UNIT 2 INDUSTRY

Structure
2.1 Introduction
2.2 What is Industry?
2.3 Industrialization and Economic Growth
2.4 The Industry'and Agriculture Nexus
2.5 Industrializationin the World and in India
2.6 Industrial Development in India after Independence
2.7 Causes of Industrial Backwardness in India
2.8 Let Us Sum Up
2.9 References and SelectedReadings
2.10 Check Your Progress - Possible Answers

2.1 INTRODUCTION
The growth of industry is usually considered an important and essential element in
the process of economic growth. It is considered as the secondary sector of
development. It contributes substantially to economic growth of a country. In this
unit you willstudy details of industry sector.
After reading this unit, you will be able to
a explainthe meaning of industry
a discuss industrialization and economic growth
a establishrelationship between agriculture and industry
a discuss industrializationin the world and Indian context
a explain industrialdevelopment in India after independence
a spell out the causes of industrial backwardness.

WHAT IS INDUSTRY?
Industry, or the industrial sector, is one of the three broad sectors into which any
economy may be divided, the other two being agriculture and services.Aparallel,
but not identical division is between the primary, secondary and tertiary sectors of
the economy. In this alternative classification,the sector corresponding to industry
would be the secondary sector. In any period, each of the three sectors produces a
lesser or greater part of the total output of any country, and a greater or lesser part
of that country's labour force is engaged in the production of each sector. The
distribution of the total production of the economy (GDP) between the three sectors
is referred to as its output structure and that of the labour force as its employment
Sectoral Issues in Of course, in any economy, a very large variety of distinct production activities are
undertaken. In the usual or standard classification scheme followed the world over,
including in India, these are grouped into nine different activities or sectors. These
nine sectors, too, are referred to as industries, and the classification scheme is called
an industrial classificationscheme. However, it should be remembered that we are
not, in this unit, referring to this general use of the term, industry. In common usage
also, the term, industry is used in this broader sense, as, for example, when people
talk about the film industry, or, of the financial services industry. Rather, our concern
will be with the more specific use, wherein are included only some and not all of the
industries. The industrial sector, in this sense, can be divided into three broad
groupings.
The divisionofthe economy into agriculture-industry-servicesorprimary-secondary-
tertiary sectors is based on some criteriarather than being entirely arbitrary.Differences
in the nature of the products produced in these sectors, the distance of their production
process from the natural environment, etc, are some of these criteria. Agriculture
and mining are, thus, primary, because they involve extracting or harvesting the earth's
products, while the secondary sector involves further processing of some of these
primary products into other products. Tertiary activities cannot, however, be placed
in a similar continuum as a third stage of processing. Rather, they are chiefly
distinguished by the fact that their 'products' tend to be intangible (lacking a physical
form) and involve providing some kind of service to the user. Thus, the services
sectors do not produce goods like the other two major sectors do.
However, in practice, the demarcation of the industrial or secondary sector from the
other two sectors has never been an easy matter. For one, certain activities may
exhibit features of more than one sector. Mining for instance is a primary activity as
it involves the extraction of natural resources, and in a sense, is more primary than
agriculture because of the fact that the resources extracted are exhaustible. The
method of that extraction, however, is more akin to industrial production than
agricultural activity, and industry is also the major consumer of the mining sector's
products. At the other end are cases like the railways, whose 'product'(i.e., transport)
is intangible, like that of many services, and like many of them, its production and
consumption are simultaneous.The production activity of the railways, however, is
closer to manufacturing. Construction, too, has a similarly ambiguous character.
Whle this activity may result in something that has a physical form (like a building or
a bridge) it is not that final result, but the activity giving rise to it, which is like a
service rather than a good, that is more often sold by the sector as its product.
For these reasons, it is not surprising that there has been a lack of unanimity about
the sub-sectors to be included in the industrial or secondary sector. Thus, Simon
Kuznets included transport and communication in industry, while Colin Clark put
even construction in services.The general practice, promoted by the United Nations,
however, has been to include, within industry, the following four sub-sectors.
i. Mining and Quarrying - this covers the activity of extraction of natural
resources like metals, coal, and oil, and those like stone quarrying.
ii. Manufacturing- this coversthe activities involvingthe mechanical or chemical
transformation of organic or inorganic substancesinto products or the assembly
of manufactured components into products, whether these are done by power
driven machinery or by hand, and in a factory or at home. These include:
 production of food and beverage products like wheat flour, processed tea, and Industry
aerated drinks; wood products like furniture; textile products like yam, cloth
and garments; leather products like footwear and bags; paper and paperboard;
rubber and plastic products like tyres, tubes, and toys; mineral products like
cement and glass; refined petrol and lubricants; chemical products like synthetic
fibres, fertilizers and pharmaceuticals; production of metals like steel and
aluminium and metal products like steel utensils; machinery, equipment,and
apparatus like industrial machinery, transformers, televisions and computers;
and transport equipment like bicycles, cars, and trucks.
iii. Electricity, Gas, Water Supply-the economic activitiesrelating to generation,
transmission, and distribution of electricity; the manufacture and distribution of
gas; and the activities associated with collection, purification, and disttibution
of water.
iv. Construction -activities relating to construction ofbuildings(dwellings, office
buildings, stores, etc.) and civil engineering works (roads, bridges, ports,
irrigation works, power and industrial plants, pipelines, airports, etc.).
While India's National Accounts Statistics (NAS, CSO) contain data for all four of
these segments of industry, the Index of Industrial Production (IIP) covers only
three sectors - mining, manufacturing, and electricity. The construction sector is
excluded by the IIP, primarily due to constraints in data availability. There is also a
use-based classification of the industries included in the IIP, where they are divided
into four groups based on the nature of use of their products: basic goods (like
cement, steel, fertilizers, electricity, and diesel); intermediate goods (like textile
yams and fibres, electronic components, automobile components,paints and pipes);
capital goods (like pumps, compressors,motors, engines, industrial machinery and
machine tools, electric transformers, computers, and commercial vehicles), and;
consumer goods, with the last being further sub-divided into consumer durables
(like cars, motorcycles, televisions, and watches) and consumer non durables (like
paper, lamps and tubes, edible oils, sugar, and soaps).
It should be kept in mind that the different views about the specific composition of
the industrial sector notwithstanding, manufacturing. is universallv regarded as the

