India’s North Eastern Region (NER), comprising eight states – Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura – is a geographically distinct and culturally diverse area. Despite its rich natural resources, including abundant water, fertile land, forests, and hydrocarbon reserves, the region has historically lagged significantly in industrial development compared to the rest of the country. This disparity in economic progress not only contributes to regional imbalances but also impedes the overall national growth trajectory. The complex interplay of historical, geographical, socio-political, and economic factors has created a unique set of challenges that have persistently hindered industrialization in the North East.

The strategic location of the North East, serving as India’s gateway to Southeast Asia, offers immense potential for cross-border trade and economic integration. However, this potential remains largely untapped due to structural impediments. Understanding the root causes of this industrial backwardness requires a multi-dimensional analysis, going beyond mere economic indicators to encompass the deeply entrenched historical grievances, infrastructural deficits, and the efficacy – or lack thereof – of governmental policies designed to stimulate growth in this sensitive region. The assessment of industrial policies adopted over decades reveals a recurring pattern of well-intentioned initiatives often encountering hurdles in implementation, sustainability, and alignment with the unique ground realities of the North East.

Reasons for Lack of Industrialization in North East India

The persistent industrial backwardness of North East India can be attributed to a confluence of deeply entrenched and interconnected factors, ranging from its unique geographical characteristics to socio-political dynamics and historical neglect.

Geographical Isolation and Challenging Topography

One of the foremost impediments is the region’s challenging geography and isolation from the mainland. The North East is connected to the rest of India by a narrow strip of land, the “Chicken’s Neck” (Siliguri Corridor), which is highly vulnerable and economically inefficient for the movement of goods and people. Much of the region, especially states like Arunachal Pradesh, Sikkim, and parts of others, is characterized by rugged mountainous terrain, dense forests, and susceptibility to natural disasters like floods and earthquakes. This topography significantly increases the cost and complexity of establishing industrial units, transporting raw materials, and distributing finished products, making it less attractive for investors. The sheer logistical hurdles involved in developing robust infrastructure in such challenging landscapes compound the problem.

Inadequate Infrastructure Development

Critical infrastructure deficits are a major bottleneck. The region suffers from poor connectivity, both within its states and with the rest of India and neighbouring countries. Road networks are often underdeveloped, poorly maintained, and prone to damage from natural calamities. Rail connectivity is sparse, reaching only a few areas, and air cargo facilities are limited. More critically, the power sector is woefully inadequate, characterized by erratic supply, high transmission losses, and insufficient generation capacity despite immense hydel potential. Communication infrastructure, though improving, still lags behind national standards, affecting the flow of information vital for business operations. Waterways, despite the potential of major rivers like the Brahmaputra, remain largely underutilized for commercial transport. The absence of reliable, affordable, and pervasive infrastructure inflates operational costs for industries and deters large-scale investment.

Socio-Political Instability and Insurgency

For decades, the North East has grappled with various forms of ethnic conflicts, separatist movements, and insurgency. This prolonged period of socio-political instability has created an environment of uncertainty and risk, severely deterring both domestic and foreign private investment. Militant activities, extortion, bandhs (strikes), and inter-community violence have disrupted economic activities, destroyed infrastructure, and displaced populations. While the intensity of insurgency has significantly reduced in recent years, the perception of risk persists, making it challenging to attract long-term capital that requires a stable and predictable business environment. The diversion of state resources towards maintaining law and order also limits funds available for development projects.

Historical Neglect and Partition Effects

Historically, the North East remained relatively isolated during the British colonial period, receiving limited attention for industrial development compared to other parts of India. The partition of India in 1947 exacerbated this isolation. It severed crucial trade routes and economic linkages that the region had with East Bengal (now Bangladesh), disrupting established markets and supply chains for commodities like jute, tea, and forest products. This geographical truncation, coupled with India’s focus on heavy industries in other regions, led to further marginalization of the North East’s economic integration into the national mainstream.

Human Capital and Skill Deficit

Despite high literacy rates in some states, the region faces a significant deficit in skilled labour required for modern industrial operations. The education system often lacks vocational training and technical institutes aligned with industrial needs. This leads to a mismatch between available human resources and the demands of industries, forcing businesses to either import skilled labour from outside the region or face productivity challenges. Moreover, a lack of local entrepreneurial culture and risk-taking proclivity, partly due to over-reliance on government jobs and traditional agricultural practices, further inhibits indigenous industrial growth.

