Pariksha SaathiLesson 8 of 10 · Indian Economy
Industrial Policy, the 1991 LPG Reforms and Public Sector Enterprises
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Industrial Policy Resolution 1948
The first industrial policy, announced on 6 April 1948, laid down a mixed economy. Arms and ammunition, atomic energy and railways became a Central government monopoly. In six basic industries, including coal, iron and steel, aircraft manufacture, shipbuilding and mineral oils, new units were to be set up by the state while existing private units could continue. Eighteen industries of national importance were placed under government regulation, and the rest were left to the private sector. The Industries (Development and Regulation) Act 1951 then gave the government power to license industries.
Industrial Policy Resolution 1956
Adopted on 30 April 1956, after the socialistic pattern of society had been accepted as the national goal, and closely tied to the Second Plan's heavy-industry strategy, it is called the economic constitution of India. Schedule A listed 17 industries that would be the exclusive responsibility of the state; Schedule B listed 12 industries that would be progressively state-owned but open to private firms as well; all others, in Schedule C, were left to private enterprise. It gave the public sector the commanding heights of the economy and also stressed small and cottage industries and balanced regional development.
The licence raj
For decades firms needed government licences to set up, expand or change products. The Monopolies and Restrictive Trade Practices (MRTP) Act 1969 restricted large business houses, the Foreign Exchange Regulation Act (FERA) 1973 controlled foreign firms, and many items were reserved for small-scale units from 1967. These controls aimed at equity and self-reliance but brought delays, corruption, inefficiency and slow growth, a system nicknamed the licence-permit-quota raj.
The 1991 crisis
By 1990-91 India faced a balance of payments crisis caused by large fiscal deficits, rising foreign debt, the oil price shock of the Gulf War, falling remittances and political instability. Foreign exchange reserves fell to barely a few weeks of imports, India's credit rating was cut, and gold was pledged with the Bank of England and the Bank of Japan to raise funds. The government of P.V. Narasimha Rao, with Manmohan Singh as Finance Minister, devalued the rupee in two steps in July 1991, took IMF support and announced the New Industrial Policy on 24 July 1991, the day the budget was presented.
The LPG reforms
Liberalisation removed controls: industrial licensing was abolished for all but a short list of industries, the asset limit on MRTP companies was dropped, and import and foreign exchange controls were eased. Privatisation reduced the state's role: industries reserved for the public sector were cut from 17 to 8 and later to very few, and government shares in public enterprises began to be sold. Globalisation linked India to the world economy: foreign investment up to 51 per cent was allowed automatically in high-priority industries and tariffs were cut. Committees shaped the reforms, such as the Narasimham Committee (1991) on banking, the Raja Chelliah Committee (1991) on taxes, the Rangarajan Committee (1993) on disinvestment and the Malhotra Committee (1993) on insurance. The MRTP Act was later replaced by the Competition Act 2002.
Disinvestment and CPSE status
Disinvestment is the sale of part or all of the government's stake in public sector enterprises, either as minority stake sales or as strategic sales that hand over management control, as with BALCO in 2001. A Department of Disinvestment was created in 1999 and renamed the Department of Investment and Public Asset Management (DIPAM) in 2016. To give successful central public sector enterprises (CPSEs) more freedom, the government created the Navratna and Miniratna categories in 1997, starting with nine Navratnas, and approved the Maharatna category in 2009, the first Maharatnas being named in 2010. A Maharatna must already be a Navratna, be listed on an Indian stock exchange and, on a three-year average, have turnover above Rs 25,000 crore, net worth above Rs 15,000 crore and net profit above Rs 5,000 crore. Miniratnas are consistently profit-making CPSEs in Category I or II, and each higher status gives more power to invest without government approval.
MSMEs and Make in India
Micro, small and medium enterprises are defined under the MSMED Act 2006, which classified them by investment in plant and machinery for manufacturing and in equipment for services, with separate limits for each. In 2020 the definition was changed to a composite test of investment and annual turnover with the same limits for manufacturing and services, export turnover being excluded, and registration moved online through Udyam; the limits are revised from time to time. Make in India, launched on 25 September 2014 with a lion as its symbol, aims to make India a global manufacturing hub by easing business rules and attracting investment.
Key facts
- IPR 1948: mixed economy; Central monopoly on arms and ammunition, atomic energy and railways; the Industries (Development and Regulation) Act 1951 brought licensing.
- IPR 1956: Schedule A 17 industries (state), Schedule B 12 (state-led, private allowed), Schedule C (private); called the economic constitution of India.
- Licence raj laws: MRTP Act 1969, FERA 1973, reservation for small-scale units from 1967; MRTP replaced by the Competition Act 2002.
- 1991 crisis: Gulf War oil shock, very low reserves, gold pledged with the Bank of England and the Bank of Japan; PM P.V. Narasimha Rao, FM Manmohan Singh; New Industrial Policy 24 July 1991.
- LPG: licensing abolished for most industries, public sector reservation cut from 17 to 8 industries, foreign investment up to 51% automatic in high-priority industries.
- Reform committees: Narasimham 1991 (banking), Raja Chelliah 1991 (tax), Rangarajan 1993 (disinvestment), Malhotra 1993 (insurance).
- Department of Disinvestment 1999, renamed DIPAM 2016; BALCO (2001) was an early strategic sale.
- Navratna and Miniratna from 1997 (nine original Navratnas); Maharatna approved 2009 (first companies 2010) - three-year average turnover above Rs 25,000 crore, net worth above Rs 15,000 crore, net profit above Rs 5,000 crore.
- MSMED Act 2006: investment-based, separate limits for manufacturing and services; 2020 revision: investment plus turnover, same for both, Udyam registration.
- Make in India: launched 25 September 2014, lion logo; aim - make India a global manufacturing hub.
Quick revision
IPR 1948 (mixed economy, 3 Central monopolies); IDRA 1951 licensing; IPR 1956: 17 Schedule A, 12 Schedule B, economic constitution; MRTP 1969, FERA 1973; 1991 BoP crisis, gold pledged, rupee devalued July 1991, New Industrial Policy 24 July 1991; public sector reservation 17 to 8; Competition Act 2002; Department of Disinvestment 1999, DIPAM 2016; Navratna/Miniratna 1997, Maharatna 2009; MSMED Act 2006, revised 2020; Make in India 25 Sept 2014.