History of India’s
Industrial Policy
1947 – 1991
India’s industrial journey moved from total state control to a market-oriented system — from the License Raj and the “Economic Constitution” of 1956 to the cautious reforms of the 1980s and the 1991 overhaul. Understanding this arc is key to explaining why manufacturing struggled, and why 1991 became inevitable.
Since 1947, India’s industrial policy has evolved dramatically — from a model of total state control toward a more market-oriented system. This journey, shaped by the Nehru-Mahalanobis vision, the License Raj, and eventually a balance-of-payments crisis, explains both India’s industrial achievements and its persistent weaknesses. Here is the full arc, with a phase-wise visual map.
The License Raj was built on a noble fear — that free markets would deepen inequality and dependence. But by trying to control everything, the state ended up rationing growth itself. 1991 was not a sudden revolution; it was the bill finally coming due. — Legacy IAS Faculty
The Journey at a Glance
Four phases trace India’s path from state monopoly to liberalisation:
Phase 1 — The Foundation (1948–1965)
State-led heavy industrialisation defined the early years:
IPR 1948
The first Industrial Policy Resolution divided industries into strategic public, joint, and private sectors.
IPR 1956 — “Economic Constitution”
The definitive Nehru-Mahalanobis blueprint, built around three schedules of industries.
The three schedules of IPR 1956 set the architecture of the state-led economy:
| Schedule | Industries | Control |
|---|---|---|
| Schedule A | 17 industries (atomic energy, defence, iron & steel) | Exclusive state monopoly. |
| Schedule B | 12 industries (aluminium, machine tools) | Progressively state-owned. |
| Schedule C | All remaining industries | Left to the private sector — but under state control. |
Under the Industries (Development & Regulation) Act, 1951 (IDRA), a licence was required for almost any industrial activity — to start, expand, or change products. This gave the government near-absolute control over what was produced, how much, and by whom.
Phase 2 — The Era of Control (1965–1980)
Controls deepened, and the economy stagnated:
MRTP Act, 1969
Placed heavy restrictions on large business houses, requiring separate approvals for any substantial investment (to curb concentration of economic power).
FERA, 1973
Severely restricted foreign investment, capping foreign equity at 40% — prompting the exit of MNCs like Coca-Cola and IBM.
SSI Reservation
Many products were reserved exclusively for small-scale industry. Intended to boost jobs, it crippled economies of scale and technological upgradation.
This period of deepening state control produced the so-called “Hindu Rate of Growth” — a sluggish ~3.5% per year (a term coined by economist Raj Krishna). Growth was slow and inefficiency was rampant.
Phase 3 — The First Stirrings of Liberalisation (1980s)
Recognising past failures, the government began cautious, piecemeal reforms — described as “pro-business” rather than “pro-market.”
Delicensing
Several industries were delicensed and the MRTP asset limit was raised, freeing firms from constant government approval.
“Broad-Banding”
Firms could change their product mix within a category without a fresh licence — e.g., a vehicle maker producing cars, trucks, or two-wheelers.
Modernisation Push
Selective liberalisation of technology and capital-goods imports helped autos and electronics modernise.
The Maruti 800 Moment
The Suzuki-Maruti collaboration to produce the Maruti 800 became the classic symbol of this modernising era.
The result: a notable acceleration in industrial growth during the 1980s, setting the stage for the comprehensive reforms of 1991.
Phase 4 — Crisis & the 1991 Overhaul
By 1991, the inward-looking model had run into a severe balance-of-payments crisis (foreign reserves down to barely a few weeks of imports), forcing radical reform.
The NIP 1991 dismantled the License Raj in one stroke: industrial licensing was abolished for all but a handful of industries; the MRTP Act was relaxed (no prior approval for expansion); FDI up to 51% was allowed automatically in priority sectors; and the number of industries reserved for the public sector was slashed from 17 to just 8 (since reduced further). This marked the birth of the L-P-G era — Liberalisation, Privatisation, Globalisation.
The Verdict — A Diversified but Inefficient Base
What It Got Right
- A diversified industrial structure — from steel to engineering
- Capabilities across a wide range of sectors
- A strong foundation for technical education & R&D (IITs, CSIR labs)
- Public-sector “temples of modern India”
What It Got Wrong
- Inefficiency & low productivity — sheltered firms had no incentive to improve
- The “Hindu Rate of Growth” (~3.5%)
- Scarcity & corruption from the License Raj (rent-seeking)
- Neglect of labour-intensive sectors (textiles, footwear, toys) — limiting jobs
Industrial Policy Resolutions — A Timeline
Probable Prelims MCQs (Application-Based)
Q1. The Industrial Policy Resolution of 1956 is often called the “Economic Constitution” because it:
(b) Classified industries into three schedules defining the role of the state and private sector
(c) Allowed 100% FDI in all sectors
(d) Established the Reserve Bank of India
Show Answer
Q2. The exit of MNCs like Coca-Cola and IBM from India in the late 1970s was a direct consequence of:
(b) The FERA, 1973
(c) The IDRA, 1951
(d) The New Industrial Policy, 1991
Show Answer
Q3. The licensing requirement that gave the government near-total control over industrial activity stemmed from which law?
(b) Companies Act, 1956
(c) MRTP Act, 1969
(d) FERA, 1973
Show Answer
Q4. The term “broad-banding,” associated with the 1980s reforms, allowed firms to:
(b) Change their product mix within a category without a new licence
(c) List on foreign stock exchanges
(d) Set their own tax rates
Show Answer
Frequently Asked Questions
Q1. Why is IPR 1956 called the “Economic Constitution”?
Because it laid down the long-term blueprint of India’s industrial economy under the Nehru-Mahalanobis vision — dividing industries into three schedules that defined exactly where the state would have a monopoly, where it would lead, and where the private sector could operate (under control). It guided policy for decades.
Q2. What was the “License Raj”?
It was the system, rooted in the IDRA 1951, under which a government licence was needed for almost any industrial activity — starting a business, expanding capacity, or changing products. It gave the state near-total control but created artificial scarcity, delays, and corruption.
Q3. What is the “Hindu Rate of Growth”?
A term (coined by Raj Krishna) for India’s sluggish ~3.5% average annual growth during the decades of heavy state control. It reflected the inefficiency of a sheltered, over-regulated economy rather than anything religious.
Q4. Why did the 1991 reforms become necessary?
The inward-looking, controlled model led to chronic inefficiency and, by 1991, a severe balance-of-payments crisis (reserves enough for only weeks of imports). This forced India to adopt the New Industrial Policy 1991 — dismantling the License Raj and embracing liberalisation.
Key Takeaways
- Foundation (1948-65): IPR 1948 & 1956 (the “Economic Constitution,” three schedules), heavy-industry focus, and the License Raj under IDRA 1951.
- Era of Control (1965-80): MRTP Act 1969, FERA 1973 (Coca-Cola & IBM exit), SSI reservation — producing the ~3.5% “Hindu Rate of Growth.”
- First Reforms (1980s): cautious “pro-business” steps — delicensing, broad-banding, technology imports, and the Maruti 800 era.
- The 1991 overhaul: a balance-of-payments crisis forced the New Industrial Policy — abolishing most licensing, relaxing MRTP, and opening up to FDI (the LPG era).
- The verdict: a diversified industrial base and strong R&D foundation, but plagued by inefficiency, scarcity, corruption, and neglected labour-intensive jobs.
