English · हिन्दी · తెలుగు · தமிழ் · മലയാളം · मराठी · ಕನ್ನಡ

Industrial policy and the 1991 reforms

Industry and infrastructure · Part 1 / 1 · Fact-checked on 25 October 2026 · how we check

Written with AI from the sources listed at the bottom of this page, then fact-checked by a separate AI.

The Industrial Policy Resolutions of 1948 and 1956 and the Industries (Development and Regulation) Act, 1951, the licence-permit raj, small-scale reservation, the MRTP Act and FERA, the Statement on Industrial Policy of July 1991, what liberalisation, privatisation and globalisation mean, the Competition Act and the CCI, Maharatna, Navratna and Miniratna enterprises, disinvestment and strategic sales, and the 2021 public sector enterprise policy.

This chapter is about how India makes things, and about the roads, ports and power that let it do so. Part 1 tells the story of industrial policy: why independent India chose a state-led path in which the government owned the biggest factories and private firms needed permission to grow, how that system held the economy back, and how the reforms that began in July 1991 opened it up. Three words sum up those reforms: liberalisation, privatisation and globalisation. The part ends with what became of the public sector. Part 2 covers industry as it is measured and supported today, and Part 3 covers infrastructure and how it is paid for.

The first Industrial Policy Resolution, of April 1948, set out a mixed economy, in which public and private enterprise would work side by side under the direction of the state. Arms and ammunition, atomic energy and railways became a monopoly of the Union government. In six basic industries, among them coal, iron and steel, shipbuilding and mineral oils, only the state would start new units, though existing private firms could carry on for ten years. The rest was open to private enterprise under regulation, which came through the Industries (Development and Regulation) Act, 1951: a firm in a scheduled industry needed a licence from the Centre to set up a factory, expand capacity substantially or make a new product. industrial licensing was meant to steer scarce capital into the industries the Plans wanted to grow.

The Industrial Policy Resolution of April 1956 went further. It followed the national goal of a 'socialistic pattern of society' and the Second Five-Year Plan, which put heavy industry at the centre of development on the view that a poor country had to build the machines that make machines. Industries were sorted into three schedules. Schedule A listed 17 industries, among them arms, atomic energy, iron and steel, railways and air transport, where new units would be the exclusive responsibility of the state. Schedule B listed 12, such as machine tools, fertilisers and road transport, that would become progressively state-owned, with private firms allowed to supplement the state's effort. Everything else, in Schedule C, was left to the private sector, still under licensing. Hence the idea of the public sector holding the 'commanding heights' of the economy.

Over the next three decades the controls grew into what critics called the licence-permit raj. A firm that wanted to build a plant, add capacity or import a machine often needed several separate approvals, each taking months. Licences tended to go to large business houses that knew how to work the system, and protected firms felt little pressure to cut costs or improve quality. From 1967 a growing list of products, at its peak more than 800, was reserved for small-scale units alone. The aim was to protect jobs, but suppose a small unit making a reserved item wanted to grow: beyond the investment limit it lost its protection, so many chose to stay small. The outcome was high costs, frequent shortages and slow growth, which the economist Raj Krishna called the 'Hindu rate of growth', about 3.5 per cent a year.

Two laws tightened the grip. The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 followed official findings that economic power was concentrated in a few business houses; large firms above an asset threshold needed government approval to expand, merge or open new units. The Foreign Exchange Regulation Act (FERA), 1973 controlled foreign exchange tightly and generally limited foreign shareholding in Indian companies to 40 per cent; IBM and Coca-Cola were among the firms that left India rather than give up control. The Industrial Policy Statement of 1977 turned attention to small and cottage industries, and District Industries Centres were set up from 1978 to serve them. In the 1980s some rules were eased, for instance by letting firms make a wider range of related products under one licence ('broad-banding'), but the core of the system stayed.

