1
Industrial Policy in India Since 1948 and Recent Changes with
Reference to Economic Problems
Introduction
• Industry is an important part of a modern economy because it converts raw materials
into finished goods, generates employment, earns foreign exchange, and promotes
technological development.
• When India became independent in 1947, it inherited a weak and underdeveloped
economy. Due to British colonial policies, Indian industries had been suppressed,
leaving the country with very little heavy industry, poor infrastructure, and a largely
agriculture-based economy.
• To overcome this situation, India’s leaders, especially Jawaharlal Nehru, believed that
the government should play a leading role in industrial development. India adopted a
mixed economy, where both public and private sectors operated, but key industries
were controlled by the state.
• Over time, problems like inefficiency in public enterprises and economic crises led to
major reforms in 1991, which liberalised the economy and encouraged private and
foreign investment. This marked India’s shift from a controlled economy to a more
open and competitive one.
1. Pre-Policy Background — Colonial Industrial Legacy
• Deliberate Deindustrialisation: The British colonial government systematically
dismantled India's traditional industries. The famous handloom textile industry of
Bengal and the steel industry of India were destroyed by British competition backed
by discriminatory tariff policies.
• Drain of Wealth: As argued by Dadabhai Naoroji in his "Drain Theory," colonial rule
drained India's economic surplus to Britain, leaving little capital for industrial
investment.
• Skewed Infrastructure: Whatever railways and infrastructure the British built were
primarily to serve colonial interests — extracting resources from the interior to ports
— rather than to develop a domestic industrial network.
• Weak Capital Formation: By 1947, India had very low savings rates, a negligible
capital market, and a banking system not oriented towards industrial credit.
• Absence of Heavy Industry: India had almost no capital goods industry. It could
produce some consumer goods but was entirely dependent on imports for
machinery, equipment, and defence materials.
This background explains why the Indian state chose to directly intervene in industrialisation
rather than leaving it to market forces, which simply did not exist in adequate strength.
(Q) Account of industrial policies in India prior to 1991)
, 2
2. Industrial Policy Resolution, 1948 — The Foundation
2.1 Context
• India had just become independent and the Constitution was yet to be framed (it
came into force in 1950).
• The government needed an immediate framework to guide industrial development
while the larger constitutional and planning architecture was being established.
• There was also political pressure from both socialist and capitalist tendencies within
the Congress party.
2.2 Classification of Industries
The 1948 IPR divided all industries into four categories:
Category I — Exclusive State Monopoly:
• Arms and ammunition.
• Atomic energy.
• Railways.
These were considered so strategic and sensitive that no private participation was
permitted.
Category II — Mixed Sector (Government + Private):
• Coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephones,
telegraphs, and wireless apparatus, and mineral oils.
• The government would set up new units in these industries, but existing private units
would be allowed to continue for a period of ten years, after which their position
would be reviewed.
Category III — Regulated Private Sector:
• Eighteen industries of national importance including heavy chemicals, heavy
machinery, machine tools, fertilisers, rubber manufactures, cotton and woollen
textiles, cement, sugar, paper, etc.
• Private sector could operate but under government regulation and licensing.
Category IV — Open Sector:
• All remaining industries were left to private enterprise with minimal regulation.
2.3 Key Features and Principles
• The policy explicitly accepted the concept of a mixed economy — neither fully
socialist nor fully capitalist.
, 3
• It recognised that both public and private sectors had legitimate roles to play in
industrial development.
• It acknowledged the importance of cottage and small-scale industries for
employment, particularly in rural areas.
• The state reserved the right to acquire any private industry in the national interest
with adequate compensation.
• Fair wages, humane working conditions, and workers' participation in management
were stated as desirable objectives.
2.4 Significance and Limitations
• Significance: It gave India its first coherent industrial framework and set the tone for
a state-led, mixed-economy approach.
• Limitation 1: It was explicitly described as a transitional policy for ten years and
lacked long-term vision.
• Limitation 2: It did not provide a detailed mechanism for planning, financing, or
executing industrial development.
• Limitation 3: It was formulated before the Constitution, so it lacked the
constitutional backing that later policies enjoyed.
3. Industrial Policy Resolution, 1956 — The Economic Constitution of India
3.1 Context and Background
• By the mid-1950s, India had adopted its Constitution (1950), which through the
Directive Principles of State Policy (Articles 38, 39, 41, 43, 46, 48A etc.) directed the
state to promote a socialist pattern of society.
