Industrial Policy, Brief Historical Perspective, New Industrial Policy of India

Industrial Policy refers to the government’s policy framework for guiding and regulating the development of industries in an economy. It determines the role of the public and private sectors, industrial licensing, investment, competition, technology, and regional development. In India, industrial policy has evolved according to changing economic conditions and development objectives. The Industrial Policy Resolution, 1956 emphasised public-sector development and a larger role for the state, while the New Industrial Policy, 1991 introduced liberalisation, privatisation, and deregulation. Industrial policy aims to promote industrial growth, employment, investment, technological development, balanced regional development, and efficient use of resources. It therefore provides an important framework for shaping the industrial environment of a country.

Objectives of Industrial Policy:

1. Industrial Growth

A major objective of industrial policy is to promote rapid and sustainable industrial growth. The government creates a suitable environment for investment, production, infrastructure, and technological development. Industrial policies may provide incentives, simplify regulations, and encourage investment in important sectors. Growth of industries increases the production of goods and services and contributes to national income and economic development. Industrial expansion also creates opportunities for entrepreneurship and employment. By providing an appropriate policy framework, the government seeks to strengthen industrial capacity and improve the competitiveness of domestic industries. Thus, industrial policy supports the overall industrial development of the economy.

2. Employment Generation

Industrial policy aims to promote employment opportunities by encouraging the establishment and expansion of industries. Industrial development creates direct employment in factories, companies, and service enterprises and indirect employment through suppliers, distributors, transporters, and other supporting activities. Policies may encourage labour-intensive industries, Micro, Small and Medium Enterprises (MSMEs), startups, and investment in new production facilities. Increased employment generates income and improves living standards. It also helps utilise the available workforce productively. Therefore, employment generation is an important objective of industrial policy for promoting inclusive economic development and reducing unemployment.

3. Balanced Regional Development

An important objective of industrial policy is to achieve balanced regional development by encouraging industries to establish operations in less-developed areas. Industrial concentration in a few regions can create regional inequalities in income, employment, infrastructure, and economic opportunities. Governments may therefore provide incentives such as tax benefits, infrastructure support, or investment assistance to encourage industries in backward or less-developed regions. Development of industries in such areas can generate employment and stimulate supporting economic activities. Thus, industrial policy seeks to reduce regional disparities and promote more balanced distribution of industrial and economic development.

4. Promotion of Private Sector

Industrial policy aims to encourage the growth of the private sector by creating a favourable business environment for investment and entrepreneurship. Policies may simplify procedures, reduce unnecessary restrictions, provide infrastructure, and facilitate domestic and foreign investment. The New Industrial Policy, 1991 significantly expanded the role of private enterprise through liberalisation and deregulation. A stronger private sector can contribute to capital formation, innovation, employment, and productivity. However, private enterprises continue to operate within applicable laws and regulations. Thus, industrial policy seeks to provide entrepreneurial freedom while maintaining appropriate government oversight.

5. Development of Public Sector

Industrial policy also seeks to establish and strengthen the public sector in areas considered important for economic development, strategic interests, or public welfare. Public enterprises may operate in sectors requiring large investments, long-term development, or significant infrastructure. Historically, the Industrial Policy Resolution, 1956 assigned an important role to the public sector in India’s industrial development. Public-sector enterprises can contribute to infrastructure, employment, regional development, and essential services. Therefore, industrial policy determines the appropriate role of government enterprises alongside private businesses within the broader framework of a mixed economy.

6. Promotion of Small-Scale Industries

Industrial policy promotes small-scale industries and MSMEs because they contribute to employment, entrepreneurship, production, and regional development. Government measures may provide access to finance, infrastructure, technology, training, marketing assistance, and other forms of support. Small enterprises can operate with relatively lower investment and may create employment in both urban and rural areas. Their development also supports large industries through supply chains and ancillary production. In India, MSMEs are governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Thus, industrial policy encourages small enterprises as important contributors to inclusive industrial growth.

7. Technological Development

Industrial policy seeks to encourage technological advancement and modernisation of industries. Adoption of improved technology can increase productivity, reduce production costs, improve quality, and strengthen international competitiveness. Government policies may support research and development, technology transfer, digitalisation, skill development, and modern production systems. Technological development is particularly important for industries facing international competition and rapidly changing consumer requirements. Industrial policy therefore creates conditions that encourage enterprises to invest in innovation, research, and modern technology. This helps strengthen industrial productivity and supports long-term economic development.

