Backward Areas and industrial Policy

In the facilities location problems, whether multi-plant or single plant, the industrial policies of the governments are very important inputs in the overall consideration. In India, the industrial development of backward areas for balanced regional development of the country has always been emphasized. This has been attempted mainly through:

1. Licensing policy
2. Location of public sector projects
3. Investment subsidy
4. Concessional finance
5. Concession on income tax import duty etc and
6. Setting up of industrial estates

All the districts in the country have been classified into four categories:

A. No industry districts an ‘special region’ districts,
B. Moderately backward districts
C. Least backward districts, and
D. Non-backward districts

The A, B, and C categories are eligible inter-alia for subsidy on investment in fixed assets in an industrial unit, as given below:

Category Percent Subsidy Maximum Limit Per unit

A 25 Rs 25 lakh
B 15 Rs15 lakh
C 10 Rs 10 lakh
D not eligible for subsidy

Taking cognizance of the importance of infrastructural facilities, Government of India provides for one third of the costs of the development of infrastructural facilities in the ‘no industry’ districts, the remaining two thirds of the cost to be met by the concerned State Government. However, the maximum limit of Central assistance in this scheme is Rs 2 crore in a district. Even companies coming under MRTP have been provided some concessions if they locate new plants in category “A” and “B” districts. Government of India also proposes to help the “no-industry” districts by establishing a ‘nucleus’ plant in each such district, which would lead to a number of ancillary units. The State Governments give various incentives to industries so that they may locate their plants in the backward areas.

Notwithstanding such helpful measures from the governments, the backward area developed has to be very successful. More than half of the industrial licenses issued during the period 1975-79 had gone to the backward areas in the developed states. Fourteen cities and towns accounted for 60 per cent of total employment in the industrial estates in the country. While Madras City accounted pr 82 percent of employment in industrial estates in Tamil Nadu, Bombay and Pune accounted for 65 per cent of employment in industrial estates in Maharashtra, and similarly the cities of Ahmedabad, Baroda and Surat accounted for 60 percent in Gujarat. Regarding investment Subsidy, only 15 percent of the eligible districts accounted for 56 percent of the subsidy amount. Moreover, most of these district are situated close to large urban centers – such as Mysore and Dharmapuri near Bangalore, North Arcot near Madras and Medak near Hyderabad. In the case of the concessional finance provided by all India financial institutions (such as IDBI, IFCI, ICICI) only 22 of the 247 districts eligible for concessional finance received the total amount of concessional finance disbursed. It is worth noting that that most of these districts were in the developed states. Similarly there does not seem to have been a conscious effort to locate various public sector units in the backward areas, barring a few exceptions such as that of Hindustan Machine Tools, Bharat heavy Electricals Ltd and Indian Telephone industries.

Due to such performance of these governmental measures which seem to have been counterproductive the implementation of the backward area industrial policy has come under severe criticism. For instance: The so called emphasis on development of backward reasons via incentives to entrepreneurs, has enabled the State to provide subsidies to industry that it was not otherwise in a position to give. The policy for development of backward areas is no more than a red herring.

The above told is debatable. But the point is that there are a number of factors which influence the plant location decision and all these have not been considered in an integrated manner by the policy makers. The emphasis has been more on financial incentives. However, the amount of ‘pull’ generated by the large cities, already industrialized towns and other developed areas needs a deeper analysis by the decision makers in order to come up with suitable measures to counter these actors exerting the pull in a direction opposite that of the intended objective. The case of backward area development highlights the importance of the various issues – qualitative and quantitative, short term and long term, economic and behavioral – that influence the plant location decision. The line dividing ‘political’ issues and social and behavioral issues is not always clear.

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