differences between the varieties of manufacturing industries can often also be more
important than those between manufacturing and the others.
In the Indian case, there is yet another division within the industrial, and particularly
manufacturing sectors,that is important. This is, the division between their organized
and unorganized components. The organized segment includes overlapping
components like public sector enterprises, registered factories, and joint-stock
companies in the industrial sector; the unorganized sector includes households and
unregisteredprivate enterprises engaged in industrial production.
Now that you have a fairly good idea about industries and their sub-sectors, please
answer the following question in Check Your Progress- 1.
Sectoral Issues in
Check Your Progress 1
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. What is meant by the industrial sector of an economy?
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2.3 INDUSTRIALIZATION AND ECONOMIC

GROWTH
Industrialization has historically been an ingredient element of the process that
Simon Kumets terms, 'modem economic growth' -the sustained growth of output
and per capita income of a country at a relatively rapid pace. This kind of growth
has been observed in the world only in the last two and a half centuries. The countries
which initially experienced such growth are those that are now termed developed
countries. These countries are spread mainly over North America and Western
Europe with Japan being the solerepresentative of this group fiom the Asian continent.
The developing countries, are primarily in Latin America, Africa and Asia, and in
which live more than three-fourths of the world's population, are those that were, at
least till the middle of the 20" century,bypassed by the process of modern economic
growth. Whether this was despite, or because of the fact that the countriesthat were
bypassed were often linked to those where such growth did take place (like India
and Britain) is an issue that is still being debated. We shall not enter into that debate
here. Suffice it to say here that the countries which came to constitute the group of
developing countrieswere, in the initial two centuries of modem economic growth,
mainly exporting primary commodities to the countries which experienced
industriahation.
The term industrializationis associated with the emergence and expansion of the
mechanized large scale factory system of production. It is a process characterized
by rapid growth of per capita output and an increase in the share of the industrial
sector in output and employment. It involves growth as well as structural change,
these two aspects being related to each other. The industrial sector's share in the
total output and employment increases during the course of industrializationbecause
production and employment in that sector grow faster than the average for the
economy as a whole.
What is the precise relationship between industrialization and rapid economic growth?
A typical pre-industrial economy is primarily an agrarian economy - one where
agriculture is the major sector of the economy. T h ~means
s that the larger part of the
labour force in such an economy is engaged in agricultural production, and most of
the output is produced in that sector.While such an economy also has an 'industrial
sector', its share in the economy is small and production is mostly of the simple
cottage industry type. In such an economy, the rate of growth of the economy as a
whole will greatly be influencedby the growth rate of the agricultural sector,because
of its sheer weight in the economy, and this weight will remain high so long as the
other sectors do not grow at a significantly faster rate. Therefore the maximum rate
Industry

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some point of time starts growing much faster than the agricultural sector then not
only would it increase its share in total output but it would also push up the overall
rate of growth of the economy beyond the ceiling set by the agricultural growth rate.
l b s is precisely what happens with an industrializationprocess and that is why there
is a link between industrializationand modem economic growth.
In this section, you read about industrializationand economic growth. Now, answer
the following questions in Check Your Progress-2.
Check Your Progress 2
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. What is meant by the industrializationof an economy?

2. What is the relationship between industrialization and the transition to rapid

economic growth?

All agricultural production requires land, and there is a maximum amount of land that
can be used for such production.Technological developments can, and have increased
the effective quantity of land that is available.Nevertheless, the land required to
produce output of some value in the agricultural sector is still typically many times
larger than the land required for a factory capable of producing industrial output of

on the quality of the land in the way that agricultural production is. In industry,
particularly manufacturing, the productivity of labour can be increasedby using more
and better machines. It is not so s i m ~ l ein agriculture. While technological

greater constraint on improving agricultural productivity.

Nature also constrains the range of produce that is available from the agricultural
sector, again subject to some increase through scientific and technical development.
l b s means that even if it were to be possible to raise the rate of growth of agricultural
production to a level much higher than the growth rate of population, beyond a point
Issue that additional output would have no use. As people's incomes increase, the range
ment
of products they consume also tends to increase. No one, with his or her belly full,
wants any more food, but would like to consume other things which cannot be
produced by the agricultural sector. The increasing diversification of consumption
accompanying increasing incomes, therefore, requires a corresponding change in
the production structure,whereby the share of non agricultural products increases.
This, in itself, implies to an extent an increase in the share of the industrial sector in
output. In addition, the industrial sector is also capable of producing a far greater
range of products than the agricultural sector -products that can be used to further
produce products, or products that can be consumed. Indeed, many of the
improvements in agriculture are themselves, dependent on products produced in the
industrial sector (e.g., fertilizers,pesticides, tractors, harvesters.).
In countries with high densities of population, like India,, there is another sense in
which agriculture cannot be the leading sector of economic development. Given
limits to the quantity of land and of the productivity of that land, there is a limit
beyond which the agricultural sector cannot sustainemployment. If ga&l employment
is to be provided to a large work force, expansion of non agricultural activities
becomes crucial.
Thus, it is clear that even though the agriculturalsector's product is not an exhaustible
natural resource, its primary character does constrain it in such a way that its declining
relative importance in the economy is more or less inherent to the process of rapid
growth. Acontinuous decline of this kind fits in withthe typical pattern of modem
economic growth exhibited by developed countries in the past. However, in this
typical pattern one also sees that while the non agricultural sectors become
correspondingly more important over time, the leading non agricultural sector driving
this process tends to be different in different phases. Initially it is the industrial sector
which drives this process so that its share increases in output and employment. This
is the period of industrialization. This is followedby a subsequentpost industrialization
stage where it is the services sector that increases its share, particularly in employment,
at the expense of industry. The movement of the relative shares of the three sectors
in output and employment accompanyingthe process of increasing per capita income
can be describedby the following figure (which shows it for employment).