8. Promotion of Foreign Investment

Industrial policy aims to attract Foreign Direct Investment (FDI) to increase capital availability, technology, managerial expertise, and international business connections. Foreign investment can contribute to industrial expansion, employment generation, infrastructure development, and integration with global markets. India introduced major liberalisation measures through the New Industrial Policy, 1991, which increased opportunities for foreign investment in various sectors. However, FDI remains subject to applicable sectoral policies, laws, and regulatory conditions. Thus, industrial policy seeks to use foreign investment as an instrument for capital formation, technological development, and industrial competitiveness.

Brief Historical Perspective of Industrial Policy in India:

1. Industrial Policy Resolution, 1948

The Industrial Policy Resolution, 1948 was the first major industrial policy after India’s Independence. It established the broad framework for industrial development and recognised a mixed economy with roles for both the public and private sectors. Certain strategic industries were reserved for the State, while private enterprises were allowed to operate in other areas under government regulation. The policy emphasised increasing industrial production and ensuring its equitable distribution. It also recognised the importance of developing basic and key industries for national development. The 1948 policy provided the initial foundation for subsequent industrial policies and established the government’s role in guiding industrial growth.

2. Industrial Policy Resolution, 1956

The Industrial Policy Resolution, 1956 represented a major shift towards greater government participation in industrial development. It aimed to accelerate industrialisation and establish a socialist pattern of society. The policy gave the public sector a predominant role, particularly in basic and strategic industries. Industries were broadly classified into categories according to the extent of State responsibility and private participation. The policy also promoted balanced regional development, reduction of economic inequalities, and expansion of public-sector enterprises. It became an important framework for India’s planned industrial development during the following decades.

3. Industrial Policy Statement, 1973

The Industrial Policy Statement, 1973 introduced changes in the industrial framework to address the growing importance of large industrial enterprises and foreign investment. It identified certain high-priority industries where investment by large industrial houses and foreign companies could be permitted, subject to government policy and regulations. The policy continued the broader approach of regulated industrial development while recognising the need for investment and expansion in selected sectors. It therefore represented an adjustment of the earlier industrial framework to changing economic requirements. The 1973 statement was one of the policy modifications made after the comprehensive 1956 industrial policy.

4. Industrial Policy Statement, 1977

The Industrial Policy Statement, 1977 placed particular emphasis on small-scale, tiny, and cottage industries. It sought to promote decentralisation of industrial activity and encourage wider participation in industrial development. Greater attention was given to employment generation, especially through labour-intensive small industries. The policy recognised the contribution of smaller enterprises to regional development and the distribution of economic opportunities. It also aimed to reduce excessive concentration of industrial activity in large enterprises and particular regions. Thus, the 1977 policy strengthened the importance of decentralised industrialisation and small enterprises within India’s regulated industrial framework.

5. Industrial Policy Statement, 1980

The Industrial Policy Statement, 1980 focused on improving industrial productivity and strengthening the competitive capacity of Indian industry. It emphasised modernisation, technological upgradation, and competition in the domestic market. The policy also encouraged the development of a stronger export base and permitted greater foreign investment in selected high-technology areas. Improving productivity and reducing production costs became important policy concerns. The approach reflected the need to make Indian industries more efficient and technologically capable while continuing government involvement in industrial development. These changes helped prepare Indian industry for the wider economic reforms that followed in the 1990s.

6. New Industrial Policy, 1991

The New Industrial Policy, 1991 marked a major transformation in India’s industrial policy. Introduced during a period of serious economic challenges, it emphasised liberalisation, deregulation, and greater private-sector participation. Industrial licensing was substantially reduced, restrictions on private investment were relaxed, and greater opportunities were provided for foreign investment and technology collaboration. The policy also aimed to improve productivity, competition, and international competitiveness. It reduced the direct role of the State in many industrial activities while retaining government involvement in strategically important areas. The 1991 reforms created a more market-oriented industrial environment and significantly changed the relationship between government and industry.

7. Post-1991 Industrial Policy

After 1991, India’s industrial policy increasingly focused on liberalisation, globalisation, competition, investment, and technological development. The private sector assumed a larger role, while government policy increasingly concentrated on creating an enabling business environment and regulating markets. The Department for Promotion of Industry and Internal Trade (DPIIT) is the central government department responsible for industrial policy formulation and promotion. Its present responsibilities include industrial policy, investment promotion, startups, ease of doing business, internal trade, and related areas. Industrial policy has therefore evolved from extensive State control towards a more market-oriented and globally integrated industrial framework.

