Industrial Policies and the 1991 Reforms
The story of Indian industry is told through a series of industrial policy resolutions, and the most important turning point is the New Industrial Policy of 1991 which ended the licence permit raj and opened the economy to competition. Examinations regularly ask about the chronological order of the policies, the classification of industries under the 1956 resolution, and the exact changes introduced in 1991. These notes set out the policies in order, explain the causes of the 1991 crisis, describe the reforms under liberalisation, privatisation and globalisation, and note the results and the points of confusion that examiners exploit.
The Industrial Policy Resolution of 1948
The first industrial policy of independent India was the Industrial Policy Resolution of 1948. It established a mixed economy in which both the public and the private sectors had a role. Industries were divided into categories: those in which the state had a monopoly, such as arms and ammunition, atomic energy and railways; those in which the state and private enterprise would both participate; and the remaining industries left to private enterprise, subject to regulation. The resolution reflected the thinking of the time that the state must lead heavy and strategic industries while private enterprise handled consumer goods. It laid the foundation on which later policies were built.
The Industrial Policy Resolution of 1956
The Industrial Policy Resolution of 1956 is regarded as the economic constitution of India because it shaped the industrial structure for decades. It adopted the goal of a socialistic pattern of society and classified industries into three schedules. Schedule A listed seventeen industries reserved for the state, including heavy industry, defence, atomic energy and major minerals. Schedule B listed twelve industries in which the state would generally establish new units but private enterprise could also expand. Schedule C covered all remaining industries, left mainly to the private sector. The resolution emphasised the public sector and industrial licensing, and its licensing system became the basis of the permit raj.
Policies of 1977 and 1980
The Janata government's Industrial Policy of 1977 gave priority to small scale, cottage and village industries and introduced the concept of the district industry centre to spread industry to rural areas. It also restricted the expansion of large business houses in certain areas to protect small producers. The Industrial Policy of 1980, under the Congress government, shifted emphasis towards competition, modernisation, technology upgradation and a degree of liberalisation, and it began to relax some licensing controls. These two policies together prepared the ground for the more radical changes of 1991 by showing that excessive controls were holding back industrial growth.
Causes of the 1991 crisis
The reforms of 1991 were forced by a severe economic crisis. The balance of payments position had deteriorated sharply and foreign exchange reserves fell to a level that could finance only about two weeks of imports. The fiscal deficit of the central government had risen to a very high level because of heavy borrowing, and inflation was running in double digits. The Gulf War of 1990-91 raised oil prices and reduced remittances from Indian workers in West Asia, worsening the trade position. At the same time the collapse of the Soviet Union removed a major trading partner. India approached the International Monetary Fund for assistance, and the conditions attached required structural reform.
The New Industrial Policy of 1991
The New Industrial Policy was announced on 24 July 1991 by the government led by Prime Minister P.V. Narasimha Rao, with Manmohan Singh as Finance Minister. It rested on three ideas, namely liberalisation, privatisation and globalisation, together called the LPG reforms. Industrial licensing was abolished for almost all industries and retained for only a small number of sectors connected with security, environment and essential goods. The number of industries reserved for the public sector was reduced sharply from seventeen to a handful. The asset limit under the Monopolies and Restrictive Trade Practices Act was removed, and the Foreign Exchange Regulation Act was later replaced by the Foreign Exchange Management Act. Foreign direct investment was permitted in many sectors, and disinvestment of public sector shares began. Small scale reservation was gradually reduced, and the rupee was devalued to correct the external balance.
Institutions and results
The reforms changed the institutional landscape. The Monopolies and Restrictive Trade Practices Act of 1969 was eventually replaced by the Competition Act of 2002, which set up the Competition Commission of India to promote fair competition. The Foreign Exchange Regulation Act of 1973 was replaced by the Foreign Exchange Management Act of 1999. Public sector reforms introduced the concepts of Navratna, Miniratna and Maharatna to give greater autonomy to well-performing enterprises, and a Department of Disinvestment was created. The results were a rise in overall growth, a boom in the services sector, larger inflows of foreign investment, and greater consumer choice. Critics point out that growth was not matched by enough employment, that the manufacturing share did not rise as expected, and that inequality and regional imbalance persisted.
Key facts at a glance
- First industrial policy: Industrial Policy Resolution 1948.