I *,ar IC Urnh
There are various reasons why the services sector assumes great importance in the
later stages of modem economic growth which we cannot go into here. Suffice to
say here that the initial driver of the process is always industrialization,and the needs
of an economy catered to by its industrial sector cannot be met by the services
sector. The importance of industrialization for any country's economic development,
therefore, remains. Critically important for a successful process of industrialization
in an agrarian economy is the achievement of some breakthrough in agricultural
productivity. Why that is the case may be understood as follows.
Whatever may be the level of industrialization achieved, complete substitution of
agriculturalproducts by products of the industrial sector is not possible. Specifically,
a large part of the food requirement of the population and the raw material
requirements of many industries will remain dependent on the agriculture sector. If
industrializationinvolves the movement of a significantpart of the workforce to non
agricultural activities, those remaining in the agricultural sector have to become
productive enough to be able to produce a surplus of food over their own requirement,
sufficient to feed the non agricultural population. How can such a change in the
employment structurehappen unless labour productivity in agriculture improves?
The rapid growth of industry also means a rapidly growing demand for raw materials
produced by the agricultural sector (e.g., cotton). Ho-Ncan this demand be met if
agriculturalimprovement does not happen? Crucially, how can both the demand for
food and non food raw materials be met simultaneously,when the land constraint
does not allow increasing the amount of land devoted to one without reducing that

Industrialization is also a process that requires large initial investments from which
products and incomes flow in the future. Once an industrial sector is developed it
can meet the requirements for financing such investment internally - fiom the income
from past investments.But in the initial stages of industrializationthese investments
have to be financed by resources coming from outside the industrial sector, which
means that the agjcultural sector may have to generate the surplus for financing this
investment.A similar scenario characterizes the issue of the market for the products
of a rapidly growingindustrial sector.Unlike what is possible in small scale agricultural
production, the producers in any large scale industry, typically, cannot consume or
use more than a small fraction of the total volume of their own production. They
need to find a market for this surplus product outside their own industries in those
from whom they can acquire other products in exchange. When the industrial sector
is developed and diversified, each industry may be able to find this outside market in
other industries. That is, the different industries may serve as markets for each other.
In the early stages of industrializationhowever, such markets have to be found outside
the industrial sector and in a pre-industrial economy it is only the agricultural sector
that can meet the need. Its ability to do so in turn depends on its productivity and

So far, we have not brought foreign trade into the picture. It may appear at first sight
that even if agricultural productivity cannot improve, an economy could still
industrialize by importing the shortfall of agriculturalproducts and exporting its surplus
industrial products. However, it would require exceptional circumstances for a pre-
industrial economy to develop, in a short period of time, such a pattern of trade.
What is more likely is that it would initially need to export agriculturalproducts, and
obtain, in exchange, those industrial products (capital goods, etc.) requied for
I Sectoral Issues in
Development
development of its industrial sector. Thus, agriculture may also have to play the role
of foreign exchange earner for enabling industrial expansion. Only at a later stage,
I
when the industrialization process has proceeded some distance, could it become
an exporter of mainly industrialproducts. Foreign trade, therefore, does not provide
any escape from the requirement of improvement in agriculturalproductivity.
Thus, a low productivity, backward, primarily agrarian economy may need
industrializationto achieve rapid economic growth. But to achieve this, it must be
first ablk to make a breakthrough in the agrarian sector which would provide the
m
necessary support to the industrializationprocess. The possibility of this breakthrough
would lie in the fact that even though there are limits to raising the productivity of
agriculture, a backward agrarian economy may be far below the maximum level 1
possible at any point of time. A change in the agrarian context which would allow
that gap to be bridged
- quickly,
- therefore, is a crucial precondition for successful
incGtriali2ation.
In this section you read about the nexus between industry and agriculture. Now,
answer the following questions in Check Your Progress-3.
Check Your progress 1
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. Distinguishbetween industrializationand post-industrialization.
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2. Why is prior developmentof agriculture important for industrialization?
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2.5 INDUSTRIALIZATION IN THE WORLD AND IN