New Industrial Policy of India 1991:

The New Industrial Policy, 1991 was introduced by the Government of India to reform the industrial sector during a period of serious economic difficulties. It marked a major shift from extensive government control towards liberalisation, privatisation, and globalisation. The policy substantially reduced industrial licensing, except for a limited number of industries, and removed several restrictions on private-sector expansion. The role of the public sector was reduced, while private investment was encouraged in many industries. The policy also liberalised Foreign Direct Investment (FDI) and promoted foreign technology collaboration to improve productivity and competitiveness. Measures were introduced to reform public-sector enterprises and encourage greater managerial and financial autonomy. The policy also sought to promote competition, technological modernisation, exports, and efficient use of resources. Overall, the 1991 policy transformed India’s industrial environment from a highly regulated system towards a more market-oriented and competitive economy.

Objectives of New Industrial Policy 1991:

1. To Achieve Liberalization and Remove Controls

Main objective was to free industry from licensing system, red tapism and unnecessary controls. To promote ease of doing business and increase efficiency. Industrial licensing was abolished except for few hazardous industries. This aimed to encourage entrepreneurship and competition. Governed by amendment in Industries (Development and Regulation) Act, 1951 – Sec 11, MRTP Act, 1969 was replaced by Competition Act, 2002, and Companies Act, 2013 for liberal incorporation and growth of private sector.

2. To Encourage Privatization and Efficiency

Objective was to reduce role of public sector and expand private sector for better efficiency and productivity. Loss-making PSUs to be disinvested and made competitive. To promote profit motive and professional management. Supported by Companies Act, 2013 – Sec 2(45) [Government Company], Sec 2(68), Disinvestment Policy and Competition Act, 2002 – Sec 3 & 4. This ensures optimum use of resources and promotes capital formation and accountability.

3. To Promote Globalization and Attract Foreign Investment

Policy aimed to integrate Indian economy with world economy and attract FDI and foreign technology for development. FERA, 1973 was replaced by liberal FEMA, 1999 – Sec 6, import restrictions were reduced and foreign equity up to 51% to 100% allowed. It encourages MNCs, technology transfer and export promotion. Regulated by FEMA, 1999, Foreign Trade Policy, SEZ Act, 2005 – Sec 3 and RBI guidelines for global competitiveness.

4. To Achieve Balanced Growth and Employment Generation

Objective was to achieve balanced regional development, increase employment opportunities, promote small scale industries and control monopoly and concentration of wealth. To ensure social justice, sustainable development and price stability through market forces. Backed by Constitution – Art 38, 39(b)(c), MSME Act, 2006 – Sec 7, Industrial Disputes Act, 1947 – Sec 2A and MGNREGA, 2005 for inclusive growth and welfare.

5. To Modernize Industries and Promote Competition

To make Indian industries globally competitive through modernization, technological upgradation and improved productivity. To promote internal and external competition, improve quality and reduce cost. Focus on R&D, innovation and export promotion. Regulated by Competition Act, 2002 – Sec 18 [Duties of Commission], Patents Act, 1970 – Sec 2(1)(j), Industries Act, 1951 and Consumer Protection Act, 2019 – Sec 2(9) for consumer welfare and quality consciousness.

Major Reforms under New Industrial Policy:

1. Abolition of Industrial Licensing

The 1991 policy substantially abolished the system of industrial licensing for most industries. Previously, businesses generally required government licences for establishing new industrial units, expanding capacity, or changing production. The reform aimed to reduce bureaucratic controls and give entrepreneurs greater freedom of entry and expansion. Licensing was retained only for a limited number of industries considered important from the perspectives of security, safety, environment, or strategic interests. This reform encouraged private investment, increased competition, and reduced delays in industrial decision-making. It represented a major step towards deregulation and a market-oriented industrial system.

2. Reduction in Public Sector Reservation

The New Industrial Policy reduced the number of industries reserved exclusively for the public sector. This allowed greater participation by private enterprises in several areas that had previously been largely restricted to government enterprises. The objective was to improve efficiency, competition, investment, and productivity. The State continued to retain responsibility in certain strategically important sectors. The reform also encouraged public-sector enterprises to improve their performance through greater autonomy and commercial orientation. Thus, reducing public-sector reservation strengthened the role of the private sector and changed the traditional structure of India’s mixed economy.

