How does the strategy of industrialisation under the New Economic Policy promote productivity growth in manufacturing industries in India? Explain.

The Pre-1991 Industrial Scenario and the Need for Reform

Before 1991, Indian industries operated under a highly regulated regime. The Industrial (Development and Regulation) Act of 1951, coupled with stringent licensing requirements, restricted capacity expansion, entry of new firms, and foreign investment. This led to inefficiencies, rent-seeking behavior, and a lack of innovation. The balance of payments crisis of 1991 served as a catalyst for comprehensive economic reforms, including industrial liberalization.

Strategies of Industrialisation under the NEP and their Impact on Productivity

1. Liberalisation: Removing Restrictions and Fostering Competition

Liberalisation involved dismantling licensing requirements, reducing tariffs and quotas on imports, and easing restrictions on foreign investment. This had several positive effects on manufacturing productivity:

• Increased Competition: The entry of foreign firms and the expansion of domestic private sector firms intensified competition, forcing Indian manufacturers to improve efficiency and quality.
• Technology Upgradation: Liberalisation facilitated the import of advanced technologies and machinery, enabling Indian firms to upgrade their production processes.
• Reduced Costs: Lower tariffs on raw materials and intermediate goods reduced production costs, enhancing competitiveness.
• Demand Stimulation: Increased consumer choice and disposable incomes stimulated demand, encouraging firms to invest in capacity expansion and innovation.

2. Privatisation: Enhancing Efficiency and Accountability

Privatisation involved the sale of public sector enterprises (PSEs) to private investors. The rationale was that private ownership would lead to greater efficiency, improved management, and increased accountability. While the pace of privatisation has been uneven, it has yielded positive results in certain sectors:

• Improved Operational Efficiency: Private owners are typically more focused on cost reduction and profit maximization, leading to improved operational efficiency.
• Investment in Modernisation: Private firms are more likely to invest in modernizing plants and equipment, boosting productivity.
• Reduced Fiscal Burden: Privatisation reduces the fiscal burden on the government by transferring loss-making PSEs to the private sector.

For example, the privatisation of Maruti Udyog Limited (now Maruti Suzuki) in 1991 led to significant improvements in quality, efficiency, and market share.

3. Globalisation: Integrating with the Global Economy

Globalisation involved opening up the Indian economy to foreign trade and investment. This had several benefits for manufacturing productivity:

• Access to Global Markets: Indian manufacturers gained access to larger global markets, enabling them to achieve economies of scale and increase production volumes.
• Foreign Direct Investment (FDI): Increased FDI brought in capital, technology, and managerial expertise, boosting productivity.
• Integration into Global Value Chains: Indian firms became integrated into global value chains, allowing them to specialize in specific tasks and improve efficiency.
• Exposure to Best Practices: Interaction with foreign firms exposed Indian manufacturers to international best practices in production, management, and marketing.

The growth of the IT-enabled services (ITES) sector, fuelled by globalisation, has had a spillover effect on manufacturing, particularly in terms of improved supply chain management and logistics.

Challenges and Limitations

Despite the positive impact of the NEP, several challenges remain:

• Infrastructure Deficiencies: Inadequate infrastructure, such as power, transportation, and logistics, continues to constrain manufacturing productivity.
• Labour Market Rigidities: Restrictive labour laws and a lack of skilled labour hinder productivity growth.
• Small and Medium Enterprises (SMEs): SMEs, which constitute a large share of the manufacturing sector, often lack access to finance, technology, and markets.
• Regional Disparities: The benefits of industrialisation have been unevenly distributed across regions, leading to regional disparities.

According to the National Manufacturing Competitiveness Council (NMCC), India needs to significantly improve its manufacturing competitiveness to achieve sustained economic growth.

Policy	Impact on Productivity
Liberalisation	Increased competition, technology upgradation, reduced costs
Privatisation	Improved operational efficiency, investment in modernisation
Globalisation	Access to global markets, FDI, integration into global value chains