Small Industries in India’s Industrialisation: Challenges and Survival

When India gained independence in 1947, Mahatma Gandhi envisioned a nation built on the strength of its villages-self-reliant communities thriving through cottage and small industries. This vision, however, took a sharp turn after 1947. The newly independent nation, eager to industrialize rapidly, chose a different path-one that prioritized large-scale, capital-intensive industries over Gandhi’s decentralized model. This decision set the stage for an ongoing tension between big and small industries that continues to shape India’s economic landscape today.

The post-independence shift: from Gandhi to Nehru 🔗

After independence, India’s economic planning was largely guided by Prime Minister Jawaharlal Nehru and statistician Prasanta Chandra Mahalanobis. The Second Five Year Plan (1956-61), often called the Mahalanobis Plan, marked a decisive departure from Gandhian economics. Mahalanobis, a close adviser to Nehru and a member of the Planning Commission, designed a growth model that prioritized investment in heavy and basic industries.

The Mahalanobis model was inspired by Soviet-style planning and the Feldman model used in the USSR’s Third Five Year Plan. It argued that for long-term economic growth, India needed to build a strong capital goods sector first-steel plants, machinery manufacturing, and heavy industries. Consumer goods production, the model suggested, could follow later once this industrial foundation was established.

Nehru believed this Western-style industrialization was essential for national strength and self-sufficiency. Under this framework, steel mills were established at Bhilai, Durgapur, and Rourkela. The Atomic Energy Commission was formed in 1957. The public sector expanded dramatically, and the government took direct control of key industries.

Why Gandhi’s model was sidelined 🔗

Gandhi had advocated for village-based industries, particularly khadi and handicrafts, as tools for rural employment and self-reliance. He saw large-scale industrialization as a threat to India’s social fabric and traditional livelihoods. But post-independence leaders viewed rapid industrialization as the only way to compete with developed nations and eliminate poverty quickly.

The prevailing belief among planners was that private investment would not flow into capital-intensive projects with long gestation periods. Therefore, the state had to lead industrialization. This approach created what became known as the “License Raj”-a complex system of permits and regulations that governed almost every aspect of industrial activity.

The unheeded alternative: the wage goods model 🔗

Not everyone agreed with the Mahalanobis strategy. In 1956, economists C.N. Vakil and P.R. Brahmananda of Bombay University published a sharp critique titled “Planning for an Expanding Economy.” They proposed an alternative approach known as the wage goods model.

Vakil and Brahmananda argued that India’s primary challenge was not a shortage of capital goods but a shortage of wage goods-essential consumer items like food, clothing, and basic necessities. Their reasoning was straightforward: at low levels of consumption, workers’ productivity depends on what they consume. Undernourished workers cannot be productive, regardless of how many machines are available.

Key features of the wage goods model 🔗

The wage goods strategy advocated prioritizing sectors that produced essential consumer goods-food grains, milk products, cloth, medicines, and basic services like healthcare and education. According to Vakil and Brahmananda, filling the “wage goods gap” was essential before pursuing heavy industrialization.

This approach aligned closely with Gandhi’s vision of decentralized, rural industrialization. It emphasized agriculture and small-scale industries that could generate immediate employment and address poverty directly. The model suggested that once basic needs were met and agricultural productivity increased, India could then pursue heavier industrialization.

However, at a meeting of the Panel of Senior Economists, 20 of 21 members approved the Mahalanobis plan. The wage goods model was rejected. According to Brahmananda, anyone who criticized the Mahalanobis model at that time was labeled “anti-national.” The result became evident by 1965-66 when India faced a severe food shortage crisis-precisely the outcome Vakil and Brahmananda had warned against.

Policy support for the small-scale sector 🔗

Despite the focus on large industries, Indian policymakers recognized the importance of small enterprises for employment generation. The Industrial Policy Resolutions of 1948, 1956, and 1977 all assigned a special role to small-scale and cottage industries.

The 1948 Industrial Policy Resolution, India’s first after independence, recognized cottage and small-scale industries as essential for utilizing local resources and reducing regional inequalities. The 1956 Resolution went further, stressing the importance of these industries for expanding employment opportunities and preventing concentration of economic power.

Government support mechanisms 🔗

Several measures were introduced to support small industries. The National Small Industries Corporation (NSIC) was established in 1955 under the Ministry of Micro, Small and Medium Enterprises. This agency provided comprehensive support including concessional credit arrangements, marketing assistance, raw material distribution, and technical training.

Other support measures included the development of industrial estates with common facilities, tax concessions and subsidies, reservation of certain products exclusively for small-scale manufacturing, and easier licensing procedures for backward areas. The 1977 Industrial Policy further strengthened protection for small industries by increasing the number of reserved items and establishing District Industries Centres to promote local entrepreneurship.

Survival in the globalization era 🔗

The economic landscape transformed dramatically with the 1991 economic reforms. Facing a severe balance of payments crisis, India embraced Liberalization, Privatization, and Globalization (LPG). Industrial licensing was abolished for most sectors, foreign investment limits were raised, and import restrictions were relaxed.

For small industries, these reforms brought both opportunities and existential threats. The protections that had shielded them for decades began to erode. Product reservations were progressively reduced, exposing small manufacturers to competition from large domestic firms and multinational corporations.

Challenges facing small industries today 🔗

The entry of multinational corporations into retail and product lines previously dominated by small enterprises has created intense competition. Many small units struggle with technological obsolescence-their equipment and processes cannot match the efficiency of larger, better-capitalized competitors. Cheap imports, particularly from China, have flooded markets, undercutting local producers.

Power sector reforms have added to the burden. In many states, electricity tariffs have increased significantly, affecting industries like powerloom textiles. The removal of subsidized inputs has raised production costs, making it harder for small units to remain competitive.

Access to finance remains a persistent challenge. While schemes exist, many small enterprises find it difficult to meet documentation requirements or provide adequate collateral. The result has been widespread industrial sickness, with numerous units shutting down or operating at reduced capacity.

The path forward 🔗

Today, small and medium enterprises in India face a critical juncture. The MSME Development Act of 2006 created a dedicated ministry and new support frameworks. Initiatives like Make in India and Startup India aim to strengthen domestic manufacturing. The NSIC continues to provide technical support through its network of Technical Services Centres, offering skill development, material testing, and common facility services.

Yet the fundamental tension identified by Gandhi decades ago persists. Can small industries survive and thrive in a globalized economy dominated by large corporations? The wage goods model, dismissed in 1956, finds echoes in current debates about inclusive growth and employment generation. As India seeks to become a manufacturing hub while addressing unemployment and inequality, the question of what role small industries should play remains as relevant as ever.

What do you think? Could a greater emphasis on small-scale industries and wage goods production have changed India’s development trajectory? In today’s globalized economy, what policies might help small enterprises compete effectively while preserving their role as major employers?

References

1. https://en.wikipedia.org/wiki/Feldman–Mahalanobis_model
2. https://en.wikipedia.org/wiki/P._R._Brahmananda
3. https://en.wikipedia.org/wiki/Industrial_Policy_Resolution_of_1956
4. https://en.wikipedia.org/wiki/National_Small_Industries_Corporation
5. https://en.wikipedia.org/wiki/Economic_liberalisation_in_India
6. https://msme.gov.in/