INDIA

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The first country in the world to experience a successful process of industrialization
was India's erstwhile colonial master, namely Great Britain. The British Industrial
Revolution began in the last quarter of the 18thcentury,just as Britain's empire in
India was being expanded under the aegis of the East India Company. Before that
revolution marked the beginning of factory production, India and China had been
the great manufacturing regions of the world and there was great demand for their
products in Europe. Indeed, the East India Company first came to India to buy
2A
Indian manufactured products. It has been estimated that in 1750 roughly 25% of
 the world's manufacturing production took place in the Indian subcontinent. However, Indudr
by the end of the 19" century, this share had come down to under 2%. During this
period, India's per capita level of industrialproduction fell to a sixth of its initial level.
In other words, India experienced in the 19" century a process that is quite the
opposite of industrialization, and indeed has been termed de-industrialization. To an
extent, at least this was the other side of Britain's industrializationprocess. The
leading sector of the British IndustrialRevolution had been the cotton textile industry.
This industryhad no prior existencein Britainwhere, traditionally, the woollen textile
T industry had been important, and was always heavily dependent on export markets.
In India, on the other hand, the traditional hand spinning and weaving based cotton
textile industry was the most important manufacturing sector. British industry was
3
able to grow at the cost of India's manufacturing sector by capturing the market that
was catered to by the traditional manufacturing activity in India. Yarn and cloth,
produced in British factories at much lower cost, displaced Indian textile products
not only outside India but also within. The latter was aided by the Indian market
being deliberately kept open by the British rulers through the policy of free trade.
The destructive impact ofBritish industrialization on India's traditionalmanufacturing
sector continued throughout the 1 9century.
~ In the second half of the century,this
was aided by the development of the railways. By connecting India's vast expanse
to ports where foreign-produced goods first arrived, the railways enabled the deeper
penetration of British manufactures into the Indian market. However, with railway
developmentproviding the impetus, the mid 19" century also saw the beginning of
modem factory production in India. The principal expression of this was the setting
up of a number of cotton and jute textile mills from 1854 onwards by Indian and
European businessmen. Thus, one can say that modem industry has a continuous
history in India that stretches back over a period more than one and a half centuries
long. During this periodthe industrial sector did not stand still. The growth of industrial
output has been accompanied by a constant evolution of the industrial structure over
time with the emergence of new industries and changes in the relative importance of
existing ones. Technological developments taking place in the world have also, in
one way or the other, regularly penetrated into the Indian industrial sector. Modem
factory industry has also impacted on the older traditional manufacturing industry,
transforming it in many ways. But, looked at in relation to its impact in transforming
India fium an agrarian to an industrial economy, the Indian experience stands out as
one of the most stunted cases of national industrialization. This is true whether we
compare India's experience with developed countries or with other important fellow
developing countries, which, like India, had not experienced significant industrial
development till the middle of the 20thcentury.
In the mid- 19'hcentury, much of the world was mainly agrarian. This was true for
even the developed countries in our group, the United Kingdom being the solitary
exception. In the United States in 1839, the agricultural sector's output wasmore
than double that of industry, and even in 1870,s1% of its workforce was engaged
in agriculture. The latter figure for Germany and France was also close to 50%.
Japan, at the same time, had more than 70% of its workforce in agriculture, and
Italy over 50%. In other words, seen at least in terms ofthe time of birth of modem
factory industry, India was not a particularly late entrant into the industrialization
process. At that time, the industrialization process of most countries had either not
begun or was in an incipient stage.
3
Sectoral Issues in While the decline of agriculture's share in output and employment has been consistently
Development
maintained, many countries have already passed the peak of the degree of
industrialization of their output and employment. Table 2.1 does not necessarily

I
show the peak values for the industrial sector's share in output and employment for
all countries, but only the peak and current values observable in data series that
extend over the last half century, or so. But it is adequate to establish that India has
not come even remotely close to traversing the distance others have managed in this
regard. The maximum share of industry in output of all the other 11 countries in the
group had, at the least, reached 35% and in most cases, including the late
industrializers, it had exceeded 40%. In India the same share never touched even s
30%, and in addition shows no signs of even heading in that direction.The comparative
picture of the degree of industrialization of employment between developed and
developing countries is a replication in inverted form of the story of agricultural
employment, including India's laggard position.
Table 2.1: Indicators of Industrialization of Selected Countries in Selected
Years

Source: World Bank, World Development Indicators, 2007 (WDI 2007), and 0ECD.Stat (httD:/
/www.oecd.org);

* Based on NSS data

In this section you read about industrialization in the world and the Indian experience
in expansion of industry and growth of industrialization. Now Check Your
Progress-4.
Check Your Progress 4
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. Why can we say that industrializationin India has been limited in comparison to
other major countries?
 Industry

, The overall record of Indian industrialization could be divided into two parts, with
I
independence from British rule serving as the dividing line. Indian industrialization
1 was, at no stage, a priority for the imperial government that was focused on ensuring
I 1 that India played its key role in propping up the British imperial order. Therefore,the
industrializationprocess lacked the cmcial backing of the state in its formativeperiod.
Therefore, the industrial develbY: -.it m colonial India remained extremely limited.
/ Between 1900-01 and 1946-47.the secondary sector's output grew at barely 1.5%
1 per annum. At independence,India was still a primarily agrarian economy, with the
agricultural sector accounting for over half the output and three-quarters of total
employment. The modern industrial sector, even after nearly a century of
development, accounted for only a small part of the economy. It also co-existed
with a surviving traditionalmanufacturing sector (or its modified version) that was as
large in terms of its contribution to national output, and accounted for a larger share
in employment. These are shown in Table 2.2.
I Table 2.2: Structure of India's GDP, 1948-49 (Percentage to Total GDP)

Source: S. Sivasubramonian, India's National Income in the 20thCentury (2000), Appendix

- Table 9 (d).

At independence,India's industrial sector was not only small but, also, very narrow.
The limited extent of industrial developmentin the colonial period expressed itself in
lop sided developmentwhere there existed important gaps in the production structure,
particularly in the case of capital goods and key infrastructure sectors.