Lack of Capital and Investment

The scarcity of both public and private capital is a major constraint. Banks and financial institutions have historically been hesitant to lend in a region perceived as high-risk, leading to low credit-deposit ratios. Local entrepreneurs often lack access to formal credit and venture capital. Private investors from outside the region are wary due to the factors mentioned above, while public sector investment has often been insufficient, fragmented, or poorly managed, failing to create a significant multiplier effect. The absence of a robust financial ecosystem further stifles industrial growth.

Market Access and Demand Constraints

Industrial growth requires access to large markets for economies of scale. The North East’s internal market is relatively small due to low population density and limited purchasing power. Accessing the larger national market is hampered by high transportation costs and logistical challenges. While there is potential for export to neighbouring countries through the Look/Act East Policy, cross-border trade infrastructure and regulatory frameworks are still evolving. The limited local demand and difficult access to external markets make it challenging for industries to achieve profitability and scale.

Policy Implementation Gaps

While various industrial policies have been formulated for the region, their effectiveness has often been hampered by implementation challenges. Bureaucratic hurdles, corruption, lack of coordination among different government agencies, and frequent policy changes have created an unpredictable environment for investors. Incentives, while attractive on paper, sometimes fail to materialize due to procedural delays or are not sustainable in the long run, leading to premature closure of units.

Environmental Regulations and Land Issues

The North East is an ecologically sensitive zone, part of two global biodiversity hotspots. Strict environmental regulations, while necessary, can sometimes add to the cost and complexity of industrial projects. Furthermore, unique land tenure systems, particularly in tribal areas where land ownership is often communal or customary rather than individual and transferable, can make land acquisition for industrial purposes extremely difficult and time-consuming, adding a significant layer of uncertainty for investors.

Assessment of Industrial Policies Adopted So Far for the Region

Over the decades, the Indian government has initiated various policies and schemes specifically tailored to address the industrial backwardness of the North Eastern Region. These policies have evolved from generic incentives to more targeted, region-specific interventions.

Early Initiatives and General Policies (Pre-1997)

Prior to the late 1990s, industrial development in the North East largely fell under the ambit of general national industrial policies. These included various tax concessions, subsidies for transport, and credit facilities that were available to industries across the country, with some special provisions for industrially backward areas. The North Eastern Council (NEC), established in 1971, played a role in planning and coordinating developmental activities, including some industrial infrastructure projects. However, these early measures were largely insufficient to counteract the deep-rooted disadvantages faced by the region. They lacked the focused, comprehensive approach required to address the unique challenges of geography, connectivity, and socio-political instability. The capital subsidy and transport subsidy schemes, while providing some relief, did not fundamentally alter the investment climate or address structural issues.

North East Industrial Policy (NEIP) 1997

Recognizing the persistent backwardness and the need for a distinct approach, the Government of India announced the North East Industrial Policy (NEIP) in 1997. This marked a significant departure from previous general policies, as it was the first policy exclusively designed for the region. Key Features:

  • Central Capital Investment Subsidy: Up to 15% of the investment in plant and machinery, subject to a ceiling.
  • Central Interest Subsidy: 3% per annum on working capital loans for a period of five years.
  • Central Comprehensive Insurance Scheme: Full premium subsidy for fire insurance for new units.
  • Excise Duty Exemption: Full exemption from excise duty for a period of 10 years from the commencement of production.
  • Income Tax Exemption: Exemption from income tax for a period of 10 years.
  • Transport Subsidy Scheme: Enhanced transport subsidy for movement of raw materials and finished goods.
  • Development of Industrial Growth Centres: Focus on developing industrial infrastructure.
  • Specific Industries: Encouragement for thrust areas like food processing, bamboo, horticulture, and tourism.

Assessment of NEIP 1997: The NEIP 1997 was largely successful in attracting a noticeable number of industrial units, particularly in Assam and Meghalaya, due to the attractive fiscal incentives, especially the excise duty exemption. It led to some growth in sectors like food processing, pharmaceuticals, and consumer goods. However, the policy had several limitations. Many units were “footloose” industries, primarily set up to avail the tax holidays rather than for long-term sustainable growth. These units often had limited forward or backward linkages with the local economy. The benefits were primarily capital-based, not production-linked, leading to some instances of rent-seeking behavior. Moreover, the policy did not adequately address the fundamental structural issues such as poor connectivity, power deficits, skilled labor shortages, and socio-political instability, which continued to deter genuine, long-term industrial investment.

