble. India had to sell 67 tons of gold to the International Monetary Fund (IMF) as part of a bailout deal, and promise economic restructuring. The government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister) started breakthrough reforms. The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies. The main objective of the government was to transform the economic system from socialism to capitalism so as to achieve high economic growth and industrialize the nation for the well-being of Indian citizens. Today India is mainly characterized as a market economy. The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 199192 to $5.3 billion in 199596. Cities like NOIDA, Gurgaon, Ghaziabad, Bangalore, Hyderabad, Pune, Chennai and Ahmedabad have risen in prominence and economic importance; become centres of rising industries and destination for foreign investment and firms.