/ After independence however, the situation was different and promotion of

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place makes for a distinction being made between the pre and post 1991 periods.
The economic policy of the Indian State was obviously not frozen between

1 independence and 1991. The central defining features of the pre 1991 strategy
were the imposition of restrictions on international economic transactions so as to
/ maintain a relative autonomy of India's economy from the international economy,
and the accordance of a major role to the state, both as a producer (public sector
i production) and as a regulator of private economic activities.Increasing openness

' ofthe economy to commodity and capital flows from outside, and the granting of
greater freedom to the private sector and the operation of market forces, are instead
1 the hallmarks of post- 1991 policy.
Sectoral Issues in
Development
2.6.1 Industries in India
Some of the major industries during the industrialization process in India are:
i. Iron and Steel: after independence, special attention was paid to the
development of the iron and steel industry. The second Five Year Plan gave top
most priority and during the period three large scale steel plants were established
in the public sector at Bhillai, Rourkela, and Durgapur. In the private sector
also, two plants namely, TISCO and IISCO were taken into hand.
ii. Jute Industry: thejute industry was one the oldest industry in India. Most of .
thejute industries were found in West Bengal.After partition majorjute growing
industries went to Bangladesh. The production ofjute textile increased from
837 thousand tonnes in 1950-51 to 1392 thousand tonnes in 1980-81 and 1

further to 1430 thousand tonnes in 1990-91.

iii. Textile Industry: the textile industry is the largest industry in modem India. It
contributes 20 percent of total industrialoutput and provides employment to
about 17million people. It also contributes 30 percent to total value of exports.
iv. Sugar Industry: the sugar industry is also an importantindustry in India. Sugar
industrieswere initially established in Bihar and Uttar Pradesh. However, in the
last three decades,the industry has developed at a faster rate in Maharashtra,
Andhra Pradesh, Karnataka, and TamilNadu. A significant fact about the sugar
industry in India is that most of the sugar mills are in the cooperative sector.
v. Cement Industry: the manufactureof cement was started in Madras in 1904.
This industry operates mainly in the private sector.In 1981,government allowed
private companies to establish mini industries. Most of the cement plants in
India are located in Andhra Pradesh, Karnataka, Madhya Pradesh, Gujarat
and Rajasthan.
t
vi. Engineering Industry: in the Second Five Year Plan which laid emphasis on
industry, a large part of investment in the industrial sector was earmarked for
engineering establishments. As a result massive investments were made in the '+

heavy and capital goods industries. There industries are found both in the public
and private sectors. Some of these are: The Bharat Heavy Plate and Vessels
Ltd. (BTTPV), Bharat Pumps and Compressors Ltd., Triveni Structurals Ltd.,
Bharat Wagon and Engineering Co. Ltd.
vii. Food Processing Industry: India is the world's second largest producer of
food, next to China. However, food exports accounts only 1.5 percent of
international food trade. There is scope for large investment in food and food
processing industries. Government is now encouraging private investment in
the food processing sector. India's food processing sector covers fruit and
vegetables; meat and poultry, milk and milk products, alcoholic beverages,
fisheries, plantation, grain processing, etc. States like Puqjab, Andhra Pradesh,
Madhya Pradesh, Maharashtra, and Haryana are doing better in the food
processing sector.
viii. Small Scale and Cottage Industry: small scale and cottage industries play
an important role in India's economy. This sector accounts for 35 per cent of
the value added by the entire manufacturing sector, 6.9 per cent of the net
38
 domestic product and 30 per cent of the country's exports. The Second Five Industry
Year Plan emphasises the role of small scale and cottage industries on the
following grounds
(i) generation of employment opportunities
(ii) an equal distribution of national income
(iii) mobilizationof capital
(iv) mobilizationof entrepreneurial skills
(v) regional dispersal of industries.

2.6.2 Industrial Growth Trends

The pace of expansion of the Indian e c o n ~ ~ mandy of industrial production after
independence was considerably more rdpid than in the first fifty years of the 20th
, century. But post-independence industrialization in India was marked by an inability
to achieve prolonged spells of rapid growth.Apart from the year to year fluctuations
in growth, there were also different trends in different phases.
As Table 2.3 indicates, three phases are distinguishable in the post independence
and pre liberalization period. The first phase corresponding to, roughly, the first
three five year plans saw an acceleration in industrial growth which was rudely halted
in the mid- 1960sin the background of two successive droughts and military conflicts.
Industrial growth slackened and then began a period that has been referred to as the
decade of industrial stagnation. Industrial growth started reviving from the late 1970s
and the next decade, again, saw reasonably rapid growth. This positive growth
trend appeared initially to receive a further impetus from liberalization in the early
1990s. However, in the secondhalf of the 1990s, industrial growth again slackened
. for a period of about six years before rebounding from 2003-04 onwards. This
growth has however again been halted in the aftermath of the global economic crisis,
with industrial growth in 2008-09 being reduced to just 3.8% and manufacturing
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growth to a mere 2.4%. In other words, the unstable nature of Indian industrial
growth has survived the transition to a liberalized economy.
Table 2.3: Annual Average Rates of Growth Real GDP in India (Per cent
per annum)

1950-51 1965-66 1980-81 1991-92 1997-98 2003-04

to to to to to to
Sector 1964-65 1979-80 1990-91 1996-97 2002-03 2007-08
Minlng &
Quarrying
Manufacturing
5.59 3.33 7.97 3.87 3.97 6.02
,
Electricity, Gas
& Water Supply 11.5 1 7.89 8.58 7.68 4.50 5.74
Construction 6.72 2.80 4.41 3.37 6.92 13.68
- - -

Industry 6.75 4.04 9.69

Source: Central Statistical Organization, National Accounts Statistics (CSO, NAS)

39
Sectoral Issues in It can be also seen that the manufacturing sector's growth trends mirror the overall
trend observed since independence. The electricity sector on the otherhand generally
grew faster in the early post independence period, with its growth being substantially
slower after liberalization. Construction activities, on the other hand, appeared to
have experienced accelerated growth since the mid 1990s,with this growth being
exceptionallyhigh in the most recent period. The parallel movements in the growth
of manufacturing and industry as a whole is not surprising in view of the fact that
manufacturinghas always accounted for a largepart of the industrial sector. However,
particularly since the mid 1970s,its weight in the industrial sector has been declining
+
- it accounted for over 75per cent of industrial value added in 1950-51 and about
73 per cent in 1974-75,but this share came down to only 55 per cent by 2007-08.
In recent years, the segment within industrywhich has raised its share considerably
is construction. In the case of electricity, on the other hand, a consistent trend of
increase in its share, which went up from 1.64 per cent in 1950-51 to 10.90 per
cent in 200-01, has been sharply reversed so that its share came down to just 5.97
per cent in 2007-08.