- 1948 established a mixed economy with public and private sectors.
- Industrial Policy Resolution 1956: economic constitution of India.
- 1956 schedules: A (17 industries, state), B (12, mixed), C (rest, private).
- Industrial Policy 1977: emphasis on small, cottage and village industries.
- Industrial Policy 1980: competition, modernisation and limited liberalisation.
- New Industrial Policy announced on 24 July 1991.
- Prime Minister P.V. Narasimha Rao; Finance Minister Manmohan Singh.
- LPG: liberalisation, privatisation and globalisation.
- Licensing abolished for most industries in 1991.
- Public sector reserved industries reduced from 17 to a few.
- MRTP Act 1969 replaced by the Competition Act 2002.
- FERA 1973 replaced by FEMA 1999.
- Rupee devalued in 1991 to correct the external balance.
- Public sector autonomy terms: Navratna, Miniratna, Maharatna.
Quick revision points
- Remember the sequence: 1948, 1956, 1977, 1980 and 1991.
- The 1956 resolution is called the economic constitution of India.
- The 1991 reforms were triggered by a balance of payments crisis.
- LPG stands for liberalisation, privatisation and globalisation.
- Licensing was retained only for a few security and environment related industries.
- MRTP dealt with monopolies; the Competition Commission now enforces competition law.
- Disinvestment means the sale of government equity in public sector enterprises.
How to prepare this topic
- Make a timeline of the five policy resolutions with their main theme in one line each.
- Memorise the three schedules of the 1956 policy and their numbers.
- List the causes of the 1991 crisis and the main features of the new policy side by side.
- Learn the full forms and the replacement laws, namely MRTP to Competition and FERA to FEMA.
- Note the date, the Prime Minister and the Finance Minister of the 1991 policy.
- Revise the Navratna, Miniratna and Maharatna categories with one example each.
Common exam traps
- Confusing the 1948 policy with the 1956 policy; the schedules belong to 1956.
- Saying the 1991 policy abolished all licensing; a few industries remained licensed.
- Attributing the 1991 reforms to a single person; it was a government decision.
- Mixing up FERA (1973) with FEMA (1999) or MRTP (1969) with the Competition Act (2002).
- Forgetting that the rupee was devalued as part of the reforms.
- Treating privatisation as the only element; liberalisation and globalisation were equally important.
Frequently Asked Questions
Why is the Industrial Policy Resolution of 1956 important?
The Industrial Policy Resolution of 1956 is called the economic constitution of India because it defined the country's industrial structure for decades. It adopted a socialistic pattern of society and classified industries into Schedule A with seventeen industries reserved for the state, Schedule B with twelve industries open to both state and private enterprise, and Schedule C containing the rest, mainly for the private sector. It also strengthened the licensing system.
What were the main causes of the 1991 economic reforms?
The reforms were forced by a severe balance of payments crisis in which foreign exchange reserves fell to about two weeks of imports. A very high fiscal deficit, double-digit inflation, the rise in oil prices and the fall in remittances during the Gulf War, and the collapse of the Soviet Union together created the crisis. India sought assistance from the International Monetary Fund, whose conditions required structural reform.
What is meant by the LPG reforms?
LPG stands for liberalisation, privatisation and globalisation, the three pillars of the New Industrial Policy of 1991. Liberalisation removed licensing and other controls and gave industry greater freedom. Privatisation involved reducing the role of the state through disinvestment and greater autonomy for public enterprises. Globalisation opened the economy to foreign trade and foreign direct investment. Together they integrated India with the world economy.
What happened to the MRTP Act and FERA under the reforms?
The Monopolies and Restrictive Trade Practices Act of 1969, which controlled the growth of large business houses, was replaced by the Competition Act of 2002, which set up the Competition Commission of India to prevent anti-competitive practices. The Foreign Exchange Regulation Act of 1973 was replaced by the Foreign Exchange Management Act of 1999, which made the management of foreign exchange more liberal and business-friendly.
What were the results of the 1991 industrial policy?
The reforms raised the overall growth rate of the economy, produced a boom in the services sector, increased foreign direct investment and gave consumers far greater choice. On the other hand, critics argue that growth was not accompanied by enough job creation, that the share of manufacturing did not rise as expected, and that inequality and regional imbalance persisted. These mixed results are frequently discussed in examinations.