3. Disinvestment of Public Sector Enterprises

The 1991 policy introduced disinvestment of government equity in selected public-sector enterprises. Under this approach, the government could sell a portion of its ownership to financial institutions, mutual funds, employees, or other investors, subject to the applicable framework. The objective was to mobilise resources, improve financial discipline, and encourage greater accountability and efficiency in public enterprises. Disinvestment also sought to reduce the financial burden associated with enterprises requiring continued government support. However, the government retained ownership and control in strategically important enterprises where considered necessary. This reform contributed to the changing role of the public sector.

4. Liberalisation of Foreign Investment

The policy encouraged greater Foreign Direct Investment (FDI) to bring capital, technology, management expertise, and international business practices into India. Automatic approval was introduced for foreign equity participation up to specified limits in selected high-priority industries, subject to the policy framework applicable at the time. Foreign investment was expected to increase capital formation, technological modernisation, and international competitiveness. The reform also encouraged multinational enterprises to establish or expand operations in India. Over time, India’s FDI framework has been modified through subsequent policies and regulations. Thus, the 1991 reforms marked an important step towards greater global economic integration.

5. Liberalisation of Foreign Technology Agreements

The New Industrial Policy simplified procedures for obtaining foreign technology and encouraged Indian industries to access advanced technologies. Automatic approval was provided in specified situations for technology agreements meeting prescribed conditions. The objective was to improve productivity, quality, modernisation, and technological capabilities of domestic industries. Access to foreign technology could help Indian enterprises compete more effectively in international markets and adopt improved production methods. The reform reduced unnecessary administrative restrictions while maintaining applicable regulatory requirements. Therefore, technological liberalisation became an important component of the broader industrial modernisation strategy introduced in 1991.

6. Reform of Monopolies and Restrictive Trade Practices

The 1991 policy changed the approach towards the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. Prior restrictions requiring large industrial houses to obtain prior government approval for expansion, establishment of new undertakings, mergers, and similar activities were substantially relaxed. The focus shifted from controlling the size of enterprises to promoting competition and efficiency. Later, the Competition Act, 2002 replaced the MRTP framework and established a modern competition-law system. These reforms aimed to encourage investment and business expansion while addressing practices that could adversely affect competition. Thus, industrial policy moved towards a more competitive market structure.

7. Greater Autonomy to Public Sector Enterprises

The 1991 policy sought to improve the performance of public-sector enterprises by providing greater managerial and financial autonomy. Selected enterprises were expected to operate with increased commercial flexibility and accountability. The government introduced mechanisms such as Memorandum of Understanding (MoU) arrangements and later developed the system of categorising certain enterprises as Maharatna, Navratna, and Miniratna based on performance and other criteria. Greater autonomy was intended to improve decision-making, productivity, investment capacity, and competitiveness. At the same time, public enterprises remained subject to applicable government policies, corporate laws, and public accountability requirements.

8. Exit Policy and Sick Industrial Units

The 1991 reforms recognised the need to address sick and financially weak industrial units and improve the overall efficiency of industry. The policy proposed mechanisms for restructuring or closing persistently unviable enterprises while providing appropriate safeguards for affected workers. The Board for Industrial and Financial Reconstruction (BIFR), established under the Sick Industrial Companies (Special Provisions) Act, 1985, played a role in dealing with industrial sickness during this period. Later, the Insolvency and Bankruptcy Code, 2016 replaced several earlier insolvency mechanisms. The broader objective was to promote efficient resource allocation and industrial restructuring.

Impact of New Industrial Policy on Indian Industry:

1. Increased Private Sector Participation

The New Industrial Policy, 1991 significantly increased the role of the private sector in Indian industry. Reduction in industrial licensing and public-sector reservations allowed private enterprises to enter and expand in many industries. Entrepreneurs gained greater freedom to make investment and production decisions according to market opportunities. Increased private participation encouraged competition, investment, efficiency, and innovation. It also reduced the earlier dominance of government enterprises in several industrial activities. As a result, the structure of Indian industry gradually became more market-oriented. The private sector emerged as an important contributor to industrial growth and economic development.