2.6.3 Structural Change in Manufacturing Output

The one change that did unambiguously accompany the growth of India's
manufacturing sector after Independence was that structure of industry. Though the
process was not entirely a linear one, the general direction after Independencewas
towards greater diversificationin manufhcturhg activities, and a decline in the relative
importanceof relatively simple, technology-based,lightmanufacturing activities.Much
of this change, which meant that India's industrial sector came to be in a position to
produce most manufactured products, had been achieved before the onset of
liberalization.
The organized or, registered manufacturing sector reflected the structural change to
a greater extent than unregistered manufacturing. Much of its growth, after
Independence, was accounted for by industry groups which had just about emerged
towards the end of the colonial period. As shown in Table 2.4, manufacturing
industriesaccountingfor over 80 per cent of the manufacturing value added in 2007- -
08 had a share of under a third in 1950-51. The most dramatic decline in relative
importance was in the case of textiles, the largest segment at independence. This
decline in the relative importance of textile industries in organized manufacturing in
part however was the result of a major shift in textile production (of fabrics) fi-om
organized textile mills, mainly to what is called the powerloom sector, which mostly,
consists of unorganized sector units. At Independence, the major part of cloth
production came fiom mills. By the end of the 1980sthe powerloom and handloom
sectors came to account for a share of 85 per cmt and mill production of cloth was
barely half of the levels in the 1950s.
 Table 2.4: Composition of Gross Value Added of Registered Industry

Manufacturing in India at Current Prices (Percentages to Total)

Manufacturing Industry 1950-51 1990-91 2007-08
food products 15.62 8.10 6.37
- beverages and tobacco products 2.84 2.37 4.03
- - -

textile products 42.60 13.47 6.67

leather & fur products 0.8 1 0.89 0.40
wood and wood products,
r hrniture, fixtures, etc. 0.81 0.39 0.27
paper and printing, etc. 5.07 4.27 2.04
Total 67.75 29.50 19.80
rubber, petroleum products, etc. 2.64 8.22 10.34
chemical and chemical products 7.30 14.63 20.57
non-metallic products 3.45 5.47 4.47
basic metals 4.67 12.85 17.88
I metal products and machinem I
3.04 I
1 1.20 1
8.25
I
I electrical machinery 0.8 1 7.01 7.46
other manufacturing 2.23 3.47 4.53 '
transport equipment 7.9 1 P
6.69
Total 32.05 70.50 80.20
Source: CSO. NAS

Despite the shift in cloth production to the unorganized sector, the relative share of
traditional industries has declined even in the unorganized manufacturing sector.
Industries like textiles, food products, and wood products constituted the large bulk
of the sector at independence,but by now more than 56 per cent of the unorganized
r manufacturing output is accounted for by other industries.In other words, structural
changehas occurred even in unorganizedmanufacturing and in the same duection as
in the organized segment.
L

(a) Organized and Unorganized Sectors

The organised sector comprises of enterprises for which the statistics are available
regularly from the budget documents or reports, annual reports in the case ofpublic
Sector, and through the Annual Survey of Industries, in the case of registered
manufacturing. On the other hand, the unorganised sector refers to those enterprises
whose activities or collection of data is not regulated under any legal provision and
/or which do not maintain any regular accounts.Non availabilityof regular information
has been the main criteria for treating the sector as unorganised. This defmition helps
to demarcate organised &omthe unorganised.For example, the units not registered
under the FactoriesAct, 1948 constituteunorganized component of manufacturing
as these are not regulated under any Act. In the case of sectors like trade, transport,
hotels and restaurants, storage and warehousing, and services, all non public sector
operating units constitute the unorganised sector. However, the enterpriseb covered
under theAnnua1Survey of Industries do not fall under the purview ofthe unorganised
Within the industrial sector, the unorganized component is relatively large only in
manufacturing and constructionactivities, its share in the other two segments being
somewhat marginal though increasing in mining and quarrying. In construction,
typically, half to more than half of the domestic product has been generated by
unorganized constructionactivities.Within theunorganized industrial sector, the size
of the constructionsegment seems to be fast catchingup with that of manufacturing
which till now has been the most important component.
At Independence, as mentioned earlier, the unregistered manufacturing sector was
larger than the registered manufacturing sector. As far as output distribution is
concerned, the picture steadily changed thereafter as the registered segments share
increased (Table 2.5).Currently, the registered segment's value added is nearly two
and a half times that of unorganized manufacturing. This reflects a deep imbalance
within the manuficturingsector since it is unregisteredmanufacturingwhich is employs
the major part of the industrial labour force.Unregistered manufacturing also accounts
for a large part of the increment in manufacturing employment. Organized
manufacturingemployment, on the other hand, has been stagnant for a long time.
Table 2.5: Distribution of manufacturingValue Added between Registered
and Unregistered Segments (Percentage Shares)
- - -

Manufacturing
Segment 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2007-08
Registered 46.78 . 51.35 56.52 55.99 65.07 66.33 69.29
- - - - - - -
Unregistered 53.79 48.95 43.46 44.01 34.93 33.67

Source: CSO, NAS

(6) Public and Private Sectors

At Independence,there were very little industry established in the Public Sector.