In 1991 the system met a crisis: foreign exchange reserves had fallen to a few weeks of imports, as the external sector chapter explains. On 24 July 1991, the day of the Union Budget, the government placed a new Statement on Industrial Policy before Parliament. industrial licensing was abolished for all industries except 18 kept under licensing for reasons of security, strategy, safety or the environment; that list has since shrunk to a handful, such as defence equipment, industrial explosives, hazardous chemicals, and tobacco products and alcoholic drinks. The industries reserved for the public sector were cut from 17 to 8, and later to just two: atomic energy and railway operations. In most fields a firm no longer needed permission to build a factory; it only had to file a memorandum informing the government.

The same statement ended the MRTP rule that large firms needed prior approval for new investment, so size alone was no longer suspect. foreign direct investment up to 51 per cent in a list of high-priority industries would get automatic approval, and agreements to bring in foreign technology were made easier. Chronically loss-making public enterprises would be referred for revival or closure, and part of the government's shareholding in some would be sold. Later laws completed the picture: FERA was replaced by the Foreign Exchange Management Act (FEMA), 1999, which treats foreign exchange violations as civil rather than criminal matters, and the MRTP Act gave way to a competition law. Industrial policy was one piece of a wider package that also included the rupee devaluation of July 1991 and lower import duties.

The reforms are summed up as LPG. liberalisation means removing controls that stop firms from deciding what to produce, how much, where and at what price: abolishing licences, freeing interest rates, ending reservations. privatisation means a smaller role for the state as owner, either by selling government shares in public enterprises or by opening fields once kept for the state, such as telecom, airlines and power, to private firms. globalisation means joining the world economy more closely through lower tariffs, easier foreign investment and a market-determined exchange rate. The three support each other: a firm freed from licensing can grow only if it can import machines and sell abroad. The package also worked on two time scales: short-term stabilisation to cut the fiscal and current account deficits, and longer-term structural reform.

Once licensing went, the danger shifted from too many controls to too little competition, since a dominant firm could still misuse its position. The Competition Act, 2002 prohibits agreements that harm competition, such as cartels that fix prices or share out markets, and abuse of a dominant position, such as predatory pricing; it also reviews 'combinations', meaning mergers and acquisitions above set thresholds. It is enforced by the Competition Commission of India, a statutory body set up in 2003, which began enforcing the rules on agreements and dominance in 2009, the year the MRTP Act was repealed, and the merger rules in 2011. The contrast matters: the MRTP Act treated bigness itself as the problem, while the Competition Act punishes harmful conduct whatever the firm's size. A 2023 amendment added a test based on deal value, so that buying a small but valuable company, often a digital one, can be reviewed.

Liberalisation did not abolish the public sector. A central public sector enterprise (CPSE) is a company in which the Union government, alone or with other CPSEs, holds more than half the shares; NTPC and ONGC are examples. To give the stronger ones room to compete, the government grades them: the Navratna and Miniratna categories were created in 1997, and the Maharatna category, for the largest, in 2009. The higher the grade, the larger the investment its board can approve without going to the ministry, and the freer it is to form joint ventures and expand abroad. A Miniratna must have made profits consistently, a Navratna is picked from among Miniratnas on a score of performance indicators, and a Maharatna must already be a listed Navratna with very large turnover, net worth and profit and a significant global presence.

disinvestment is the sale by the government of part or all of its shares in a public enterprise. It began in 1991-92 with small minority stakes sold mainly to raise money for the budget. The Rangarajan Committee (1993) advised how far the government's stake could fall, and a Disinvestment Commission (1996) advised on what to sell and how. Between 1999 and 2004 came strategic disinvestment, the sale of a controlling stake with management control to a private buyer: Modern Food Industries was first, in 2000, followed by BALCO in 2001. The department in charge was renamed DIPAM (Department of Investment and Public Asset Management) in 2016, and the sale of Air India to the Tata group was completed in January 2022. The New Public Sector Enterprise Policy of the 2021-22 Budget keeps only a bare minimum presence in four broad strategic sectors (atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; banking, insurance and financial services); elsewhere enterprises are to be privatised or closed.