North East Industrial Investment Promotion Policy (NEIIPP) 2007

The NEIP 1997 was eventually replaced by the North East Industrial Investment Promotion Policy (NEIIPP) in 2007, aiming to rectify some of the shortcomings of its predecessor and introduce new measures. Key Features:

  • Similar Fiscal Incentives: Continued with central capital investment subsidy (15%), interest subsidy (3%), and comprehensive insurance.
  • Broadened Scope: Included services sectors, not just manufacturing.
  • Inclusion of Sikkim: The policy was extended to include Sikkim.
  • Focus on Specific Sectors: Continued emphasis on sectors like IT, biotechnology, and tourism.
  • Infrastructure Development Fund: Allocation for improving critical infrastructure.

Assessment of NEIIPP 2007: NEIIPP 2007 largely continued the incentive-driven approach of NEIP 1997. While it provided a continuous framework of support, it faced similar criticisms. The “footloose” nature of industries persisted, with many units relocating or closing down once the incentive period expired. The policy’s primary focus remained on fiscal concessions rather than creating a conducive ecosystem for sustainable industrial growth. Infrastructure development, despite being a stated objective, did not see the accelerated pace required. Furthermore, the withdrawal of the policy in 2017 created uncertainty and dampened investor confidence, as existing units faced the challenge of competing without the previously assured incentives. The abrupt withdrawal was largely attributed to the rationalization of central schemes under the Goods and Services Tax (GST) regime, which fundamentally changed the landscape of indirect taxation and made excise duty exemptions redundant.

Role of North Eastern Council (NEC) and Ministry of DoNER

The North Eastern Council (NEC) has historically been the primary regional planning body, mandated to ensure balanced economic development. Its role has been to identify projects and schemes, fund infrastructure, and support various sectors. The creation of the Ministry of Development of North Eastern Region (DoNER) in 2001 elevated the focus on the region, bringing a dedicated central ministry to coordinate development efforts, including industrial promotion. Assessment: Both NEC and DoNER have played crucial roles in advocating for the region and channelizing funds. They have supported various infrastructure projects, skill development initiatives, and sector-specific programs. However, their impact on large-scale industrialization has been limited. Funds, while substantial, have often been spread thin across numerous small projects, lacking the critical mass required for transformative change. Coordination challenges among various central and state agencies, and often between DoNER and line ministries, have also hampered effective implementation. The approach has often been more project-based rather than systemic, failing to address the fundamental barriers to private investment and large-scale industrial growth.

Look East/Act East Policy and Industrial Linkages

India’s “Look East Policy” (initiated in the early 1990s) and its upgraded version, the “Act East Policy” (from 2014), aimed to strengthen economic and strategic ties with Southeast Asian nations. The North East was envisioned as the land bridge for this engagement, with aspirations for cross-border trade, infrastructure development, and industrial integration. Assessment: While the Act East Policy conceptually places the North East at the heart of India’s outreach to ASEAN, its tangible impact on industrialization within the region has been slow. Infrastructure projects connecting the North East to Myanmar and Bangladesh (e.g., Kaladan Multi-Modal Transit Transport Project, Trilateral Highway) are progressing but face significant delays. Cross-border trade, though increasing, is still far from its potential due to tariff and non-tariff barriers, limited border infrastructure, and procedural complexities. The policy has primarily focused on connectivity and trade facilitation rather than direct industrial investment within the North East linked to global value chains. For the policy to truly foster industrialization, there needs to be a conscious effort to establish SEZ-like industrial clusters near border areas, with seamless logistics and market access to ASEAN.

North East Industrial Development Scheme (NEIDS) 2018 and PM-DevINE

In a bid to provide a fresh impetus after the withdrawal of NEIIPP 2007, the government launched the North East Industrial Development Scheme (NEIDS) in 2018 for a period of five years. Key Features:

  • Capital Investment Incentive: 30% of investment in plant and machinery with a ceiling of Rs. 5 crore.
  • Interest Incentive: 3% on working capital for 7 years, subject to a maximum of Rs. 1 crore.
  • GST Reimbursement: Reimbursement of Central Share of GST (CGST and IGST) for 5 years.
  • Transport Incentive: 20% of the cost of transportation of finished goods (up to a limit) and raw materials.
  • Employment Incentive: Reimbursement of 3.67% of the employer’s contribution to EPF for new employment.
  • Power Subsidy: 20% of the cost of power for 5 years.

