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Introduction
DOI: 10.4324/9781003047490-1
In a developing country context, industrialization is often considered to be synonymous with economic development. Immediately after Independence, India adopted the Industrial Policy Resolution, 1948, which created a mixed economy, reserving spheres for the private and public sectors. About four decades later, when India embarked on an economic reforms programme in 1991, the major instrument was the Industrial Policy Statement of July 24, 1991. The orientation of this policy was diametrically opposite to the 1948 one, though both of them intended to speed up the process of industrialization in India.
Industrial policy is the strategic effort made by a country’s government to promote industrialization, particularly the development of the manufacturing sector. Unlike the broader economy-wide macroeconomic policies, industrial policies are often sector specific. Often, they are partly both – macroeconomic or horizontal, and sector-specific or selective (also called vertical). For example, a country might broadly follow an import-substituting industrialization policy whereby almost every sector enjoys some amount of protection from imports, yet some sectors might enjoy a higher or lower degree of protection, depending on the priorities and emphasis of the government. Industrial policies are normally considered interventionist and hence are opposed by mainstream economists advocating market-oriented policies.
While even mainstream economists accept the need for interventions that are intended to regulate networks and public infrastructure, or for correcting information asymmetries and promoting R&D, the debate is about whether government interventions should go beyond them. Historically, however, it is difficult to find an example where industrialization has taken place in a perfectly laissez-faire environment and without any state intervention beyond a level that the mainstream economists are willing to concede, be it the case of US industrialization or more recent examples of industrialization of East Asian countries or some success stories in some Latin American countries (Chang 2002; Rodrik 2004).
Even in a developed economy, it is rare to find an economic policy that does not embrace an industrial policy aspect to maintain its industrial dynamism, except for a brief period during the 1980s and 1990s when having no policy was accepted as the default industrial policy. Even during this period, governments in such countries continued with several initiatives that can broadly fall under industrial policy. But now, especially after the financial crisis of 2007, developed countries like the US, Germany, and Japan all have accepted the need for an industrial policy (Andreoni 2017).
While the American Recovery and Reinvestment Act (ARRA) of 2009, and the 2010 National Export Initiative, form the latest industrial policy cycle in the US, an industrial policy was active even during the administration of George W. Bush (2000–2008) in the form of the American Competitiveness Initiative. It tried to improve competitiveness by providing skills, finance, and a tax-friendly business environment, ensuring greater access to international markets through bilateral trade agreements and several technology initiatives and policies. There have been several other sectoral polices and initiatives to improve industrial performance.
Similar is the story of other countries. To give a few prominent examples of recent industrial policy measures in the developed world: the 2009 New Growth Strategy and the Industrial Structure Vision 2010, and initiatives through the Industrial Competitiveness Committee in Japan; and in Germany, the 2008 ZIM (Zentrales Innovations program Mittelstand), the Konjunkturpakete I e II (economic stimulus) in 2008, the Protection of Jobs and Modernization of Federal Republic 2008, Special Program for Large Enterprises 2008, Boosting internal demand for new cars 2008 and the 2010 High-Tech Strategy 2020.
In any case, industrial policy is a tool for effective coordination of the activities of various sectors of the economy, and so, quite important for successful industrialization. Despite criticism from many quarters, there is growing consensus in the recent development literature that state intervention is often necessary. While the current debate has shifted away from dismissing industrial policy to recognizing its relevance, the best ways of promoting industrialization are still widely debated, particularly in the context of the global trade regime whereby some of the industrial policies used earlier have now been restricted or outlawed (Rodrik 2009; Dubey 2020).
1.1 The Indian Context
As indicated before, while the 1948 industrial policy of India put emphasis on the role of the public sector, the 1991 industrial policy put emphasis on the role of foreign capital and technology to drive the industrialization process. The real industrial policy in the post-Independence era, however, came with the 1956 Industrial Policy Resolution, which, along with the role of the public sector, put emphasis on heavy industry to create the industrial base in the country.
The shift between 1948 and 1956 was guided by the adoption of the Constitution of India and the initial experience with the industrialization process, the success of the First Five Year Plan in particular. This policy remained in force until 1977, when another Industrial Policy was adopted, though the changes were not so drastic. There was an added emphasis on the small-scale sector to promote industrialization in backward areas, and it created District Industries Centres.
