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Industrialisation is very important for the economic development of a country. It has been noticed that countries which are industrially well developed have higher per capita income than those which are not.

Role of the industrial sector in the Indian economy

  • ƒModernises agriculture: By modernizing agriculture and improving its productivity, it not only provides latest tools and equipments, but also enhances efficiency in agriculture.
  • ƒGenerates employment: Industries accelerate the generation of employment opportunities. In 2009- 10, around 21.5% of the labour force is engaged in industries. (see chart 4)
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  • Contributes to GDP: Industrial sector has shown a remarkable increase in its contribution to the GDP from 12% in 1950-51 to 30% in 2011-12. (See chart 5)
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  • Contributes to exports: More than two-third of India’s export earnings are through manufactured goods.
  • Raises per capita income: When the industrial output is high, the income per head also increases. This is also indicated by the high GNP per capita in industrially developed countries which, however, are low in industrially developing countries.
  • Helps in economic growth: Industrialisation contributes towards the promotion of capital and consumer goods. This strengthens the economy and helps in attaining self-sustaining growth.
  • Meets rising demands: Agricultural goods experience falling demand over a period of time. However, demand of consumers towards industrial products seldom diminishes and industries meet their rising demand.
  • Strengthens the economy: The contribution of industries towards strengthening the economy may be listed as below.
    • …Industries producing capital goods enable the production of large quantities at low costs. This renders the economy as industrial in character and further strengthens its infrastructure
    • …It is the sole contributor towards the production of economic infrastructure goods like railways, dams etc.
    • …Supplies farm-implements, chemical fertilizers, etc., and provides transport and storage facilities to agriculture.
    • …Promotes self-reliance in terms of defence materials.

Classification of industries

The industries of a country can be broadly classified on the basis of their sizes, their end- use and investment.
On the basis of the size of industries
Industries may be classified into large industries, medium industries and small industries.
Large industries contribute largely to the country’s index of industrial production. They include
  • Mining and quarrying
  • ƒManufacturing
  • ƒElectricity, gas and water supply
  • ƒOn the basis of end-use
  • ƒThe end-use of output of the industries may be used to classify them as:
  • ƒBasic goods industries (minerals, fertilizers, cement, iron and steel, non-ferrous basic metals, electricity, etc.)
  • ƒCapital goods industries (machinery, machine tools, etc.)
  • ƒIntermediate goods industries (chemicals, plastic, etc.)
  • ƒConsumer goods industries: durable goods and non durables (like watches, cosmetics, etc.)
On the basis of investment
Micro, Small and Medium Enterprises Development Act, 2006 has broadly classified enterprises into those engaged in manufacturing and providing of services. Both categories have further been classified in micro, small and medium on the basis of their investment.
  • ƒManufacturing sector units with investment upto ₹ 25 lakh are called micro enterprises, between ₹ 25 lakh and ₹ 5 crore are called small enterprises and between ₹ 5 crore and ₹ 10 crore are called medium enterprises
  • ƒService sector units with investment upto ₹ 10 lakh are called micro units, between 10 lakh and ₹ 2 crore are called small enterprises, and between ₹ 2 crore and ₹ 5 crore are called medium enterprises

