78 years of freedom
This isn’t the primary time the federal government has tried to take action within the quest of Narendra Modi’s authorities to strengthen its home manufacturing sector. The truth is, the manufacturing sector has not directly been the main focus of presidency coverage, since 1956, not directly, for its comparatively modest success.
At independence and at the moment, the Indian financial system seemed very completely different from its current state, each by way of measurement and composition. On the time, agriculture was the overwhelmingly dominant driving power of the financial system, contributing about half of GDP, in line with information with the Reserve Financial institution of India.
In the meantime, the brand new manufacturing sector accounts for round 11% of GDP. At present, the companies sector has taken over the dominant function vacant by agriculture, however manufacturing stays largely the place it was.
The primary five-year plan (1951-56) centered on the concept of accelerating home financial savings, because it was estimated that increased financial savings would straight result in increased investments. Nonetheless, this coverage has fallen right into a basic drawback. The nation has not produced home capital items, so investments couldn’t be elevated considerably.
The second five-year plan based mostly on the concept of PC Mahalanobis (1956-61), and successive plans have sought to deal with this by growing funding within the capital items that produce the sector itself. The concept was to extend authorities funding within the manufacturing of capital items, whereas micro, small and medium-sized enterprises and medium-sized enterprises (MSMEs) would cater to the patron items market.
As economist Professor Aditya Bhattacharjea acknowledged in a paper revealed in Springer Nature, “As a result of long-term progress is seen as a strategy to cut back widespread poverty, this mannequin supplied mental justification for growing funding within the capital items sector in labor-abused international locations.”
So what follows is that each funding and manufacturing in equipment, metals and chemical industries exceed progress within the client items business.
The Mahalanobis mannequin didn’t incorporate insurance policies per business, however there have been a number of broad themes which have come to characterize India’s industrial coverage over the primary 30 years since independence.
The primary and most blatant theme was the most important function of the general public sector. The sense on the time was that not like what Modi authorities felt within the wake of the Covid-19 pandemic, the general public sector needed to do heavy lifting as personal sector investments wouldn’t be taking a load for a while.
The 1948 Industrial Coverage Decision (IPR) reserved the manufacturing of federal arms and ammunition, and new investments in a wide range of sectors, together with iron and metal, plane, ships, telephones, telegraphs and radio tools, have been saved because the unique area of central public sector companies.
The 1956 IPR got here after the historic Abadi Session of the Indian Nationwide Congress in 1955, increasing the reserved listing to 14 sectors. The driving ideology was for the federal government and the general public sector to tackle the “orderly top” of the financial system.
A second, equally essential theme of this thought course of was using licenses as a way to make sure that scarce assets have been allotted to precedence sectors.
Third, the idea that home industries should be protected against worldwide competitors, and this safety took the type of excessive tariffs – US President Donald Trump nonetheless seems to be in bother right now – and import licenses.
By 1980, the manufacturing share of India’s GDP had grown to round 16-17%. In keeping with some economists like Pulapre Balakrishnan, the true progress of the manufacturing sector took off from right here, not from liberalization in 1991, as usually envisaged.
They mentioned they have been on account of a number of coverage adjustments enacted by the federal government on the time. Permits automated enlargement of license capability as much as 25%, and produces different objects throughout the similar broad industrial class utilizing manufacturing licenses, and considerably eases cement and metal worth management.
The tip of the 1991 reforms and the resultant finish of the “Licensing RAJ”, opening up the financial system to the personal sector and worldwide competitors helped issues much more.
Sudden autumn
Nonetheless, there have been vital adjustments that yr as GDP manufacturing shares constantly declined for the subsequent decade. The principle purpose for this transformation was the unhealthy belongings (NPA) disaster within the banking sector. Financial institution lending in 2009-14 led to the buildup of unhealthy money owed revealed in 2015-18 after a banking sector asset high quality evaluation. This was the disaster and its fallout that financial institution lending to massive industries had successfully dried up.
This, coupled with the surplus capability of mortgage gas created in 2009-14, meant that firms didn’t should spend money on extra capabilities to fulfill demand, they usually couldn’t discover sufficient credit score in the event that they needed to speculate.
All of this was the elevated reliance on imports from China, successfully changing nearly all of Indian manufacturing into meeting and repackaging forces. In fact, the Covid-19 pandemic has severely hindered each demand and funding in India.
Subsequently, the efforts of the Modi authorities in India couldn’t stop the GDP manufacturing share from falling from 15.6% in 2015-16 to 12.6% in 2024-25.
One other drawback going through the Modi authorities, the entire earlier governments, was the necessity for a lot of reforms to advertise manufacturing on the state degree. Thus, the federal authorities has launched a land and labor reform framework that would probably enhance the scale of India’s manufacturing, however they’re holding on as most state governments aren’t working collectively.
In the meantime, the companies sector is transferring from power to power behind the IT growth. Subsequently, if companies accounted for 37% of GDP in 1950, this elevated to 42% from 1996 to 97. The acceleration has since been speedy, with the sector at present accounting for nearly 58% of GDP.
So, 78 years after independence, manufacturing nonetheless exists in India’s progress narrative, regardless of the enthusiastic efforts of the federal government. In the meantime, the companies sector is blossoming outdoors the federal government’s focus.
Printed – August 15, 2025 03:26 on