• The Indian National Congress formally adopted the socialist pattern of society as the
goal of economic policy at its Avadi Session in 1955.
• The Second Five Year Plan (1956–61), based on the P.C. Mahalanobis two-sector
model, emphasised rapid development of heavy and capital goods industries as the
engine of long-term growth.
• India also accepted membership of the United Nations and various international
economic organisations that emphasised planned development for newly
independent nations.
3.2 Mahalanobis Model — Brief Explanation
• Professor P.C. Mahalanobis, founder of the Indian Statistical Institute, argued that to
achieve rapid and self-sustaining growth, India must invest heavily in heavy industries
and capital goods.
• Capital goods industries produce machines that make other machines — investment
in them creates a multiplier effect across the entire economy.
, 4
• The model divided the economy into the capital goods sector and the consumer
goods sector and argued that investing more in capital goods would, over time, raise
the capacity to produce consumer goods as well.
• This model justified the dominant role of the public sector in heavy industry.
3.3 Three Schedules — Reclassification of Industries
Schedule A — Exclusive Public Sector (17 Industries):
• Arms, ammunition, and allied items of defence.
• Atomic energy.
• Iron and steel.
• Heavy castings and forgings of iron and steel.
• Heavy plant and machinery required for iron and steel production, mining, machine
tool manufacture, etc.
• Heavy electrical plant including large hydraulic and steam turbines.
• Coal and lignite.
• Mineral oils.
• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold, and diamond.
• Mining and processing of copper, lead, zinc, tin, molybdenum, and wolfram.
• Minerals specified in the Schedule to the Atomic Energy Order, 1953.
• Air transport.
• Rail transport.
• Shipbuilding.
• Telephones, telegraph, and wireless apparatus (excluding radio receiving sets).
• Generation and distribution of electricity.
New units in all these industries could only be established by the central government.
Existing private units were allowed to continue but not expand without government
permission.
Schedule B — Mixed Sector (12 Industries):
• All other minerals not in Schedule A.
• Aluminium and other non-ferrous metals not in Schedule A.
• Machine tools.
• Ferro-alloys and tool steels.
• Basic and intermediate products required by the chemical industry (dyes, drugs,
plastics).
• Antibiotics and other essential drugs.
• Fertilisers.
• Synthetic rubber.
Industrial Policy in India Since 1948 and Recent Changes with
Reference to Economic Problems
Introduction
• Industry is an important part of a modern economy because it converts raw materials
into finished goods, generates employment, earns foreign exchange, and promotes
technological development.
• When India became independent in 1947, it inherited a weak and underdeveloped
economy. Due to British colonial policies, Indian industries had been suppressed,
leaving the country with very little heavy industry, poor infrastructure, and a largely
agriculture-based economy.
• To overcome this situation, India’s leaders, especially Jawaharlal Nehru, believed that
the government should play a leading role in industrial development. India adopted a
mixed economy, where both public and private sectors operated, but key industries
were controlled by the state.
• Over time, problems like inefficiency in public enterprises and economic crises led to
major reforms in 1991, which liberalised the economy and encouraged private and
foreign investment. This marked India’s shift from a controlled economy to a more
open and competitive one.
1. Pre-Policy Background — Colonial Industrial Legacy
• Deliberate Deindustrialisation: The British colonial government systematically
dismantled India's traditional industries. The famous handloom textile industry of
Bengal and the steel industry of India were destroyed by British competition backed
by discriminatory tariff policies.
• Drain of Wealth: As argued by Dadabhai Naoroji in his "Drain Theory," colonial rule
drained India's economic surplus to Britain, leaving little capital for industrial
investment.
• Skewed Infrastructure: Whatever railways and infrastructure the British built were
primarily to serve colonial interests — extracting resources from the interior to ports
— rather than to develop a domestic industrial network.
• Weak Capital Formation: By 1947, India had very low savings rates, a negligible
capital market, and a banking system not oriented towards industrial credit.
• Absence of Heavy Industry: India had almost no capital goods industry. It could
produce some consumer goods but was entirely dependent on imports for
machinery, equipment, and defence materials.
This background explains why the Indian state chose to directly intervene in industrialisation
rather than leaving it to market forces, which simply did not exist in adequate strength.
(Q) Account of industrial policies in India prior to 1991)
, 2
2. Industrial Policy Resolution, 1948 — The Foundation
2.1 Context
• India had just become independent and the Constitution was yet to be framed (it
came into force in 1950).
• The government needed an immediate framework to guide industrial development
while the larger constitutional and planning architecture was being established.
