Industrial Policy Resolution 1956 and the Mixed Economy in India

Mixed Economy in India: Meaning and Purpose

What Is a Mixed Economy in India

A mixed economy is one in which the government and the market together decide what is produced, how it is produced and how it is shared. The market supplies what it can produce well, and the government supplies the essential goods and services that the market fails to provide. For India, the planners had a specific picture. India would be a society with a strong public sector, with private property and with democracy, and the government would plan for an economy in which the private sector was also encouraged to take part in the effort.

Why India Chose a Mixed Economy

Two Models and a Middle Path

On the eve of independence, India had two models of modern development before it. One was the liberal-capitalist model of much of Europe and the United States, and the other was the socialist model of the Soviet Union. Many people were deeply impressed by the Soviet example, among them the leaders of the Communist Party of India, the Socialist Party and leaders such as Nehru within the Congress. Very few supported American-style capitalist development.

Behind this lay a broad consensus from the national movement. The government of a free India could not confine itself to the narrow commercial functions of the colonial government. Removing poverty and redistributing social and economic opportunity were seen mainly as the responsibility of the government, and development could not be left to private actors alone.

Nehru and many other leaders therefore looked for an alternative to the extreme versions of both capitalism and socialism. Sympathetic to the socialist outlook, they wanted an economic system that combined the best features of socialism without its drawbacks. The result was the mixed economy, in which the State would plan and lead while private property and private enterprise continued to exist.

The Bombay Plan and the Planning Commission

The case for planning was not made by the left alone. In 1944 a section of the big industrialists got together and drafted a joint proposal for a planned economy, called the Bombay Plan. It wanted the State to take major initiatives in industrial and other economic investment. Its eight signatories included J. R. D. Tata and G. D. Birla, and it set a target of doubling agricultural output and raising industrial output five-fold over fifteen years. It also proposed protection for young Indian industries and, where the private sector could not act, public enterprises in critical industries.

After independence the Planning Commission was set up in March 1950 by a simple resolution of the Government of India, with the Prime Minister as its Chairperson. It was not created by the Constitution. It had an advisory role, and its recommendations became effective only when the Union Cabinet approved them. The Commission opted for five-year plans, an idea borrowed from the Soviet Union, and the First Five-Year Plan (1951 to 1956) began the series. Planning had four stated goals: Growth, modernisation, self-reliance and equity.

Soviet Influence and Its Limits

The Soviet Union shaped the Indian model in several visible ways. Besides the five-year plan itself, the Second Plan's logic of building capital goods first has a Soviet ancestor, and Nehru's own socialist leanings pointed the same way. Socialist thinkers in India had drawn parallels with Russia since the Russian Revolution of 1917, and after independence Nehru's conception of democratic socialism influenced the policies that later came to be called the Licence Raj.

The nearest Soviet parallel to a mixed economy is Lenin's New Economic Policy of 1921, which Lenin proposed as a temporary expedient. It allowed private individuals to own small and medium-sized enterprises, while the Soviet government continued to control large industries, banks and foreign trade. India's choice looks similar in structure, with a State that held the large and basic industries and a private sector in the rest.

The differences are as important as the likeness. Soviet planning was a command economy, which did not suit a democratic India with privately owned industry. India also kept private property and democracy, and it adopted the mixed economy as a lasting design, whereas Lenin had called his policy one step backward to take two steps forward. Influence is therefore a fair word, but copying is not.

Industrial Policy Resolution 1948: The First Statement

Provisions of the 1948 Industrial Policy

The Industrial Policy Resolution of 1948, dated 6 April 1948, was independent India's first statement on industry. It stressed a continuous increase in production and its equitable distribution, and it said that the State must play a progressively active role in the development of industries. It had three layers.

• Central monopoly: Arms and ammunition, atomic energy and railway transport would be the monopoly of the Central Government.
• State responsibility: The State would be exclusively responsible for the establishment of new undertakings in six basic industries, except where it found it necessary, in the national interest, to secure the cooperation of private enterprise.
• Open field: The rest of the industrial field was left open to private enterprise, although the State would also progressively participate in it.