Pattern of industrial development

The development in capital goods industries, diversification in manufacturing products, growth of technology oriented industries and expansion of small scale industries are indicators of overall development in this sector. The major aspects that signify the performance of the industrial sector are
Industrial growth
The industrial growth fluctuated during the period 1951 to 2010- 11. While the first three planning periods (1951-65) saw a stable growth rate of about 8%, it declined sharply to 4.1% in the next 15 years after which favourable changes in circumstances led to push this figure up to 7.8% between 1980 and 1991. However, industrial production grew only by 0.6% during 1991-92 and 4% during 1992-93 after which there has been improvements in this sector. The annual average growth during 1992-2000 was 6.2%. It slowed down to 5% in 2000-01 and further to 2.7% in 2001-02. This fall in growth rate can be attributed to poor domestic demand for intermediate goods, low inventory demand for capital goods, high oil prices and existence of excess capacity and infrastructural constraints. 2002-07, under the 10th plan, had targets of 10% growth, while the 11th seeks to achieve 8.5% growth p.a in the GDP. This implies that the targeted growth rate of industries is 10% p.a and manufacturing at 12%. While the first half of 2007-08 saw a high growth rate of 8.5%, it fell drastically to 2.4% in 2008-09. It further improved to 10.5% in 2009- 10. This resurge is a result of increase in GDP, high credit flow to industry, growing scope of Indian market, etc.
A study of the industrial structure between 1965 and 1980 reveals the presence of retrogression. This implies that the rate of growth of consumption goods meant for the elite class (including beverages, watches, perfumes, etc.) were much higher than that of the goods meant to meet the requirements of the mass of our population (including goods such as cotton, coal, etc.). The deceleration in the growth rate and presence of retrogression may be attributed to the following causes.
  • ƒBiased developmental programmes for very large and very small industries, leaving the medium sized industries neglected
  • ƒThe priority given to industry, level of domestic demand and per capita income were low. This led to the capital employed per worker in the industry to be low
  • ƒHigh dependence on imports for capital goods
  • ƒPoor performance of agricultural sector
  • ƒFall in real investment in public sector
  • ƒFall in import substitution
  • ƒRegulation and control over private sector (through industrial licensing, MRTP Act, high taxation, price and distribution controls etc.)
  • ƒNarrow market for industrial goods in rural areas

Growth of basic and capital goods industries

Since 1951, there has been a change in the structure of industry which is now inclined towards basic and capital goods and intermediate goods. This was based on the Mahalanobis model according to which, giving priority to basic and capital goods industries will enable to set up a strong base for development in future. This principle was used for over four decades. During the 2nd year plan, steel plants were set up in the public sector at Bhilai, Rourkela and Durgapur. Machine building, machine tools, ship building and fertilizers developed under the public sector. Growth of consumer goods industries Consumer goods industries, especially those producing goods for the elite-class, such as man-made fibres, textiles, cigarettes, motor cars etc. flourished. From 1991, the priority was in favour of intermediate and consumer goods over basic and capital goods which led to a sharp and quick rise in the output of consumer durables.

Growth of public sector

While there were only 5 units operating in the public sector, and had a total capital of around ₹ 30 crores, there were 248 units with a total capital of about ₹ 6,66,800 crores in March 2011. Indian industrial sector has a number of public sector giants such as ONGC, Indian Oil Corporation, Steel Authority of India, Bharat Heavy electrical, etc. Out of 248 Central Public Sector Enterprises (CPSE’s), 220 were in operation. 158 out of 220 Central Public Sector Enterprises (CPSEs) make profits. In 2009-10, their net profits were over ₹1,08,000 crores while the net loss of the remaining loss making units were about ₹ 22,000 crores in 2010-11.
Development in infrastructure
The infrastructural facilities of Indian economy developed to a great extent. It included the growth in various segments of infrastructure like power generation, energy sources, transport (road and railways) and telecommunication. Modernisation and expansion were undertaken through railway electrification and dieselisation, extensive discovery of petroleum and gas reserves, nationalisation and development of coal mining, manufacture of heavy electrical equipment, electricity grids, development of electronic telephone exchange and expansion of port facilities for import and export. Financial institutions like LIC, IDBI and commercial banks supported industrial finance to a great extent.
Broad-based and modernized industrial sector
Non-traditional industries like those producing chemical, engineering or electrical goods gained more prominence than traditional industries like those producing textiles. This had widened the range of goods we produce and improved our production capacity.
Emergence of large business houses
In 1951, only two large business houses existed, which were Tata and Birla. However, there was substantial development, both in terms of the number of such large business houses and their assets. Now there are about 80 business houses such as Reliance, Bajaj, Thapars, Mafatlal,, Kirloskars, Shriram, Walchand, Singhania, and so on, who have broken the monopoly of Tata’s and Birla’s.
Research activities
The Council of Scientific and Industrial Research initiated the establishment of a number of research laboratories. Research and development facilities were promoted in both, public and private sector units. Foreign technical collaboration enabled the exchange of technological know-how. Information and communication technology, space research, nuclear technology and electronics developed substantially leading to a high ranking of India in terms of technological talent and manpower.