The next Industrial Policy was to come in 1980, emphasizing capacity utilization and productivity, and export-oriented and import-substituting units. Interestingly, this was the first time when consumer interest and prices and quality issues were mentioned in the industrial policy document. The 1990 Industrial Policy could not create any impact, as the 1991 Industrial Policy soon came along. It enhanced the role of foreign investment and foreign technology, reduced the role of the public sector, instituted a series of liberalization measures including removal of licensing requirements, and removed some provisions of the Monopolies and Restrictive Trade Practices Act 1969. The 1991 Industrial Policy is the longest lasting policy so far. Broadly speaking, however, one can argue that pre-1991 policies were essentially similar. On the other hand, it can also be argued whether India has any industrial policy as such in the post-1991 economic policy framework.
It is quite obvious that when we talk about industrial policy or industrialization strategy, it is not just what has been discussed in the government policy document that has been named industrial policy, but that it is a much broader concept which includes several other policy domains including trade policy, investment policy, state involvement, banking and financial policy, and so on. In all these areas, the country went for more liberalized environment which was in line with the philosophy that having no policy is the default policy. Accordingly, characterizing the overall development or industrialization strategy of the country is quite difficult.
The dominant narrative is that prior to 1991, India followed an import-substituting industrialization policy. While this might have been partly true, it is questionable also if this has indeed been the industrialization strategy of India. Import substitution may not have been the only reason that India might have imposed high import barriers. Dealing with a shortage of foreign exchange and the felt need to discourage conspicuous consumption could have been other reasons. Moreover, India also adopted several policies and programmes to encourage exports, as well.
On the other hand, it is also difficult to argue that India simply dumped import-substituting industrialization in the post-1991 period. The experience of the automobile industry is a clear example. Foreign investors who entered India in this sector were given targets for indigenization of their production in India in terms of sourcing of the components they used. The sector also enjoyed the protection of relatively high tariff rates. These are obviously important components of an import-substituting industrialization strategy.
Similarly, it has also been often argued that India followed a Soviet-type central planning model since the 1950s. While it is true that India used to have five-year plans, such plans were used by many other countries that have never been termed planned economies. South Korea and Taiwan had five-year and four-year plans, respectively. While these countries have been termed coordinated market economies like Germany, India has been compared with the former Soviet Union! Maybe Nehru’s fascination for Fabian socialism was partially responsible for this, but this could also be due to India’s perceived political alignment with the Soviet bloc rather than NATO (the North Atlantic Treaty Organization). Hence, along with characterizing the industrialization strategy, characterizing the overall economic policy framework is also an issue of debate.
1.2 The Problematique
Now the question is how these different industrial policies were successful (or otherwise) in creating the desired outcomes. This is indeed a difficult question, as industrial growth performance is not determined by industrial policies only. Not only macroeconomic policies, but also other socio-economic factors and political situations, as well as global economic and geo-political issues, play an important role in this regard. For example, the famous 1991 reforms were triggered by the economic crisis that was in turn triggered by higher oil prices and decline in exports due to the Gulf War of 1990–91 waged by the US-led coalition forces in response to the Iraqi invasion of Kuwait.
However, as explained previously, overall industrial growth rates may not truly reflect the performance of industrial policies. Industrial policies are not macroeconomic policies. Even though overall industrial policies were adopted from time to time, they put varying emphasis on different sectors of the economy. Moreover, strategic industrial policy would also require deep understanding of how different sub-sectors in the manufacturing sector have been performing, and how these different levels of performance are linked to different policy variables.
When it comes to industrialization and industrial performance in India, it is now well accepted that India had only limited success. It could not match the performance of the East Asian countries, and at the same time, it did not go the African way (Nayyar 2006). While India maintained its growth momentum for a long time, even after its policy shift in 1991, an inconvenient truth is that its success in getting ahead in terms of growth in manufacturing remains elusive. India’s share of manufacturing increased steadily during 1950–1980, and it continued to rise slowly until the mid-1990s, but it became stagnant thereafter and even experienced a decline since 2008 (Raihan 2020). GDP data for the period after 2013–14 are not truly comparable; nevertheless, the share of manufacturing in GDP continued to decline even after 2013–14, and Nayyar (2019) observed that between 1990 and 2016, the share of manufacturing has declined from 19.7 per cent to 16.5 per cent. According to Basole and Narayan (2020), the share of manufacturing further declined to 14.9 per cent in 2017.