The Resolution also promised a review. The question of nationalising any existing industry was to be looked at again after ten years and decided on the circumstances then prevailing. This was seen as a sign of accommodation to the capitalists, who had been alarmed when an earlier Congress committee headed by Nehru proposed that existing undertakings should begin to pass from private to public ownership after five years.

Licensing Under the Industries (Development and Regulation) Act, 1951

The policy needed a law behind it. The Industries (Development and Regulation) Act, 1951, gave the Central Government the power to regulate private industry, and the 1956 Resolution later said that private undertakings would be subject to control and regulation under this Act.

In practice the licence system worked through several permissions. A new industry could not start without a licence. An existing industry needed a licence to expand its output or to diversify into a new variety of goods. Licences also governed a plant's location and product mix. The system had a regional purpose, since it was easier to obtain a licence for a unit in an economically backward area, and such units also received tax benefits and electricity at a lower tariff. The aim was regional equality, and the same aim returns in the 1956 Resolution.

The licence was also a planning tool. The Government gave a licence to expand production only if it was convinced that the economy needed more of that good, so that output did not exceed what the economy required.

From Avadi to the 1956 Resolution

The Socialistic Pattern of Society, 1954 and 1955

In December 1954 Parliament accepted the socialistic pattern of society as the objective of social and economic policy. The Congress adopted the same goal at its Avadi session in January 1955. The Avadi Resolution declared that planning should take place with a view to the establishment of a socialistic pattern of society, where the principal means of production were under social ownership or control, production was progressively speeded up and wealth was shared equitably. Nehru defined this in a flexible way, with strong emphasis on modernisation and production.

This did not mean nationalising existing industry. Although the 1956 Resolution and the Second Plan greatly widened the public sector, they made no mention of taking over existing industries. The model stayed a mixed economy in which the public and the private sectors were to coexist and complement each other.

Why a Fresh Policy Was Needed in 1956

By 1956 eight years had passed since the first Resolution. The Constitution had been enacted with its Fundamental Rights and Directive Principles, planning had proceeded on an organised basis and the First Plan had been completed. With the Second Plan about to be placed before the country, the Government said that a fresh statement was needed, governed by the Constitution, the objective of socialism and the experience gained.

The Resolution set out what was now essential. It said the economy had to accelerate its growth and speed up industrialisation, to develop heavy industries and machine-making industries, to expand the public sector and to build up a large and growing cooperative sector. It also aimed to reduce disparities in income and wealth and to prevent private monopolies and the concentration of economic power.

Industrial Policy Resolution 1956 in Detail

Schedule A, Schedule B and Schedule C

The Industrial Policy Resolution of 1956 is dated 30 April 1956. It said that industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector, as should other essential industries that need investment on a scale which only the State could provide. It then classified industries into three categories, with the warning that the categories would overlap and were not water-tight compartments.

Schedule A listed 17 industries. They included arms and ammunition, atomic energy, iron and steel, heavy castings and forgings, heavy electrical plant, coal and lignite, mineral oils, mining of several ores, aircraft, air transport, railway transport, shipbuilding, telephones and telegraph apparatus, and the generation and distribution of electricity. Railways and air transport, arms and ammunition, and atomic energy were to be developed as Central Government monopolies. In some cases, privately owned units could produce a Schedule A item for their own requirements, and existing private units could expand.

Schedule B contained 12 industries in which the State would increasingly set up new undertakings while private enterprise could also develop, either on its own or with State participation. Schedule C covered everything else, which the Resolution expected the private sector to develop, though the State could start any industry even there. Private undertakings stayed subject to the 1951 Act, but the Government also said it was desirable to let them develop with as much freedom as the targets of the national plan allowed.

Small, Cottage and Village Industries

The 1956 Resolution gave a separate place to cottage, village and small-scale industry. It argued that they provide immediate large-scale employment, give a more equitable distribution of national income and help mobilise capital and skill that would otherwise remain unused. They also avoid some of the problems of unplanned urbanisation, because small centres of production can be set up all over the country.

