Industrial Policy Resolution – 1956

Before we delve into the details of Industrial Policy Resolution of 1956, let’s go back to the business environment of the day. It was a time when India’s first five year plan (1951-56) was about to finish. The first plan mainly focussed on agriculture and improving food grain production. Before that, the Industrial (Department and Regulation) Act of IDR Act of 1951 had been enacted. This act empowered the Government of India to regulate the pattern of Industrial development through licensing. This was advent of License Raj in India.

In 1955, the Imperial Bank of India was nationalized and renamed as State Bank of India. In 1956, some 200 insurance companies and provident societies were merged to give birth to LIC of India. A State Trading Corporation (STC) was established to export and import in select commodities. It was also established to trade with the communist countries (these countries preferred to deal with state party). The STC was also given monopoly in the trade of Cement, which was import material at that time.

Mahalanobis Model : Basis of Industrial Policy Resolution  1956

The Industrial Policy Resolution of 1956 was based upon the Mahalanobis Model of growth. This Model suggested that there should be an emphasis on the heavy industries, which can lead the Indian Economy to a long term higher growth path.

Mahalanobis Model

In 1950s, an Old Russian Model was indianized by PC Mahalanobis, the founder of Indian Statistical Institute and a close aide of Pandit Nehru. This model is known to have set the statistical foundations for state-directed investments and created the intellectual underpinnings of the license-raj through an elaborate input-output model. This Model suggested that there should be an emphasis on the heavy industries, which can lead the Indian Economy to a long term higher growth path. India’s second five year plan and Industrial policy Resolution 1956, which paved the way for development of Public Sector and license raj; were based upon this model.

The four fold classification of the 1948 Industrial Policy was changed now to a threefold classification in Schedule A, B and C industries.

Three Fold Classification of the Industries

Schedule A Industries

This comprised 17 industrial areas which were strictly under the Central Government. The companies of this area were known as CPSE (central Public Sector Undertakings). These included key industries such as Defence Equipment; Atomic Energy; Iron & Steel and heavy plants / machineries required for iron & steel production; Heavy power plants; Coal & Lignite; Mining & processing of key minerals; Railways and Air Transport; Aircraft & ship building; Telephones, Telegraphs and wireless except radio sets; Electricity generation and distribution.

Schedule B Industries

This category comprised 12 industries that were put to the State Governments to take measures and was left to the state government to follow up with the private sector with provisions of compulsory licensing. However, states were not given monopoly over these industries. They had to be state owned but private sector was expected to supplement the efforts of the State. States were expected to facilitate and encourage development of these industries in the private sector, in accordance with the programmes formulated under the Five Year Plans.

The schedule B industries included other minerals than central monopoly; machine tools; ferro alloys, steel tools; raw material needed for manufacturing of drugs, dyes and plastics; essential drugs and antibiotics; fertilizers; synthetic rubber; chemical pulp, road and sea transport.

Schedule C Industries

The Industrial areas which were left out of the Schedule A & B were left with the private sectors subject to licensing and regulation under the IDR Act.

Other Focus Aras of Industrial Policy 1956

The other key focus areas were as follows:

• This policy integrated the need for infrastructure development as prelude to private investment. Thus, it gave priority to power, transport and financial institutions.
• It recognized the role of cottage and small scale sector in context of employment generation and balanced regional growth and provided it tax concessions and subsidies.
• It gave priority to industrial development in the backward regions of the country to spur balanced growth.
• It welcomed FDI as complimentary to domestic saving if major share in control and management was in Indian hands.
• It gave importance to “Industrial Peace” by offering share to workers in the profit and management; better work environment and participation in the management.
• It stressed the need to promote technical and managerial skill for industrial growth, thereby proposing establishment of ITIs and introducing business management courses in universities.
• It also laid emphasis on decentralization of the management of PSUs.

However, the major thrust area of the 1956 policy was to enhance the role of public sector in the process of growth and development on socialistic pattern of society. It did not undermine the private investment but expected that private investment would kick-start if public sector achieves a breakthrough in the development of infrastructure.

Outcomes

The outcome of this policy must be seen in conjunction with the Industries (Development & Regulation) Act of 1951. The first major outcome was that the public sector in the country expanded and it became the main vehicle for Industrial Growth. The government gave priority to backward regions to establish the Industrial units to spur balanced growth.

However, since all the Schedule B and many of the Schedule C industries came under provisions of compulsory licensing  of Industries (Development & Regulation) Act of 1951; Industries in India were under License raj.

Annexure

Schedule A Industries in the Industrial Policy Resolution 1956

1. Arms and ammunition and allied items of defense equipment.
2. Atomic energy.
3. Iron and Steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture and for such other basic industries as may be specified by the Central Government.
6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Mineral oils.
9. Mining of iron ore, manganese ore, chrome-ore, gypsum, sulphur, gold and diamond.
10. Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram.
11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 1953.
12. Air transport.
13. Railway Transport.
14. Ship Building.
15. Telephones and telephone cables telegraph and wireless apparatus (excluding radio receiving sets).
16. Generation and distribution of electricity.

Schedule B Industries as per Industrial Policy Resolution 1956

1. All other minerals except ‘minor minerals’ as defined in Section 3 of the Minerals Concession Rules 1949
2. Aluminum and other non-ferrous metals not included in Schedule A
3. Machine tools
4. Ferro-alloys and tool steels
5. Basic and intermediate products required by chemical industries such as the manufacture of drugs, dye-stuffs and plastics
6. Antibiotics and other essential drugs
7. Fertilizers
8. Synthetic rubber
9. Carbonization of coal
10. Chemical pulp
11. Road transport
12. Sea transport

Analysis of Industrial Policy 1956

The Industrial Policy, 1956 was an elaborate document and was hailed as “Economic Constitution of India” It touched virtually all aspects of Industrial development. It established the public sector as epicentre of industrialization. Further, this policy must be analyzed in conjunction with IDA Act and License Raj and in light of the below statements.

• One of the pillars of this policy was to check concentration of economic power in few individuals, groups or business houses. To what extent this policy was able to achieve this?
• To what extent this policy was able to spur Industrial growth, check unemployment and bridge the rural urban divide?

One of the pillars of this policy was to check concentration of economic power in few individuals, groups or business houses. To what extent this policy was able to achieve this?

The 1956 policy in injunction with the  IDA act did just reverse of what it was supposed to do. The licensing policy of the government favoured big business houses who were in better position to raise huge amount of capital and had the better management skills to run the industry. They were also able to secure financial assistance from development and finance institutions. Further, since there was no proper system of allocation of licenses in place; pre-empting of licensing by authorities to select people or groups happened due to an array of reasons. Overall, the freedom of entry into industry was restricted due to licensing and this resulted in the concentration of economic power in few individuals.

To what extent this policy was able to spur Industrial growth, check unemployment and bridge the rural urban divide?

The pace of annual industrial growth could never go above 3 or 4%. The performance of the PSUs was also initially dismal and even today we see a lots of sick PSUs around.

Further, India could not combat unemployment, rural-urban divide, imbalance growth and other problems. The reasons were many fold. Firstly, the expansion of industry in backward regions was dismal. Secondly, the heavy industries were capital intensive rather than labour intensive. They lacked employment potential. The potential of employment generation was in small and cottage industries but they were sidelined practically either in want of institutional finance or due to competition. Most of the institutional finance was grabbed by large scale industries leaving little for them.