Industry: Pattern & Structure of Growth, Major Challenges, Policy Responses | UGC NET Economics – Notes

Introduction

The industrial sector occupies a critical position in India’s structural transformation, contributing roughly 25-28% of GVA, with manufacturing alone accounting for around 13-17% depending on the year and base series used. Despite decades of policy emphasis, India’s manufacturing share has remained persistently below the level typically associated with successful East Asian industrializers like South Korea and China, giving rise to the widely debated concern of premature deindustrialization, a term popularized by economist Dani Rodrik and applied to India by scholars such as Arvind Subramanian. India’s industrial trajectory is thus often characterized as one of “services-led growth” bypassing a robust manufacturing-led transition, a pattern that departs from the classical Lewis model and Kaldor’s laws of growth, which emphasize manufacturing as the engine of productivity growth.

Pattern of Growth

The evolution of Indian industry can be traced across distinct phases. The pre-independence phase was marked by deindustrialization under colonial rule, as documented by economic historians like Amiya Bagchi and Bipan Chandra, whereby traditional handicrafts (notably textiles) were destroyed due to discriminatory tariff policy favoring British manufactured imports, alongside the drain of capital.

The post-independence phase (1950s-1980s) was shaped by the Mahalanobis strategy (Second Five Year Plan, 1956), which prioritized heavy and capital goods industries on the premise that building domestic capacity in machine-making sectors would generate self-sustained industrial growth. This was operationalized through the Industrial Policy Resolution of 1956, which classified industries into three schedules (public sector exclusive, mixed, private), establishing the foundation of the “license-permit-quota raj.” The Industries (Development and Regulation) Act, 1951 mandated licensing for establishing or expanding industrial units, creating extensive bureaucratic controls that later economists like Jagdish Bhagwati and Padma Desai criticized for breeding inefficiency, rent-seeking, and stunted competitiveness. Reservation of certain products for the small-scale sector (SSI reservation policy) further fragmented production, preventing firms from achieving economies of scale—a policy widely critiqed in later reform literature.

The crisis and reform phase (1991) marked a watershed, triggered by the Balance of Payments crisis of 1991, under which the New Industrial Policy (1991) dismantled large parts of the licensing framework, abolished the Monopolies and Restrictive Trade Practices (MRTP) Act‘s asset-size thresholds, opened sectors to Foreign Direct Investment (FDI), and reduced the list of industries reserved for the public sector from 17 to a handful (later further reduced). This period saw a shift toward market-determined industrial growth, though economists note that manufacturing growth in the 1990s and 2000s remained volatile and did not achieve the labor-absorptive, export-oriented dynamism seen in East Asia.

The post-2014 phase has emphasized manufacturing revival through flagship initiatives like “Make in India” (2014), aiming to raise manufacturing’s GDP share to 25% (a target subsequently pushed to later years given underperformance), alongside more recent Production Linked Incentive (PLI) schemes (2020 onward) targeting sectors such as electronics, pharmaceuticals, textiles, and automobiles to boost domestic manufacturing and reduce import dependence, particularly from China.