More recently, the “Prime Minister’s Development Initiative for North East Region” (PM-DevINE) scheme was announced in 2022-23 to fund infrastructure and social development projects based on felt needs of the states.

Assessment of NEIDS 2018 and PM-DevINE: NEIDS 2018 aimed to learn from past experiences by making incentives more diversified (e.g., linking to employment and power costs) and incorporating GST reimbursement. However, its effectiveness is yet to be fully assessed given its relatively recent inception and limited duration. The capital subsidy limits are lower than previous policies, potentially reducing attractiveness for large-scale investments. The fundamental challenge remains: incentives alone cannot overcome deep-seated issues like poor infrastructure, lack of skilled labour, and law and order concerns. PM-DevINE, while providing a new funding window for infrastructure and social projects, is a broader development initiative and not solely focused on industrialization. It aims to fill critical development gaps but is not a direct industrial policy.

Overall Critique of Industrial Policies

The trajectory of industrial policies for the North East reveals a consistent reliance on fiscal incentives, primarily in the form of subsidies and tax exemptions. While these policies have succeeded in attracting some industries, particularly those with low capital intensity and quick returns, they have largely failed to foster sustainable, deeply rooted industrial ecosystems. The “rent-seeking” behavior, where industries are set up primarily to exploit incentives and often shut down post-expiration, remains a challenge.

The policies have generally fallen short in addressing the core structural impediments:

  • Infrastructure Deficit: While policies mention infrastructure development, the pace and quality of execution have been inadequate to truly de-bottleneck the region.
  • Human Capital Gap: Skill development initiatives have been sporadic and not consistently linked to industrial demands.
  • Investment Climate: Beyond incentives, the overall investment climate (ease of doing business, land acquisition, law and order) has not seen sufficient improvement to draw large, long-term investors.
  • Market Access: Policies have not adequately facilitated integration with national and international markets.
  • Policy Instability: Frequent changes or withdrawal of policies (like NEIIPP 2007) create uncertainty and deter long-term investment.

In essence, past policies have provided “carrots” without adequately smoothing the “road” or addressing the “predators” (referring to challenges like instability and high operational costs). A truly effective industrial policy for the North East needs to transcend mere fiscal incentives and focus on comprehensive ecosystem development, including robust infrastructure, skilled workforce, stable governance, land reforms, and strong market linkages, leveraging its strategic position as a gateway to Southeast Asia.

The North East’s lack of industrialization is a multifaceted problem stemming from a complex interplay of historical, geographical, infrastructural, socio-political, and economic factors. The region’s challenging topography, coupled with its historical isolation and the disruptive effects of India’s partition, has created significant logistical and market access barriers. Critical deficiencies in connectivity, power supply, and other basic infrastructure have inflated operational costs, making the region unattractive for large-scale industrial investment. Moreover, decades of socio-political instability and insurgency have created an environment of uncertainty, severely eroding investor confidence and diverting resources away from productive development. The unique land tenure systems and a relatively underdeveloped human capital base further compound these challenges, collectively making industrial expansion an uphill battle.

The industrial policies adopted for the North East, from the targeted NEIP 1997 and NEIIPP 2007 to the more recent NEIDS 2018, have primarily relied on fiscal incentives like subsidies and tax exemptions to attract industries. While these policies have had some success in drawing “footloose” industries, they have largely failed to foster sustainable, deeply integrated industrial ecosystems within the region. The critical limitation of these incentive-driven approaches has been their inability to fundamentally address the root causes of industrial backwardness, such as severe infrastructure deficits, skill shortages, and an unstable investment climate. The frequent changes in policy, exemplified by the abrupt withdrawal of NEIIPP 2007, have also contributed to investor uncertainty, highlighting the need for long-term, stable, and comprehensive policy frameworks.

For sustainable industrial development in the North East, a paradigm shift is required. Future strategies must move beyond mere financial inducements to focus on holistic ecosystem development. This entails massive, sustained investment in world-class infrastructure – roads, railways, airports, and especially reliable power supply – to reduce logistical costs and improve connectivity. Simultaneously, there is an urgent need to tailor skill development programs to meet industrial demands, fostering local entrepreneurship, and streamlining land acquisition processes while respecting traditional rights. Leveraging the “Act East Policy” to establish seamless cross-border trade infrastructure and industrial zones can unlock the region’s vast potential as a vibrant gateway to Southeast Asia, transforming it from a peripheral region into a dynamic hub of economic activity.