Compared to other Asian countries, India’s manufacturing output (as a share of GDP) peaked too early, and at a much lower level (Nayyar 2019). This has raised the concern of premature deindustrialization in India. While traditionally deindustrialization has been defined as a decline in the share of manufacturing in total employment, in recent literature, it has also been defined in terms of decline in the share of manufacturing output in GDP. Tregenna (2009), however, suggested that deindustrialization should be defined in terms of a sustained decline in both the share of manufacturing in total employment as well its share in GDP. Basole and Narayan (2020) estimated that between 2011 and 2017, the share of manufacturing in total employment has witnessed a marginal decline from 12.6 per cent to 12.1 per cent. A premature deindustrialization in India, therefore, seems to be real.
The question arises whether this limited success was due to any conscious strategies and policies adopted in India, or if it was just due to market forces. This, of course, would require understanding first if India had an industrial policy and how it changed over time. Some key questions that can be raised in this context are: did India follow a planned economy model or a coordinated market economy model? If it is the latter, then how did it deviate from the variants of the model as followed in countries like Germany and South Korea? Did India follow an import-substituting policy or an export-led growth strategy, or a combination of both? If India followed an industrial policy regime, then it would be pertinent to look at the elements of such an industrial policy that might have led to whatever success India could achieve in industrial performance.
Against this backdrop, it would be useful to examine if India followed an “industrial policy” and a combination of import-substituting and export-led growth strategies, as was followed in several coordinated market economies; and if the industrial policy, as well as elements of a coordinated market economy framework, played a positive role in the limited success in industrialization and industrial performance of India.
1.3 The Analytical Framework
The analytical framework used in this book is that of structuralist economics, which views an economic system as not just a system of variables determined in the market but essentially as a socio-economic process. As against the neo-classical construct of a market-guided equilibrating mechanism, the structuralist construct views the economic system as a non-equilibrating evolutionary process (Street and James 1982). Human beings are not seen as rational decision makers with the primary motive of utility maximization; their behaviour is also influenced by historical and cultural conditioning.
An important component of structuralist economics is the context, both in the sense of time and space (Baghirathan et al 2004). Hence, this framework rejects the idea of a one-size-fits-all type policy prescriptions for all types of economies at all times. In fact, the same country might have to follow different policy regimes at different points of time, not just due to socio-economic and cultural changes within the country but also due to changes in the global environment. As described by di Filippo (2009), structuralist economics has four basic characteristics: a historic structural perspective, a systemic reading of society, a global outlook, and a multidimensional approach.
In a broad sense, the origins of structuralism have been traced to the emergence of the doctrine of market failure in England during the 1930s and 1940s (Arndt 1985). In a sense, even Keynes was influenced by this line of thought, as he argued that the economy would not get out of depression simply through market forces and the government needed to act to enhance effective demand and stimulate output expansion (Baghirathan et al 2004). However, the framework emerged after the market failure doctrine was synthesized with the Latin American structuralist theory of inflation developed by the ECLAC (Economic Commission for Latin America and the Caribbean). The ECLAC termed its analysis “structuralist” in the mid-1950s as, in contrast to monetarist view of inflation, it argued that the persistent inflation in Latin America was a cost-push phenomenon, driven primarily by supply rigidities of the agricultural sector, and money was endogenous to it.
It has, however, been pointed out that, while the term “structuralism” had been in use for quite some time in other disciplines like linguistics, anthropology, and philosophy, some elements of current structuralist economics can be traced to the “structuralist” economic school in France (Blankenburg et al 2008). But it has also been argued that what is now understood by structuralist economics has no direct link with the French structuralist school of thought. While the French school was concerned with disparities in social organizations, structuralist economics emphasized the importance of what are considered non-economic factors in macroeconomic models (Taylor 1983; Missio et al 2015).
Blankenburg et al (2008), however, argued that the importance of the French structuralist school should not be ignored. Referring to François Perroux’s work, they argued that he emphasized the importance of institutions and structure over time in economic analysis as against the neo-classical approach of treating resources and technology as given. Moreover, his theory of domination, which he applied to different levels ...