The post-Independence strategy, however, accorded the public sector an important
role in the developmentof the certain key industries,includinginfrastructureindustries,
and this set the stage for an expanding public sector presence in industry. In the
initial period after Independence,this was mainly public investment dnven and did
not involve nationalization of industries. The growth of public investment,however,
slipped after 1965but the period immediately succeeding its deceleration also saw
the high tide ofnationalization. This process covered, apart from banks and general
insurance, the mining industries and the oil sector. Manufacturing activity was largely
excludedfrom the ambit of nationalization.However,there were government takeova
of private companies in the textile and engineering industries, mainly of those that
had turned chronically sick, a process that continued up to the early 1980s.As a
result of all of these, the public sector presence in the industrial sector increased
more or less consistentlybefore liberalization,in all segments of industry, though it
was in the mining and electricity sectors that this presence came to be an overwhelming
one (See Table 2.6).Manufacturing and construction remained largely the domain
of private sector units. After liberalization the trend of increasing public sector share
was been reversed in all segments of industry as the focus shifted to privatization.
I Table 2.6: Share of Public Sector In Output of The Industrial Sector Industry
I
(Percentage)
Industry
Segment 1960-61 1970-71 1980-81 1990-91 2000-01 2007-08
Mining &
Quarrying 10.73 25.38 73.74 87.59 74.81 76.66
Manufacturing 2.61 9.53 13.11 20.23 12.48 13.08
Electricity, Gas
& Water Supply 73.63 90.85 56.89 116.71 105.70 101.21
Construction 7.72 7,81 16.21 15.99 14.63 8.63
Industry 6.05 14.06 20.90 33.74 27.12 22.88
Source: CSO, NAS

Note: The more than 100% share of the public sector in the electricity sector in
some years is made possible by the use of different methods by the CSO to calculate
the value added in such activities for the economy as a whole, and for the public
sector. Obviously the actual public sector share cannot exceed 100% and the figures
shown in the table should be taken as showing the broad trend in these shares rather
than their precise values.
In this section you read about industrial development in India after independence.
Now answer the following questions in CheckYour Progress-5.
Check Your Progress 5
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. What are the two main features, one negative and the other positive, of Indian
industrial development since Independence?

2. Why does the rising share of the organized sector in manufacturing sector output
reflect an imbalance?

We have seen the limitednature of India's industrializationand how industrial growth

in India after independence has been characterized by instability.This instability has
remained a persistent feature, even though many other things in the context of
industrialization have changed in a major way over the six decades after
Independence. Let us briefly list these changesbetween the early post independence
period and the current phase of the Indian economy.
i At the time of Independence, a highly unstable and slow growing agricultural
sector was the major sector of the economy. The industrial sector in comparison
produced only 30 per cent of the output produced by agriculture. By now, the
services sector,which grew steadily and at a very high rate, replaced agriculture
as the largest sector of the Indian economy. The industrial sector, too, produces
one and a half times what agricultureproduces. Within the manufacturing sector,
significant change has occurred in the structure so that industries, like the textile
industries and food products industries which are dependent on raw materials
produced by the agricultural sector, have declined in relative importance.
ii At the time of Independence, India's savings rate and therefore, its capacity to
undertake the investments required by the industrial sector was very limited -
savings, as a percentage of GDP was under 10 per cent. At the same time
investments were also very critical in view of the narrowness of the industrial
sector -given the inter-linkagesbetween industries the growth of many industries
depended on others being able to grow correspondinglyto provide the necessary
inputs and capital goods. Most of the gaps in the industrial structure were in
heavier industries and infhstructure industries which required large investments.
In contrast, today we have a situation where, not only is the industrial structure
much broader, India's savings and investment rate have touched historically
high levels, close to 35 per cent.
...
N. After Independence,the economic policy adopted by the Indian state involved
a number of restrictions on the private sector and the free play of market forces,
includingrestrictions on imports and foreign investment.After liberalizationthere
has been a change in the opposite direction.
2.7.1 Causes of India's Industrial Backwardness
The subject of the reasons for India's persistent industrial backwardness is a more
controversial one. In the literature on Indian industrialization one can find many
diffferet explanationsbeing offered at differentpoints of time. One kind of explanation,
which has also been ajustification for liberalization,laid the blame for India's industrial
difficultiesafter independenceon the doors of the restrictive economicpolicy adopted
after independence. It was argued that this thwarted competition and generated
inefficiencies in the industrial sector, and did not allow Indian industry to take
advantage of export markets in the manner that other countries in East and South
East Asia did. Two other shortcomingsat the level of policy may, instead, offer more
reasonable explanations for the long runlimitations in Indian industrialization-these
are the failures on the agrarian front, and in sustainingpublic investment growth.
Earlier, we mentioned the importance of agrarian change for industrialization.In
India the kind of agrarian breakthrough typically associatedwith industrialization
never happened. In the colonial period, the agrarian sector had been the principal
base for India's exports, which financed not merely its imports of industrial products,
but helped maintain a recurrent export surplus. The agrarian sector had also provided
a substantial part of the state revenue for a long time and financed the unilateral
 such exports and the surplus for expanding industry was no longer available after Industry
independence.
There are many ways in which agrarian backwardness held back industrialization,
some more important in some phases than in others. One important way that has
been of a long term nature is the holding back of the development of a large domestic
market for industrial products. In India, since a large part of the population derives
its livelihood from agriculture, low average incomes coupled with inequality in the
distribution of agricultural income have meant the exclusion of a large part of the
population from the market for industrial products. The consequent narrowness of
the domestic market has had two W e r implications.One is that it has not adequately
provided the base on which exports of manufactured products could have been
'
developed over time. Second, the dependence of the industrial sector on a narrow
market provided by the relatively well-to-dc, has also made the industrial structure
more biased towards capital intensik, ,-., Action than it need have been, since the
rich demand relatively more of such products. This has reinforced the market
constraint since large scale employment in industry, which could have created an
internal market within the industrial sector, has not materialised. These difficulties
associated with agriculturalbackwardness still persist. Therefore, despite the fact
that relative to industry and services the importance of agriculture in total output may
have declined, the agricultural sector may still hold the key to a successful
industrializationprocess in India.
Investment, on one hand, is an expenditurewhich creates demand for the products
produced by others.At the same time, investment also creates the capacity to produce
and supply products to others. The difference between private and public investment
lies in their motivation, and this makes for complementarities between them. Private
investment is undertaken only in expectation of a return or profit, and will be
forthcoming only when the investor expects a reasonable return within a reasonable
time. Private investment, therefore, tends to be less in many areas where large
investments with low returns and long gestation periods are required. These are
>
characteristic features of many infrastructure sectors in any economy, and even of
some heavier manufacturing industries in the early stages of industrialization. These
sectors are however critical for industrial growth and deficiencies in them also hinder
private investment in industries dependent on them for supply of necessary inputs.
Inadequate infrastructurecan not only limit the quantity of production possible, it
can also increase the costs of production of industrial products -which also limits
their competitiveness in internationalmarkets. Profit oriented private investment is
also susceptible to being depressed if investors do not anticipate that there will be
adequate demand for the products that would eventually flow fiom such investments.
Public investment,in such circumstances,can generate the demand for a wide range
of industries, which then induces private investment in them. Public and private
investments are, therefore, complementary and it is extremely difficult for a process,
driven entirely by private investment, to sustain itself over long periods of time.

