Model Answer
0 min readIntroduction
Prior to the economic liberalization of 1991, India adopted a heavily regulated industrial policy regime characterized by extensive licensing, permits, and reservation of certain production lines for the small-scale sector (SSS). This reservation policy, formalized through the Industries (Development and Regulation) Act, 1951, aimed to promote employment, reduce regional disparities, and foster entrepreneurship among a wider segment of the population. The core idea was to protect small industries from competition with large-scale enterprises. However, the efficacy of this approach in achieving its stated goals has been a subject of considerable debate. This answer will delve into the objectives of the reservation policy and critically evaluate its success in the pre-liberalization era.
Rationale Behind Reservation
The reservation policy stemmed from the Gandhian philosophy of self-sufficiency and decentralized industrial development. Key objectives included:
- Employment Generation: SSS were considered more labour-intensive than large-scale industries, thus offering greater employment opportunities.
- Regional Dispersal of Industries: Encouraging SSS in rural and backward areas aimed to reduce regional imbalances.
- Promoting Entrepreneurship: The policy sought to nurture indigenous entrepreneurship by providing a protected market.
- Preventing Concentration of Economic Power: Limiting the dominance of large business houses was another stated goal.
Implementation and Evolution
Initially, the reservation policy covered a limited number of items. However, over time, the list expanded significantly, encompassing over 800 items by the late 1980s. This expansion was often driven by political considerations and lobbying by SSS associations. The policy operated through a licensing system, where large-scale units required licenses to produce goods reserved for the SSS.
Successes of the Reservation Policy
- Growth of the SSS: The number of SSS units increased substantially during the reservation period. According to data from the Annual Survey of Industries, the SSS sector accounted for approximately 40% of the total industrial output in the 1980s. (Knowledge cutoff 2023)
- Employment Creation: The SSS sector was a significant employer, providing livelihoods to millions of people, particularly in rural areas.
- Development of Ancillary Industries: The reservation policy fostered the growth of ancillary industries that supplied inputs to the SSS.
Failures and Negative Consequences
Despite some successes, the reservation policy suffered from several critical shortcomings:
- Stifled Growth and Innovation: The protected environment reduced incentives for SSS units to invest in technology upgradation, innovation, and quality improvement.
- Inefficiency and Lack of Competitiveness: SSS units often remained small and inefficient, unable to compete with larger firms in the post-liberalization era.
- Rent-Seeking and Corruption: The licensing system created opportunities for rent-seeking and corruption.
- Limited Economies of Scale: Reservation prevented larger, more efficient firms from achieving economies of scale, leading to higher production costs.
- Distortion of Industrial Structure: The policy distorted the industrial structure by artificially protecting inefficient units.
The Impact of Liberalization
The economic liberalization of 1991 led to the gradual dismantling of the reservation policy. Many items were de-reserved, exposing SSS units to competition. This resulted in significant challenges for many SSS units, leading to closures and job losses. However, it also forced some units to modernize and become more competitive.
| Aspect | Pre-Liberalization (Reservation) | Post-Liberalization (De-reservation) |
|---|---|---|
| Competition | Limited | Increased |
| Innovation | Low | Higher |
| Efficiency | Generally Low | Variable, with some improvement |
| Growth | Steady, but constrained | More dynamic, but uneven |
Conclusion
The reservation policy for the small-scale sector in pre-liberalization India achieved limited success in realizing its objectives. While it contributed to employment generation and the growth of the SSS, it also stifled innovation, promoted inefficiency, and distorted the industrial structure. The policy’s emphasis on protectionism ultimately hindered the long-term competitiveness of Indian industries. The dismantling of the reservation policy post-1991, though initially disruptive, was a necessary step towards creating a more dynamic and efficient industrial sector. A more nuanced approach, focusing on supporting SSS through access to finance, technology, and market information, rather than protection, is crucial for their sustainable development.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.