Measuring the Efficiency of Resource Use in Indian Manufacturing Industries in Pre- and Post-Reform Periods

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Section I Industrial Policy in the Pre Reform Period:

The Indian planners were swayed by the idea of controlling the private initiative, private investment, markets, industry and guiding the growth and the direction of the economy for the betterment of all the sections of the society. This thinking was evident even in the pre-independence period as the role of the state in the country's industrial development was discussed intensively among the dominant socio political leadership and the business class. The result of such discussions was the 'Bombay Plan', which argued in favour of the state interventions not merely to develop the physical and the social infrastructure but also to lead and guide the development of the private industrial sector (Degnbol-Martinussen, 2001). Although the signatories of the plan did not envisage a planned economy but what followed after independence i.e. the centralized planned economy, virtually controlled all the areas/sectors for diverting the resources and the initiative towards social good. Various factors like the inclination of the dominant political leadership of the day towards the socialistic pattern of growth, the success of the Soviet model of the centralized industrial development, the rejection of the market mechanism by majority of the economists and many other factors led to the adoption of a strategy in which 'state' was the leader (Kansra, 1999). This belief was further strengthened by the reports of the various committees like the report of the Monopolies Enquiry Commission (1964), the Mahalanobis report, and the report of the Dutt committee (1969). These reports conclusively proved that there was something rotten in the state of industrial administration (Eliot, 1971). Thus, the planners intended to build a system where all the sections of the society contribute to the development of the economy by placing the needs of the economy on top and their own needs on the bottom. For this purpose various restrictions were levied on the functioning of the private industrial sector in order to achieve the following objectives: to achieve self-reliance and to promote social justice (Ahluwalia, 1991 and Srivastava, 1996). Self-reliance, as an objective, gained ground due to export pessimism and import substitution (the infant industry argument), which will be discussed in detail later. The social objective led to the creation of a wide and huge public sector and the support for the small-scale industries (which was finally changed to protection). And for the attainment of these two, the creation of the wide industrial base was indispensable. For realizing these objectives various kinds of policies and instruments were framed. These policies succeeded quite fairly as it led to the creation of the wide industrial base and the success of the import substitution policy increased our self-reliance. But the success was quite short lived as after the late sixties the industrial progress slackened down and thus, adversely affected the growth of the whole economy. Various studies revealed that in the course of achieving these objectives, such policies were framed that were unduly restrictive and led to the creation of an industrial sector that was not competitive, inefficient and under the pretext of protecting our industries, rampant oligopolies were created. Although some changes were introduced in the industrial policy in the eighties but it did not improve ist performance significantly. Discussed below, is the detailed analysis of these policies that restricted competition and their impact on efficiency of resource use.
Policies that Restricted Internal Competition:

Industrial policy resolution of 1948 was the first definite statement of the government towards industry. This resolution made it clear that both the public and the private sectors are going to play an important role in ist development. This resolution reserved industries like the arms and ammunition, energy, railways and transport for the public sector and it was made clear that in the area of iron and steel, coal, ship-building etc, new establishments would be only by state. Apart from this there were industries that were reserved for government regulation like salt, tractors, automobiles, electricity etc. and the rest of the industries not included elsewhere were left for the private sector. Thus, this policy resolution laid the foundations for the concept of mixed economy. However, the Indian planners thought to regulate the working of the markets in order to steer clear the economy of concentration of the economic power in the hands of the few big business houses and this was sought to be achieved by the licensing system which came into being with the Industries (Development and the Regulation) Act of 1951. With this act it was made compulsory for the industries to obtain licenses to:

i) establish a new undertaking.
Ii) for manufacturing a new article in an existing undertaking.
Iii) expanding capacity.
Iv) producing a good that was later brought under licensing.
V) for changing a location (Desai, 1988).
The government thought that the best way to rule out the concentration of the economic power was to restrict and regulate the internal competition i.e. the virtual elimination of the 'contestability' of the markets (Bhagwati, 1993). Meanwhile, the First Five Year Plan was framed and implemented and the results were so strongly positive that it made the planners and the leaders to believe that the policy that they had decided for the country was the best policy and it needed to be strengthened with more instruments that could lead to a faster realization of the objectives. With this aim in mind the Industrial Policy Resolution of 1956 was announced that gave a new classification of the industries and the industries were divided into three schedules. In Schedule A as many as 17 industries were reserved for the public sector and Schedule B covered those industries that were to be gradually state owned and the number of industries was 12. Remaining industries were left in Schedule C which were left for the private sector but it was mentioned very clearly that these industries were also to be controlled (Bandyopadhyay, 2009). Thus, this policy virtually enabled the government to widen ist jaws over the markets by widening the area to be under ist direct control and thus, giving more than the desirable role to the public sector. With this resolution it became apparent that there was going to be a huge expansion of the public sector and it was going to be the leader in the growth of the country and the private sector was only going to play the role of the younger brother. With in no time public sector expanded rapidly from
infrastructure to the basic and heavy industries, from power generation to chemical industries, from tourism to bread manufacture. Public sector was to be seen everywhere. The industries that were reserved for the private sector were regularly controlled by several acts like the Essential Commodities Act (1955). With this act wider powers were conferred on to the government to control the production, supply, distribution of the items declared as essential. Controls were exercised over iron and steel, coal, fertilizers, and cotton textiles. These controls were motivated by the desire to ensure allocation of adequate amounts to 'priority' sectors often at some reasonable price (for example the control over iron and steel, cement), some were motivated by the equity considerations (like motor cars), and the other reason was to prevent the inflationary effects. But the failure of such a policy was apparent as the priorities were not clearly defined and allocations were not made as per the objectives of the policy. Moreover, it so happened that the public sector commodities were sold to the private sector at lower costs whereas, no or little control was exercised on the private sector to sell their commodities, made with the help of the public sector good, at lower prices. As a result the producers of the public sector good were deprived of huge profits that meant loss of revenue to the government and the final consumer was also deprived of the benefits of the controlled prices (Bhagwati and Desai, 1970). With the emphasis of the large-scale sector on the capital-intensive techniques, to help create greater employment opportunities the small-scale sector was promoted to foster the growth of industries with the labour intensive techniques and to aid in the spread of industrialization to the rural and backward areas. However, with the passage of time the policy of promoting these industries changed to protecting these industries. With the industrial licensing policy of 1977 and 1980, these industries received further support in the shape of various concessions and protection from the large-scale industries.