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Indian Economic Policy

Notes classified all industrial output into two categories, consumer goods and capital goods output and classified
various stages in terms of the ratio of consumer goods output to that of capital goods output. “In stage I
the consumer goods industries are of overwhelming importance, their net output being on the average
five times as large as that of capital goods industries.” This ratio is 2.5 : 1 in the second stage and falls to
1 : 1 in the third stage and still lower in the fourth stage. Both these types of classifications emphasise the
increasing role of the capital goods industries in the economy as industrial development takes place.
Though the general development of industry itself has proceeded from consumer goods to the capital
goods, there are many variations of this pattern, both in terms of time taken to attain later stages and
in terms of relative importance of each of the stages. Similarly, underdeveloped countries may also
evolve a different pattern of industrialisation suitable to their economic conditions. It has been
suggested that the pattern of industrialisation in under-developed countries should be guided
primarily by considerations arising from the relative scarcity of capital. Since labour is relatively
plentiful and capital scarce, the development of labour-intensive consumer goods seems quite legitimate.
However, the basic premise of this approach is inappropriate. The problem is not how to economise the
use of capital (this has to be done as an inevitable condition) but how to increase its supply. Since most
underdeveloped countries do not produce these goods at home, the only alternative to increasing their
supplies is through imports. This depends upon the rate of growth in exports of primary commodities
and manufactured goods. As it has been pointed above, the countries are facing an “export lag” in their
exports of primary commodities. Consequently, primary commodity exports do not seem to be a reliable
source of foreign exchange earning in order to increase the import of capital goods.

Soviet pattern of industrialisation involves a straight jump from the first to the third
stage while British pattern is that of a gradual evolution.

Industrial Pattern and the Five-Year Plans

The Government of India launched the process of industrialisation as conscious and deliberate policy
of economic growth in early fifties. The Government recognised the significant contribution
industrialisation could make to the development process, “as a base for the growth of the primary
sector, as a catalytic agent for the development of infrastructure, as a stimulant to generation of
technologies through R & D effort . . . and as a growth multiplier.”

Industries and the Second Plan (1956-61)
The Second Five-Year Plan programme for industrialisation was based on the Industrial Policy
Resolution of 1956 which envisaged a big expansion of the public sector. A base of heavy industry
was sought to be created. The actual investment in the public sector on organised industry was ` 870
crores. Private sector investment was ` 675 crores during the Second Plan period—more than envisaged
in the Plan. Similarly, investment in village and small industries was ` 265 crores (in both public and
private sectors). Taken together, total investment in industries was ` 1,810 crores, i.e., 27 percent of
the total investment during the Second Plan.
The industrial pattern sought to be developed during the Second Plan was conceived in terms of the
following priorities :
(i) increased production of iron and steel and of heavy engineering and machine building industries;
(ii) expansion of capacity in respect of other development commodities and producer goods such as
aluminium, cement, chemical pulp, dyestuffs and phosphatic fertilisers, and of essential drugs.
(iii) modernisation and re-equipment of important national industries which have already come
into existence such as jute and cotton textiles and sugar;
(iv) fuller utilisation of existing installed capacity in industries where there are gaps between capacity
and production; and
(v) expansion of capacity of consumer goods keeping in view the requirements of common
production programmes and the productions targets for the decentralised sector of industry.

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