Industrial Policy: From the 1948 Resolution to 1991 and Beyond

Phase 1: state-led industrialisation (1948–1980)

Industrial Policy Resolution (IPR) 1948: it set out a mixed economy, reserving some industries for the state (arms, atomic energy and railways), with the private sector allowed elsewhere under regulation.

Industries (Development and Regulation) Act 1951 (IDRA): it created the licence raj. Industrial licences were needed to set up, expand or relocate a factory.

IPR 1956: based on the Mahalanobis model of the Second Plan, which prioritised heavy industry and capital goods. Industries were classified into three schedules:

• Schedule A: 17 industries, exclusively the state's responsibility.
• Schedule B: 12 industries, progressively state-owned, with the private sector supplementing.
• Schedule C: the rest, left to the private sector.

The public sector was given the "commanding heights" of the economy.

Results:

• a broad industrial base: steel plants, BHEL, HAL, power and fertilisers;
• inefficiency, delays, rent-seeking, monopolistic controls and low productivity.

Further controls:

• MRTP Act 1969: curbed monopolies and the concentration of economic power.
• FERA 1973: tight foreign exchange controls and limits on foreign equity.
• Small-scale industry reservation: from 1967, more than 800 items were reserved for small firms. All had been de-reserved by 2015.

Growth: GDP growth averaged about 3.5% a year from 1950 to 1980, the "Hindu rate of growth" (a term coined by Raj Krishna).

Phase 2: partial liberalisation (1980s)

Policy shifted in the 1980s:

• delicensing of some industries;
• broad-banding of licences;
• relaxed MRTP thresholds;
• easier imports of capital goods.

Growth rose to about 5.5% a year, but it was financed partly by external borrowing and fiscal deficits, which led to the 1991 crisis.

Phase 3: the New Industrial Policy 1991

Announced on 24 July 1991 together with the Budget (Prime Minister P.V. Narasimha Rao, Finance Minister Manmohan Singh), the LPG reforms were:

1. Delicensing: industrial licensing was abolished for all but 18 industries. Only five remain today: alcoholic drinks, tobacco products (cigarettes), defence aerospace and warships, industrial explosives, and specified hazardous chemicals.

2. Public sector reform:

• the number of industries reserved for the public sector was cut from 17 to 8, and later to 2: atomic energy and railway operations;
• disinvestment began;
• BIFR handled sick PSUs.

3. MRTP reform: the pre-entry asset threshold was abolished. The MRTP Act was replaced by the Competition Act 2002, enforced by the Competition Commission of India (CCI).

4. Foreign investment: automatic approval for FDI up to 51% in priority industries; FERA was replaced by FEMA (1999).

5. Foreign technology agreements became automatic.

Results:

• higher growth, about 6–7% in the 1990s and 8–9% in 2003–08;
• the IT and services boom;
• competitive manufacturing in autos and pharmaceuticals;
• forex reserves built up.

Criticisms:

• manufacturing remained stuck at about 15–17% of GDP;
• agriculture reform was neglected;
• inequality widened;
• "jobless growth".

Phase 4: Make in India and Atmanirbhar Bharat

Make in India (September 2014):

• goals: raise manufacturing to 25% of GDP and create 100 million manufacturing jobs, initially by 2022;
• covered 25 sectors, later recast as 27;
• supported by ease of doing business reforms. India rose from 142nd (2014) to 63rd (2019) in the World Bank's Doing Business ranking, which was discontinued in 2021 after data irregularities.

Production Linked Incentive (PLI) schemes (2020–21):

• 14 sectors with an outlay of about ₹1.97 lakh crore;
• incentives of about 4–6% of incremental sales over five years;
• sectors: mobile phones and electronics, pharmaceuticals, medical devices, automobiles and components, advanced chemistry cell batteries, solar PV modules, textiles (man-made fibre), food processing, white goods, specialty steel, drones, telecom and IT hardware;
• results: India became the second-largest mobile phone maker and its smartphone exports soared. Apple's supply chain shifted part of its production to India. Results in other sectors have been uneven, and incentive disbursement has been slow.

Semiconductors:

• the India Semiconductor Mission (2021, ₹76,000 crore);
• Micron's assembly and test plant at Sanand (Gujarat);
• the Tata–PSMC fab at Dholera;
• further OSAT units approved in 2024–25.

Infrastructure for industry:

• PM Gati Shakti (2021);
• the National Logistics Policy (2022);
• industrial corridors: DMIC, CBIC, AKIC;
• 12 new industrial smart cities under the National Industrial Corridor Programme (approved 2024).

Other reforms:

• the corporate tax cut (2019): 22%, and 15% for new manufacturing firms (the concessional regime lapsed in March 2024);
• decriminalisation through the Jan Vishwas Act 2023;
• the National Manufacturing Mission announced in the 2025–26 Budget.

Debates on industrial policy

Should India target manufacturing or services?

• Some economists argue that services-led growth is India's comparative advantage, citing GCCs and IT.
• Others say manufacturing is essential to absorb low-skilled labour, and that "premature deindustrialisation" (Dani Rodrik) threatens it.

Industrial policy is back worldwide: the US CHIPS Act and Inflation Reduction Act, and the EU Green Deal Industrial Plan. Its return raises questions of WTO compliance and picking winners.

India's risks:

• tariff protection making inputs costlier;
• weak value addition in assembly;
• dependence on Chinese inputs: India imports large amounts of electronic components and active pharmaceutical ingredients (APIs) from China.

Common prelims traps

• Only two sectors are now reserved for the public sector: atomic energy and railway operations.
• The MRTP Act was replaced by the Competition Act 2002, not by FEMA.
• IPR 1956 created three schedules (A, B, C), not 1948.
• The "Hindu rate of growth" was coined by Raj Krishna.

Quick self-test

1. *How many industries still need an industrial licence?* Five.
2. *What did the PLI scheme reward?* Incremental sales over a base year.
3. *Why was the Doing Business index discontinued?* Data irregularities found in 2021.

Practice: Mains question

*"The Production Linked Incentive scheme has shown that industrial policy can work, but only selectively." Critically evaluate. (250 words)*

Disinvestment and privatisation over time

1991–2003: minority stake sales, under the Rangarajan Committee (1993) recommendations. The first strategic sales took place in 1999–2004: Modern Foods, BALCO, VSNL, Hindustan Zinc and Maruti. A separate Department of Disinvestment was set up in 1999.

2004–14: a focus on minority stakes and listing (National Investment Fund, 2005).

2014 onward: strategic sales returned (Air India, Neelachal Ispat) along with the NPSE policy of 2021.

Analysis: what makes industrial policy succeed?

Lessons from East Asia:

• export discipline: support is conditional on performance in world markets;
• time-bound support;
• competition among firms;
• state capacity to monitor.

Indian policy before 1991 offered protection without discipline. The PLI scheme's design, which rewards incremental sales, is closer to the East Asian model.

Supporting conditions for success:

• reliable power and logistics;
• flexible land and labour markets;
• a stable tariff regime;
• skilled workers.

The National Manufacturing Mission and Gati Shakti aim to address these.

Key term

Licence raj: the system of permits, licences and regulations (1951–1991) under which firms needed government approval to set up, expand or change their products. It encouraged rent-seeking and limited competition.