2.7.2 Causes of Industrial Sickness of Small Scale Industries

(SSIs)
The small scale industries play an importantrole in industrial development.However,
many of them are victim of industrial sickness.A few important causes of sickness
are listed.
45
Sectoral Issues in 1. Lack of finance: finance is important for opening, maintaining, and sustaining
Development
industries. Lack of finance, along with other factors like inefficient working
capital management, absence of costing and pricing, planning, and budgeting
also affect SSI's.
2. Bad productionpolicies: the wrong selection of sites, production, inappropriate
plant and machinery, lack of quality control, and poor research and development.
3. Marketing: the third cause of sickness is related to marketing. The poor sales
techniques and branding also affect the proliferation of SSI's. .
4. Human resources: one of the important reasons for sickness of SSIs is non
availability of skilled manpower. Even if available, there is no provision for
human resource development.
In India however, the government has not been able to ensure adequate levels of
public investment for supporting the nation's industrialization effort. The only period
in which public investment grew somewhat rapidly was during the first three Five
Year plans. Once this growth slipped in the mid 1960s, it never really recovered and
this problem of inadequate public investmentplagues the Indian economy till today.
Inadequate public investment, in turn, has also reinforced the agrarian constraint
because somepart ofthis investment is that which contributes to improving agricultural
productivity (e.g., in irrigation).
In this section you read about the dynamics of industrial movement in India. Now
answer the following question in Check Your Progressd.
Check Your Progress 6
Note: a) Write your answer in about 50 words.
b) Check your progress with possible answers given at the end of the unit.
1. Give two reasons why India may still need industrialization.

2.8 LET US SUM UP

Though modern industry made its first appearance in India a long time ago, India's
industrialization has remained an incompleteone. Very limited industrial development
happened in the colonial period, since government policy remained oriented to a
different direction. After Independence, a conscious effort was made towards
promoting industrialization.While this succeeded in raising the level of industrial
development much beyond what had been possible under colonialism, there were
also critical shortcoinings in policy whch prevented the optimum level performance.
As a result, industrial growth took place in fits and starts and its transformative
impact on the Indian economy rcmained limited. Liberalization ofthe Indian economy
since the early 1990swas considered the panacea for India's industrial woes. But
Sectoral Issues in
2.10 CHECK YOUR PROGRESS - POSSIBLE
ANSWERS
Check Your Progress 1
1. The industrial sector in any economy encompassesthe activities of mining and
quarrying, manufacturing, production and distribution of electricity, gas and
water, and construction. Like the agricultural sector, and unlike the tertiary or
services sector, it is chiefly a producer of goods through furtherprocessing of
primary products or manufactured inputs.
Check your Progress-2
1. Industrializationis a process of rapid growth of per capita income accompanied
by an increasing share of the industrial sector in the economy's output and
employment. It is historically associated with the increasing use of machinery,
or the mechanization of production.
2. Rapid economic growth implies increase in output of an economy at a high
pace. Industrialization is associated with the transition of an agrarian economy
to such a trajectory because it lifts the maximum possible level of growth of
output beyond the levels previously set by the agriculturalsector's growth.
Check your Progress3
1. Industrializationrepresents the early stage of economic developmentwhen the
importance of the industrial sector in the economy increases at the expense of
the agricultural sector. Post-industrializationis a later stage when the relative
importanceofthe industrial sector declines after reaching a peak and the services
sector gains in importance.
2. A prior development of the agriculturalsector is important for industrialization '
because: a) agriculture has to provide food for the growing non agricultural
population; and, b) it has to, in the early stages of industrialization, provide a
corresponding supply of raw materials for the expanding industrial sector, a
surplus for investment, and a market.
Check your Progress-4
1. We can say that industrializationin India has been limited in comparison to
other major countries because the maximum levels attained by the share of the
industrialsector in total output and employment in India are considerably lower
than the peak levels of these in case of other countries.
Check your Progress-5
1. The main negative feature of industrial development in India after independence
has been the instability in it growth. The principal positive feature on the other
hand has been the structural change and increasingdiversification experienced
by the sector.
2. The rising share of the organized sector in manufacturing output reflects an
imbalance because the overwhelmingly and increasingly larger part of
manufacturingemployment is in its unorganizedrather than orgamed component.