Pre-1991 Industrial Policy — The Licence Raj Era

2.1 Industrial Policy Resolutions

Industrial Policy Resolution (IPR) 1948: Established mixed economy; categorised industries into:

• Group I: State monopoly (defence, railways, atomic energy)
• Group II: State control (coal, iron, steel, aircraft)
• Group III: Private sector with government regulation

Industrial Policy Resolution (IPR) 1956 (the "Economic Constitution" of India):

• Schedule A: 17 industries exclusively for public sector (defence, heavy engineering, atomic energy, mining, etc.)
• Schedule B: 12 industries for mixed sector (joint state-private)
• Schedule C: Remaining industries open to private sector but subject to licensing

This became the foundation of the Licence Raj — a system requiring:

1. Industrial licence to set up new units
2. Import licence for machinery and raw materials
3. Foreign exchange allocation from RBI
4. Location clearances from government
5. Capacity restrictions on licensed production

Effects of Licence Raj:

• Protected inefficient producers from competition
• Created inspector raj and widespread rent-seeking/corruption
• Slowed India's growth to "Hindu rate of growth" (~3.5% GDP/year, 1950–1980)
• Led to shortages, poor quality goods, high prices for consumers

MRTP Act, 1969 (Monopolies and Restrictive Trade Practices Act):

• Barred companies with assets >Rs 20 crore (later Rs 100 crore) from expanding without government approval
• Targeted "monopoly houses" (Tata, Birla, Mafatlal)
• Paradoxically harmed efficiency — economies of scale denied

2.2 Early Industrial Achievements Despite Constraints

The Licence Raj era was not without achievements:

• Creation of heavy industry base: BHEL, SAIL, ONGC, NTPC
• Public sector enterprises (PSEs): Rose from 5 (1951) to 248 (1989)
• Nehru-Mahalanobis model: Focus on capital goods (heavy industry) as growth engine
• Three-tier planning: Industrial policy tied to Five Year Plans (1951–2017)

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