• There was also political pressure from both socialist and capitalist tendencies within
the Congress party.
2.2 Classification of Industries
The 1948 IPR divided all industries into four categories:
Category I — Exclusive State Monopoly:
• Arms and ammunition.
• Atomic energy.
• Railways.
These were considered so strategic and sensitive that no private participation was
permitted.
Category II — Mixed Sector (Government + Private):
• Coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of telephones,
telegraphs, and wireless apparatus, and mineral oils.
• The government would set up new units in these industries, but existing private units
would be allowed to continue for a period of ten years, after which their position
would be reviewed.
Category III — Regulated Private Sector:
• Eighteen industries of national importance including heavy chemicals, heavy
machinery, machine tools, fertilisers, rubber manufactures, cotton and woollen
textiles, cement, sugar, paper, etc.
• Private sector could operate but under government regulation and licensing.
Category IV — Open Sector:
• All remaining industries were left to private enterprise with minimal regulation.
2.3 Key Features and Principles
• The policy explicitly accepted the concept of a mixed economy — neither fully
socialist nor fully capitalist.
, 3
• It recognised that both public and private sectors had legitimate roles to play in
industrial development.
• It acknowledged the importance of cottage and small-scale industries for
employment, particularly in rural areas.
• The state reserved the right to acquire any private industry in the national interest
with adequate compensation.
• Fair wages, humane working conditions, and workers' participation in management
were stated as desirable objectives.
2.4 Significance and Limitations
• Significance: It gave India its first coherent industrial framework and set the tone for
a state-led, mixed-economy approach.
• Limitation 1: It was explicitly described as a transitional policy for ten years and
lacked long-term vision.
• Limitation 2: It did not provide a detailed mechanism for planning, financing, or
executing industrial development.
• Limitation 3: It was formulated before the Constitution, so it lacked the
constitutional backing that later policies enjoyed.
3. Industrial Policy Resolution, 1956 — The Economic Constitution of India
3.1 Context and Background
• By the mid-1950s, India had adopted its Constitution (1950), which through the
Directive Principles of State Policy (Articles 38, 39, 41, 43, 46, 48A etc.) directed the
state to promote a socialist pattern of society.
• The Indian National Congress formally adopted the socialist pattern of society as the
goal of economic policy at its Avadi Session in 1955.
• The Second Five Year Plan (1956–61), based on the P.C. Mahalanobis two-sector
model, emphasised rapid development of heavy and capital goods industries as the
engine of long-term growth.
• India also accepted membership of the United Nations and various international
economic organisations that emphasised planned development for newly
independent nations.
3.2 Mahalanobis Model — Brief Explanation
• Professor P.C. Mahalanobis, founder of the Indian Statistical Institute, argued that to
achieve rapid and self-sustaining growth, India must invest heavily in heavy industries
and capital goods.
• Capital goods industries produce machines that make other machines — investment
in them creates a multiplier effect across the entire economy.
, 4
• The model divided the economy into the capital goods sector and the consumer
goods sector and argued that investing more in capital goods would, over time, raise
the capacity to produce consumer goods as well.
• This model justified the dominant role of the public sector in heavy industry.
3.3 Three Schedules — Reclassification of Industries
Schedule A — Exclusive Public Sector (17 Industries):
• Arms, ammunition, and allied items of defence.
• Atomic energy.
• Iron and steel.
• Heavy castings and forgings of iron and steel.
• Heavy plant and machinery required for iron and steel production, mining, machine
tool manufacture, etc.
• Heavy electrical plant including large hydraulic and steam turbines.
• Coal and lignite.
• Mineral oils.
• Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold, and diamond.
• Mining and processing of copper, lead, zinc, tin, molybdenum, and wolfram.
• Minerals specified in the Schedule to the Atomic Energy Order, 1953.
• Air transport.
• Rail transport.
• Shipbuilding.
• Telephones, telegraph, and wireless apparatus (excluding radio receiving sets).
• Generation and distribution of electricity.
New units in all these industries could only be established by the central government.
Existing private units were allowed to continue but not expand without government
permission.
Schedule B — Mixed Sector (12 Industries):
• All other minerals not in Schedule A.
• Aluminium and other non-ferrous metals not in Schedule A.
• Machine tools.
• Ferro-alloys and tool steels.
• Basic and intermediate products required by the chemical industry (dyes, drugs,
plastics).
• Antibiotics and other essential drugs.
• Fertilisers.
• Synthetic rubber.
