2.1. The Pre-Reform Regime

The pre-reform industrial policy regime relied heavily on the development of a public sector to cater to the infrastructure needs of development and to provide direction to the process of industrial development within a mixed economy framework. Besides 'reserving' certain strategic areas of industrial production, for example, iron and steel, coal, transport, power, mineral oils, atomic energy, arms and ammunition, and allied items of defence equipment, in the public sector, the state also acted as the leading entrepreneur in machine tools, non-ferrous metals, fertilizers, etc. Nevertheless, the private sector was expected to play a major role, especially in the provision of consumer goods and building up the small-scale sector.

Industrial licensing was a major instrument of control of the private sector under which permission of central government was needed for both investment in new units and for substantial expansion of capacity in existing units. Licensing also controlled technology, output mix, capacity location, and import content. Large industrial houses needed separate permission for investment or expansion under the Monopolies and Restrictive Trade Practices (MRTP) Act so as to prevent the concentration of economic power. There were price and distribution controls in industries such as fertilizers, cement, aluminium, petroleum, and pharmaceuticals. Almost 800 items were reserved for production by small-scale units as a way of protecting the small-scale sector from competition from large-scale units. There were also barriers to industrial restructuring and exit of firms.

India's import tariffs were among the highest in the world, with duty rates above 200 percent being fairly common and tariff rates being highly dispersed. Imports of manufactured consumer goods were completely banned. For the rest, only some goods were freely importable, and for most items where domestic substitutes were being produced, imports were only possible with import licences. The criteria for issuing these licences were non-transparent, delays were endemic, and corruption unavoidable. Policies towards foreign investment were quite restrictive, reflecting the general protectionist thrust of industrial policy.

The period from 1950 to 1980 experienced stagnant industrial growth at the rate of 5.5 per cent per annum. However, significant diversification of the industrial structure was achieved. But total factor productivity (a measure of the efficiency with which labour and capital are used in generating value added in the manufacturing sector) is estimated to have stagnated/declined during the period from 1960 to 1980. The high-cost industrial structure resulting from the heavily protectionist policy regime created an anti-export bias in the industrial sector. The erosion of competitiveness could be seen in the secular decline of India's share in global exports of manufactured goods from 1 per cent in 1950 to 0.4 per cent in 1980.