Model Answer
0 min readIntroduction
Prior to 1991, India’s industrial policy was heavily influenced by a socialist and protectionist ideology, aiming for self-reliance and equitable distribution of wealth. This era, often termed the ‘License-Permit Raj’, saw the state playing a dominant role in industrial development. While the intention was to build a strong industrial base, the actual outcome was characterized by slow growth, inefficiency, and a lack of global competitiveness. This answer will discuss the key inadequacies that plagued the process of industrialisation in pre-liberalised India, hindering its potential.
The Policy Framework: A Controlled Economy
The industrial policy resolution of 1948 laid the foundation for state-led industrialization. The Industrial Development and Regulation Act of 1951 provided the legal framework for regulating industries. Key features included:
- Dominance of the Public Sector: Strategic industries like steel, iron, shipbuilding, and aviation were reserved for the public sector.
- Import Substitution Industrialization (ISI): Emphasis was placed on producing goods domestically to reduce reliance on imports, often through high tariffs and quotas.
- Licensing Raj: Businesses required licenses for almost every aspect of their operations – production, expansion, investment, and even closure.
- Price Controls: The government controlled prices of many essential commodities and industrial products.
Inadequacies in the Industrialisation Process
1. Inefficiency and Low Productivity
The public sector, despite significant investment, suffered from chronic inefficiencies. Lack of competition, bureaucratic delays, and political interference led to low productivity and poor quality. The average capacity utilization in the public sector was often below optimal levels. For example, studies in the 1980s showed that many public sector units operated at less than 50% capacity.
2. Lack of Innovation and Technological Advancement
The protected domestic market shielded industries from foreign competition, reducing the incentive to innovate and adopt new technologies. The licensing system discouraged investment in research and development. The focus remained on replicating existing technologies rather than developing indigenous capabilities. The lack of competition also stifled entrepreneurial spirit.
3. Slow Growth and Limited Diversification
The growth rate of Indian industry remained relatively slow compared to other developing economies. The average annual growth rate of the industrial sector during the 1970s and 1980s was around 4-5%. The industrial base remained concentrated in a few sectors, with limited diversification into high-growth areas like electronics and information technology.
4. The ‘License-Permit Raj’ and Corruption
The complex licensing system created opportunities for rent-seeking and corruption. Businesses often had to resort to bribing officials to obtain licenses and permits. This increased the cost of doing business and discouraged investment. The delays in obtaining licenses also hampered project implementation.
5. Import Restrictions and Balance of Payments Issues
While ISI aimed for self-reliance, it also led to inefficiencies and a lack of competitiveness. High tariffs and quotas restricted access to cheaper and better-quality imports. This, coupled with low export growth, contributed to balance of payments problems. By the late 1980s, India faced a severe foreign exchange crisis.
Comparative Perspective
| Feature | Pre-Liberalisation India | East Asian Economies (e.g., South Korea, Taiwan) |
|---|---|---|
| Role of State | Dominant, controlling | Facilitator, strategic intervention |
| Trade Policy | Protectionist, import substitution | Export-oriented, open trade |
| Competition | Limited, monopolies common | High, fostering innovation |
| Growth Rate | Slow (4-5% annually) | Rapid (8-10% annually) |
Conclusion
The inadequacies in the pre-liberalised industrialisation process stemmed from an overemphasis on state control, protectionism, and a lack of competition. While the intention was to build a self-reliant and equitable economy, the outcome was slow growth, inefficiency, and a stifled entrepreneurial spirit. The 1991 reforms were a direct response to these failures, ushering in an era of liberalisation, privatisation, and globalisation aimed at unlocking India’s industrial potential. The lessons from this period remain relevant for shaping future industrial policies.
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.