Model Answer
0 min readIntroduction
Post-independence India adopted a mixed economy model, with a significant role for the public sector and a focus on promoting domestic industries. A key feature of this approach was the policy of reservation, implemented through the Industries (Development and Regulation) Act, 1951. This policy reserved certain industries exclusively for the small-scale sector, aiming to protect them from competition from large-scale units, promote employment, and ensure a more equitable distribution of wealth. However, this protectionist approach, while well-intentioned, had a complex and often detrimental impact on India’s industrial development in the decades leading up to the 1991 liberalization.
The Policy of Reservation: Scope and Evolution
The reservation policy initially covered a limited number of industries, primarily those considered suitable for small-scale production due to their labor-intensive nature or local resource availability. Over time, the list of reserved items expanded significantly, encompassing industries like vanaspati, hand tools, leather products, and certain types of machinery. The objective was to prevent large businesses from dominating these sectors and to encourage the growth of a vibrant small-scale enterprise (SSE) sector.
Positive Impacts of Reservation
- Promoting Entrepreneurship: The policy fostered entrepreneurship among small-scale industrialists, providing them with a protected market and encouraging investment in these sectors.
- Employment Generation: SSEs are inherently more labor-intensive than large-scale industries. Reservation contributed to significant employment generation, particularly in rural and semi-urban areas.
- Regional Development: The policy encouraged the dispersal of industries across different regions, reducing regional disparities.
- Indigenous Technology Development: It incentivized the development of appropriate technologies suited to the needs of the Indian market.
Negative Impacts of Reservation
- Hindered Economies of Scale: By restricting competition, the policy prevented firms from achieving economies of scale, leading to higher production costs and lower efficiency.
- Reduced Technological Upgradation: Protected from competition, SSEs had limited incentive to invest in research and development or adopt new technologies. This resulted in technological stagnation.
- Rent-Seeking Behavior & Corruption: The reservation policy created opportunities for rent-seeking behavior and corruption, as firms lobbied to have their products included in the reserved list.
- Stifled Innovation: Lack of competition discouraged innovation and the development of new products.
- Quality Issues: Without competitive pressure, the quality of products manufactured in the reserved sector often remained substandard.
- Impact on Export Competitiveness: The lack of scale and technological advancement hampered the ability of SSEs to compete in international markets.
Specific Examples & Data
For instance, the reservation of vanaspati production led to a fragmented industry with numerous small units, unable to compete with larger, more efficient producers in other countries. According to a study by the National Council of Applied Economic Research (NCAER) in the 1980s, reserved industries exhibited significantly lower rates of growth and productivity compared to non-reserved industries. (Knowledge Cutoff: 2023). The automobile component industry, while benefiting initially, faced constraints due to the limited scale of operations in the reserved segment.
| Aspect | Impact of Reservation |
|---|---|
| Productivity | Lower productivity compared to non-reserved industries |
| Technological Advancement | Slowed down technological upgradation |
| Export Competitiveness | Reduced ability to compete in global markets |
| Efficiency | Lower efficiency due to lack of economies of scale |
The policy was gradually dismantled after the liberalization of 1991, with many items being de-reserved to promote competition and efficiency. The Small Industries Development Bank of India (SIDBI), established in 1990, played a role in supporting the SSE sector during this transition.
Conclusion
The policy of reservation in favor of small-scale industries, while rooted in noble intentions of promoting entrepreneurship and employment, ultimately proved to be a significant impediment to India’s industrial growth and competitiveness. It fostered inefficiency, stifled innovation, and created opportunities for rent-seeking. The gradual de-reservation of industries post-1991 was a necessary step towards creating a more dynamic and globally competitive industrial sector, although it also presented challenges for the SSEs requiring support for modernization and adaptation.
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.