The State's earlier methods were to restrict the volume of production in the large-scale sector, to tax differentially and to subsidise directly. The new aim was to make the decentralised sector strong enough to support itself and to integrate it with large industry, by improving its competitive strength. Industrial estates and rural community workshops had started to meet the lack of technical help and working space, and industrial cooperatives were to be encouraged.

In 1955 the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for rural development. A small-scale unit was defined by the maximum investment allowed on its assets, and in 1950 that limit was ₹5 lakh. These industries are believed to use more labour than large firms and so to generate more employment, but they cannot compete with big firms. So the production of a number of products was reserved for the small-scale sector, and these units also received concessions such as lower excise duty and bank loans at lower interest rates.

Regional Balance, Cooperatives and Workers

The Resolution treated industry as a tool of balanced development. It said that disparities in levels of development between regions should be progressively reduced, and that power, water supply and transport should be made available to areas lagging behind industrially, where the location was otherwise suitable. Only a balanced and coordinated development of the industrial and the agricultural economy in each region, it said, could raise living standards across the whole country.

Three other aims ran through the text. The cooperative principle was to be applied whenever possible, with a steadily increasing share of private-sector activity organised on cooperative lines. Labour was described as a partner in development, with joint consultation and the progressive association of workers and technicians in management. Public enterprises were to work on business lines, with decentralised authority, and to be judged by their total results, with the largest possible measure of freedom.

Industrial Policy 1948 and 1956 Compared

The two Resolutions differ most in how far they carried the State's role. The 1948 text kept a review of nationalisation after ten years, while the 1956 text widened the State's field into two Schedules and dropped any plan to take over existing industry.

The Mahalanobis Strategy and the Second Plan

Heavy Industry First in the Second Plan

The Second Five-Year Plan (1956 to 1961) was the plan of the 1956 Resolution. It stressed heavy industries and was drafted by a team of economists and planners under the leadership of P. C. Mahalanobis. The First Plan had preached patience and focused on agriculture, dams and irrigation. The second wanted a quick structural transformation by making changes in all possible directions at once.

The Mahalanobis model, put forward in 1953, holds that a high standard of consumption can be reached only when a country first builds the capacity to produce capital goods. A strong capital goods sector then expands the nation's capacity to produce consumer goods in the long run. The price is slower growth in the short run, because investment in capital goods does not itself produce consumer goods. The Second Plan followed this logic and gave rapid industrialisation, with the public sector in the lead, its main emphasis.

The Plan ran into difficulty. Costs rose unexpectedly, prices went up and the foreign exchange reserve fell. India faced an external payments crisis in 1957, and the Plan was revised in 1958. Critics such as B. R. Shenoy had warned that depending on deficit financing for heavy industrialisation was a recipe for trouble.

Import Substitution and Protection

The industrial policy was closely tied to trade policy. In the first seven plans trade followed an inward-looking strategy called import substitution, which replaced imports with domestic production and protected domestic industry from foreign competition. From the Second Plan there was a determined drive to replace imports of basic and capital goods with home production.

Protection took two forms. Tariffs were taxes on imported goods, which made them dearer and discouraged their use. Quotas fixed the quantity that could be imported. The reasoning was that industries in developing countries could not compete with those of richer economies at the start, and that protected industries would learn to compete over time. Planners also feared that scarce foreign exchange would be spent on luxury imports if no limits were placed. Protection helped both public and private industry to grow.

The Public Sector and the Results of the Policy

Public Sector Enterprises as the Main Instrument

The Resolutions gave the State the commanding heights of industry, and the public sector grew to fill them. In 1951 there were five public sector undertakings under the government; by March 2021 the number was 365. Under the Second Plan, steel plants at Bhilai, Durgapur and Rourkela were set up with the help of the Soviet Union, the United Kingdom and West Germany. Nehru once called public sector enterprises the temples of modern India.

The reasons for such heavy State investment were practical. At independence India had almost no infrastructure of power, transport and communication. These sectors need heavy capital, technology, skilled manpower and entrepreneurship, which the private sector of the time could not supply, and there was no market that could pay for them. The basic industries such as iron and steel, coal, oil and electricity needed the same inputs. Public enterprises were also expected to generate employment, and their profits were meant to pay for public goods such as education and health.