Growth of small-scale units

With a low and fixed investment and comparatively small work-force, small scale industrial units produce a relatively small volume of output of goods and services. The growth in small-scale and cottage industries in India can be highlighted as follows:
  • ƒThere was a faster growth rate in the small-scale sector than in the large scale sector. The production in small scale and cottage industries grew at 10% p.a. Micro, Small and Medium Enterprises (MSMEs) contribute to 45% of the gross value of output in the manufacturing sector
  • ƒThere was a remarkable increase in the number of registered and unregistered small-scale units from 16,000 units in 1950 to 5.30 lakhs in 1981-82 and 30 million MSMEs in 2010-11
  • ƒIt employed 73 million persons in 2010-11
  • ƒIt contributes to 40% of the total exports
  • ƒThey produce a wide range of products including simple and sophisticated engineering products, electrical, electronics, chemicals, plastics, steel, cement, textiles, matches, and readymade garments
  • ƒThey meet the requirements of medium and large units for materials and components
  • ƒThey provide a means of living to artisans, sustain the viability of a large number of villages and towns, enhance the quality of life, provide fine handicrafts and pieces of art and project the heritage of India
  • ƒMany of these industries manufacture and ensure availability of consumer goods of mass consumption
  • ƒSmall scale industries have an employment generating capacity per unit of capital at over 8 times of that of large industries and an output generating capacity per unit of capital at 3 times larger than that of large industries. For example: For 10 lakh investment, SSI generate 14 employment opportunity as against 2 by Large Manufacturing units

Problems of industrial development in India

  • ƒUnable to achieve targets: The achievements in the entire period of planning were below the set targets, except in a few years. The average industrial growth rate from 1951 to 2011-12 was 6.2% as against the target of 8% p.a
  • ƒLow utilization: Some of the most important industries have been underutilized. The factors responsible for underutilization of capacity are in indiscriminately grabbing of capacities by private enterprise, demand short-falls, over-optimistic demand projections, bottle-necks in supply, labour problems and deliberate underutilization with the objective of creating shortages to earn more profits.
  • ƒInadequate infrastructure: Inadequate transport facilities, frequent power failures and poor condition of roads have pointed out at the absence of world class infrastructure and have hampered industrial growth.
  • ƒRising capital-output ratio: The incremental capital output ratio (ICOR) which was 2.95 during the 1st plan increased to 3.9 during the 7th Plan and further to around 4 during 8th, 9th and 10th plans. For instance, inorder to produce output worth one lakh, SSI requires an investment of 48,000/- where as Large scale industries requires only 43,000/-.
  • ƒHigh cost: The costs and prices of manufactured goods and services in India are generally higher than the international price levels due to import substitution, government protection to indigenous industries, monopolistic tendencies in substitution, etc.
  • ƒInsufficient generation of employment: The proportion of employment generated is much below the rate of investment. Factory employment engrossed only 2% of the labour force in 1980. There has also been a decrease in employment generation through industrialisation over the following decades. Even labour intensive manufacturing sub-sectors like leather, food products, jute and leather products failed to generate adequate employment in the recent years.
    While employment generation is a major objective of five year plans, direct employment has not been generated to meet the requirements, although indirect employment may have been generated in ancillary sectors.
  • ƒLow performance of public sector: While the huge public investment has led to a growth of the public sector, there has been unsatisfactory performance with regard to production and profit. Many of the PSU’s incur heavy losses while the profitability of a large proportion of the rest is low. The net losses of the 62 loss making units was 22,000 crore rupees in 2010-11 as compared to 14,600 crores in 2008-09.
  • ƒSectoral imbalances: All sectors of the economy are to be developed in a coordinated form. However, inadequate support from agriculture and infrastructure has hampered industrial growth. Also, the input-output relations between industries like steel and machine building, petro-chemicals and fertilizers, have to be harmoniously developed.
  • ƒRegional imbalances: There is regional concentration of large scale industries in few states like Maharashtra, West Bengal, Tamilnadu, and Gujarat. These four states account for 50% of total factories and 50% of productive capital. This tendency to concentrate around urban conglomerates has been followed by small scale units as well.
  • ƒIndustrial sickness: Industrial sickness is found in all sectors of industries including small, medium and large units. There were 1.07 lakh sick units in March 2009, 96% of which were small units. This is due to financial mismanagement, demand recession, labour unrest, working capital shortage, cost escalations, etc. As on 2010, India has around 2 lakh sick units with an outstanding bank credit of ₹ 7,000 crores

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