Page 196 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes private economic activity and guiding public sector enterprises that absorbed a high and increasing
fraction of investment. According to Rakesh Mohon (1992), the Second Five Year Plan and even later
Plans had been increasingly concerned with the allocation of public resources and much less with
indications and policies to direct the whole economy in desired directions. P.C. Mahalanobis influenced
the plans heavily. His economic model ignored foreign trade and assumed that domestic investment
was limited by the domestic ability to produce capital goods. In this model, the key elements were
import substitution, predominance of the public sector and promotion of heavy industry. With the
passage of time, these policies combined with industrial licensing system and extensive bureaucratic
control over production, import and export, capital issues, foreign exchange, allocation of raw
materials, price and allocation of credit served to eliminate competition within the domestic market
and to generate a highly inefficient and restrictive production system. It was clear by the late 1970s
and early 1980s that the pervasive regulation and controls over private economic activity by the
Government had effects opposite to those intended and had inhibited economic efficiency and industrial
growth in the country. Thus, from that time onwards, the idea of bringing in industrial policy reforms
in the Indian economy was in the air. In 1984, to “rationalise” controls became the declared objective.
Industrial Sector in Pre-Reform Period
In the pre-reform period, the industrial sector in India fared quite impressively in the 1980s in terms
of growth of output/value added, compared to the earlier decades. There has been much discussion
in recent literature on the pattern of growth in the 1980s and the factors behind the improved growth
performance. With the introduction of some major policy reforms in 1985, the re-orientation of
industrial and trade policies initiated in the mid-1970s received a fillip. Let us see whether the growth
performance in the second half of the 1980s was superior to that in the first half of the period.
Pattern of Industrial Growth : If we look at average annual growth rates in Gross Value Added
(GVA) for the entire economy, the agricultural sector and the different subsectors of the industrial
sector for the 1970s, 1980s and the two halves of the 1980s, we find that there was appreciable increase
in the growth rate in the 1980s in all sectors/sub-sectors for which comparable figures are available.
We find from comparison of the two halves of the 1980s that with the exception of registered
manufacturing, other sectors/ sub-sectors fared better in the second half. Moreover, the unregistered
manufacturing sub-sector improved its growth rate considerably from 4.1 to 7.5% per annum and
this improvement alone is responsible for the observed increase in the growth rate of the manufacturing
sector from 6.2 to 7.8%. It may be noted that the share of industry increased substantially over the 15-
year period (1950-51 to 1965-66), from 12.8 to 19.1%. However, the increase was marginal over the
subsequent 15-year period (1965-66 to 1980-81) from 19.1 to 20.8%. We see that the structural change
in favour of industry again gained momentum in 1980s. Industry, on the other hand, accounted for a
little more than one quarter (25.1 %) of total GDP at the end of that decade.
16.2 The Role of Industrialisation

Industrialisation has a major role to play in the economic development of the underdeveloped
countries. The gap in per capita incomes between the developed and underdeveloped countries is
largely reflected in the disparity in the structure of their economies; the former are largely industrial
economies, while in the latter production is confined predominantly to agriculture. Table 1 clearly
reveals the positive relationship between per capita income and the share of manufacturing output
(industry including construction). Undoubtedly, some countries have achieved relatively high per
capita incomes by virtue of their fortunate natural resource endowments.

Petroleum exporting countries like Saudi-Arabia, Kuwait, and UAR have achieved higher
per capita income by exploiting the strong advantage that they enjoy in international
trade. But these countries are a rather special case.

The pattern of ‘growth through trade’ in primary commodities was, however, realised in the nineteenth
century when industrialization was closely linked with international trade, because(a) countries
previously isolated by high transport costs as well as other barriers came to specialize, and (b) economic

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