Achievements, 1950 to 1990

The industrial sector's share of GDP rose from 13.0 per cent in 1950‑51 to 24.6 per cent in 1990‑91, and the sector grew at about 6 per cent a year over the period. Indian industry, once mostly cotton textiles and jute, was well diversified by 1990, largely through the public sector. The promotion of small industry opened business to people without the capital to start large firms, and protection allowed home industries to develop in electronics and automobiles.

The agricultural share fell from 59.0 per cent to 34.9 per cent while services rose from 28.0 to 40.5 per cent in the same period. The industrial growth rate of about 6 per cent is a different figure from overall growth, which for the Licence Raj years is often put at about 3.5 per cent a year, the record that Raj Krishna called the Hindu rate of growth.

Licence Raj and the Criticisms of the Model

C. Rajagopalachari coined the term Permit-Licence Raj for the system of strict government control, and he opposed it through the Swatantra Party. At its height, up to 80 government agencies had to grant approval before a private company could produce something. The criticisms fall into a few groups.

• Misuse of licences: A big industrialist would get a licence not to start a new firm but to prevent competitors from starting theirs.
• Wasted effort: More time went into obtaining licences and lobbying ministries than into improving products.
• Concentration: Official inquiries, the Hazari report of 1967 and the Dutt Committee of 1969, found that large groups had obtained a disproportionate share of licences.
• No competition: Because of import restrictions, producers had a captive market and little reason to improve quality.
• Public sector losses: Many public sector firms incurred heavy losses but continued to function because a government undertaking is hard to close, and in some fields, such as telecommunication, the public sector monopoly continued after private firms could also have provided the service.

Defenders of the policy make two points. Public sector firms, on this view, should be judged by their contribution to the welfare of the people and not only by profit, and protection was reasonable as long as rich countries protected their own producers.

Later Changes and the Legacy of the Resolution

From 1973 to 1991

The 1956 Resolution was changed by statements over the next decades rather than replaced. In 1973 the Government defined large industrial houses as those with assets above ₹20 crore, the threshold of the Monopolies and Restrictive Trade Practices (MRTP) Act, to control the concentration of economic power, and it identified high-priority industries open to large houses and foreign companies. The MRTP Act itself had come into force in June 1970. The Foreign Exchange Regulation Act, 1973, required most foreign-owned companies to reduce their shareholding to 40 per cent.

The 1977 statement emphasised decentralisation and the role of small, tiny and cottage industries, and it expanded the list of items reserved for the small-scale sector from 180 to more than 500. The 1980 statement turned to competition in the domestic market, technological upgrading and modernisation.

The break came with the Statement on Industrial Policy of 24 July 1991. It said that industrial licensing would be abolished for all industries except a short specified list related to security and strategic concerns, social reasons, hazardous chemicals, overriding environmental reasons and items of elitist consumption, and it kept public sector reservation only for areas where security and strategic concerns predominate. It also noted that many public enterprises had become a burden rather than an asset.

The Industries (Development and Regulation) Act, 1951, is still in force, but only a short list of industries now needs a compulsory licence, and only atomic energy and railway transport remain reserved for the public sector. Economists still debate how much of India's later growth acceleration should be credited to ending the Licence Raj, and how much to changes that began in the 1980s.

Sources

• NCERT: Indian Economic Development (Class XI), Indian Economy 1950‑1990
• NCERT: Politics in India since Independence (Class XII), Politics of Planned Development
• Department for Promotion of Industry and Internal Trade: Industrial Policy Resolution 1956 and later statements
• Department for Promotion of Industry and Internal Trade: Industrial licensing and investment
• Office of the Development Commissioner (MSME): Report of the Expert Committee on Small Enterprises
• Ministry of Steel: Annual Report 2008‑09
• Wikipedia: Bombay Plan
• Wikipedia: Industrial Policy Resolution of 1956
• Wikipedia: License Raj
• Wikipedia: Mahalanobis model
• Wikipedia: Mixed economy
• Wikipedia: New Economic Policy
• Wikipedia: Public sector undertakings in India
• Wikipedia: Second Five-Year Plan (India)
• UPSC: Civil Services Examination question papers