Industrial Policy: Industrial Development after Independence, Concepts

The compilation of these Indian Economy (1950-1990) Notes makes students exam preparation simpler and organised.

Industrial Policy

During many decades after independence, India was largely an agrarian economy. But for any economy to be globally successful it must have a robust industrial sector. And so for the first seven five-year plans India actively focussed on industrial development through industrial policy formation. Let us take a look.

Industrial Policy
Industrial development is a very important aspect of any economy. It creates employment, promotes research and development, leads to modernization and ultimately makes the economy self-sufficient. In fact, industrial development even boosts other sectors of the economy like the agricultural sector (new farming technology) and the service sector. It is also closely related to the development of trade.

But just after independence India’s industrial sector was in very poor condition. It only contributed about 11.8% to the national GDP. The output and productivity were very low. We were also technologically backward. There were only two established industries – cotton and jute. So it became clear that there needed to be an emphasis on industrial development and increasing the variety of industries in our industrial sector. And so the government formed our industrial policies accordingly.

Industrial Development

Control of the State
One of the biggest hurdles in industrial development was the lack of capital. Private industrialists did not have enough capital to build a new industry. And even if they did, the risk involved was too high. So in 1948, it was decided that state would play the primary role in promoting the industrial sector. So the state would have absolute and complete control over all industries that were vital to the economy and the needs of the public.

Coal, petroleum, aviation, steel etc were all reserved exclusively for the state. The private sector could provide services complementary to those by the state. The public enterprises thus had a monopoly over the markets for many years to come.

Industrial Policy Resolution 1956
During the second five-year plan the industrial policy resolution came into action. The aim was to introduce more private capital into the industry but in a systematic manner. So this resolution classified industries into three categories as seen below,

  1. First Category: Industries exclusively owned only by the State
  2. Second Category: Industries for which private sectors could provide supplementary services. These industries would still be mainly the responsibility of the State. And also only the State could start new industries.
  3. Third Category: The remaining industries fell to the Private Sector.

While any private company or individual could start an industry falling in the third category it was not that simple. The state still maintained control over these industries via licenses and permits. Every new industry needed a license and many permits from the appropriate ministry. They even needed permissions and permits to expand the present industry.

The aim behind such an industrial policy was to keep a check on the quality of the products. It was also an important tool to promote regional equality, i.e. make sure industries were developed in economically backward areas.

Small Scale Industries
In 1955 a special committee known as the Karve Committee advised the promotion of small-scale industries for the purpose of rural development. It was believed that since small-scale industries are more labour intensive they would create more employment. Also, the manpower requirement of small-scale industries is semi-skilled or unskilled which was suitable for those times.

However, these small-scale industries cannot match up to large-scale industries. So there were special goods and products reserved by the government. These could only be manufactured by small and medium scale industries. Such industries also got financial aid in form of loans and tax and duty breaks.

Strengthening of Infrastructure for Industrial Development
One of the first requirements for the development of the economy is to improve the infrastructure of the country. The various other sectors of the economy cannot develop without the support of infrastructure facilities like transport, rail, banking communication, etc.

So to develop these industries the government formed appropriate industrial policies. The development of most of these industries fell to the public sector. Like for example, the rail industry to this day remains firmly in the public sector.

Promotion of Capital Goods Industry
Capital goods are goods used in the production of other goods. Capital goods are not for direct sale to the consumer. But they are a hallmark of a good industrials sector. So the government decided to focus on the capital goods industry for the development of our industrial sector.

So the Mahalanobis model came into effect in the second five-year plan. The focus here was on heavy industries, especially those that produce capital goods. This was to create a robust capital base for the economy. So industries of heavy metals, chemicals, machine building, tools, electrical, etc all saw growth in this period.

Such industries have massive capital requirements. But the government ensured they had enough capital to function smoothly. Soon there was a development of high-tech goods in the market as well.


What was the contribution of the industrial sector in 1950?
A. 11.8%
B. 12.3%
C. 24.6%
D. None of the above
The correct option is “A”. During the post-independence era, the contribution of the industrial sector was only 11.8% of the GDP. We saw some development of this in the coming years and by 1991 it had become around 25%.