Put together, industrial policy has passed through three stages. From 1948 to the late 1970s the state led and licensed; in the 1980s controls were eased at the edges; and from 1991 the state stopped deciding what firms may make, and turned instead to regulating conduct through the Competition Commission, owning fewer enterprises and, as Part 2 shows, offering incentives to industries it wants to grow. The four pillars of 1991 were delicensing, a much smaller area reserved for the public sector, the end of MRTP prior approval, and open doors to foreign investment and technology. Selling shares is not the only way to use public assets: leasing them out while keeping ownership, called asset monetisation, returns in Part 3.

Exam traps

• Schedules A (17 industries), B (12) and C belong to the Industrial Policy Resolution of 1956, not 1948. The 1948 resolution made arms, atomic energy and railways a state monopoly and reserved new units in six basic industries for the state.
• Industrial licensing was created by the Industries (Development and Regulation) Act, 1951, not by either policy resolution, which are policy statements, not laws.
• In 1991 licensing was kept for 18 industries, and industries reserved for the public sector were cut from 17 to 8. Today only two remain reserved: atomic energy and railway operations.
• FEMA (1999) replaced FERA (1973) and treats foreign exchange violations as civil matters. The Competition Act dates from 2002, but the MRTP Act was repealed only in 2009.
• The Competition Commission of India is a statutory body, not a constitutional one. The MRTP Act targeted size; the Competition Act targets conduct (anti-competitive agreements, abuse of dominance) and reviews mergers.
• Navratna and Miniratna date from 1997; Maharatna from 2009. A Maharatna must already be a Navratna and be listed on a stock exchange.
• Disinvestment can be a small minority sale; strategic disinvestment transfers management control. The first strategic sale was Modern Food Industries (2000), not BALCO (2001) or Air India (completed January 2022). DIPAM got its name in 2016.

Recap

• 1948 resolution: mixed economy; state monopoly in arms, atomic energy and railways; IDRA 1951 brought industrial licensing.
• 1956 resolution: socialistic pattern, heavy industry first; Schedule A (17, state only), B (12, progressively state), C (private, licensed).
• Licence-permit raj: many approvals, small-scale reservation from 1967 (over 800 items at peak), slow growth of about 3.5 per cent.
• MRTP Act 1969 curbed big business houses; FERA 1973 capped foreign equity generally at 40 per cent; 1977 statement and District Industries Centres (1978).
• 24 July 1991: licensing kept for only 18 industries; public sector reservation 17 to 8 (now atomic energy and railway operations); MRTP prior approval ended; FDI up to 51 per cent automatic in priority industries.
• LPG: liberalisation (fewer controls), privatisation (smaller state ownership), globalisation (closer links with the world economy).
• Competition Act 2002 and the CCI (set up 2003): agreements, dominance, combinations; MRTP repealed 2009; deal value test added in 2023.
• CPSE grades: Miniratna and Navratna (1997), Maharatna (2009). Disinvestment from 1991-92; first strategic sale Modern Food Industries (2000); DIPAM (2016); Air India (2022); 2021-22 policy: four strategic sectors.

Practice questions

Sources

• The Industries (Development and Regulation) Act, 1951; the Monopolies and Restrictive Trade Practices Act, 1969; the Foreign Exchange Regulation Act, 1973; the Foreign Exchange Management Act, 1999 — https://www.indiacode.nic.in
• The Competition Act, 2002; the Competition (Amendment) Act, 2023 — https://www.indiacode.nic.in
• Industrial Policy Resolutions of 6 April 1948 and 30 April 1956, and the Statement on Industrial Policy of 24 July 1991 (Ministry of Industry; published by the Department for Promotion of Industry and Internal Trade) — https://dpiit.gov.in
• Economic Survey 1991-92 (crisis and reform programme) and later Economic Surveys, chapters on industry — https://www.indiabudget.gov.in/economicsurvey/
• Department of Public Enterprises: guidelines on Maharatna, Navratna and Miniratna status; DIPAM: history of disinvestment and the strategic sale of Air India (January 2022) (PIB releases) — https://dipam.gov.in
• Union Budget 2021-22, Budget Speech: New Public Sector Enterprise Policy and strategic disinvestment — https://www.indiabudget.gov.in