2. Growth of Foreign Investment

The policy encouraged greater inflow of Foreign Direct Investment (FDI) into India. Liberalisation of foreign investment rules enabled international companies to participate in selected Indian industries, subject to applicable regulations. Foreign investment brought additional capital, technology, managerial expertise, and global business practices. It also encouraged Indian companies to improve their productivity and competitiveness. Increased participation of multinational enterprises strengthened India’s integration with international markets and global supply chains. However, the extent and sectoral conditions for foreign investment have evolved through subsequent government policies. Overall, the 1991 reforms created a more foreign-investment-friendly industrial environment.

3. Increased Competition

The New Industrial Policy reduced several restrictions on industrial entry and expansion, resulting in greater competition in many sectors. Domestic and foreign enterprises increasingly competed on the basis of price, quality, technology, productivity, and customer service. Competition encouraged firms to reduce costs, improve efficiency, modernise production, and develop new products. Consumers gained access to a wider range of goods and services in several markets. The later Competition Act, 2002 established a modern legal framework for preventing practices that adversely affect competition. Thus, the reforms contributed to a more competitive industrial structure in India.

4. Technological Modernisation

The 1991 policy encouraged Indian industries to adopt modern technology through easier access to foreign technology and increased investment. Technology agreements and collaboration with foreign companies enabled businesses to obtain improved production techniques, machinery, management systems, and technical knowledge. Modernisation helped many enterprises improve productivity, quality, efficiency, and international competitiveness. Increased competition also encouraged firms to invest in research, development, digital technologies, and process improvements. Technological advancement became an important part of industrial transformation after 1991. Thus, the policy contributed to the gradual modernisation and technological upgrading of Indian industry.

5. Expansion of Industrial Production

The reforms created a more liberalised industrial environment, allowing businesses greater freedom to establish, expand, and diversify their operations. Removal of many licensing requirements reduced administrative barriers and facilitated investment decisions. Increased private investment, foreign investment, competition, and technological adoption supported industrial expansion in several sectors. Enterprises could respond more readily to changing market demand and introduce new products and production capacities. The impact differed across industries and periods, but overall, industrial policy reforms changed the conditions under which Indian businesses operated. The policy therefore contributed to greater industrial dynamism and diversification.

6. Improvement in Efficiency and Productivity

The New Industrial Policy increased pressure on enterprises to improve efficiency and productivity. Greater competition meant that firms could no longer depend primarily on administrative protection or licensing restrictions. Businesses increasingly focused on reducing production costs, improving quality, adopting technology, and using resources more effectively. Public-sector enterprises were also encouraged to improve their commercial performance and managerial autonomy. These changes promoted a stronger performance-oriented business culture. Although improvements varied among industries and enterprises, the reform environment encouraged firms to become more responsive to market conditions. Thus, efficiency and productivity became increasingly important factors in Indian industrial operations.

7. Globalisation of Indian Industry

The 1991 reforms accelerated the globalisation of Indian industry by increasing interaction with international markets, foreign investors, technologies, and companies. Indian enterprises gained greater opportunities to access foreign markets, technologies, and international capital. At the same time, domestic firms faced increased competition from global companies operating in India. This encouraged improvements in quality, productivity, management practices, and international standards. Indian industries gradually became more integrated with global supply chains and international trade. The extent of global integration has varied across sectors, but the 1991 policy clearly marked a significant movement towards a more globally connected Indian industrial economy.

8. Changes in Public Sector

The New Industrial Policy changed the traditional role of the public sector by reducing the number of industries reserved for government enterprises and encouraging greater autonomy and commercial efficiency. Selected public-sector enterprises were subjected to restructuring, disinvestment, or increased managerial flexibility. The government increasingly focused on strategic and essential areas rather than maintaining extensive ownership across industries. This resulted in greater participation of private enterprises in sectors previously dominated by public enterprises. However, public-sector enterprises continued to have an important role in several strategic and infrastructure-related areas. Thus, the policy led to a reorientation rather than complete withdrawal of the public sector.

Criticism of New Industrial Policy of India, 1991:

1. Adverse Effect on Small Scale Industries

New policy gave more importance to large industries, MNCs and FDI, which created unequal competition for Small Scale Industries [SSI]. Cheap imported goods and products of big companies harmed MSME sector. It led to closure of many small units and increased unemployment. SSI could not compete in terms of technology and capital. Though protected under MSME Act, 2006 – Sec 7 and Industrial Disputes Act, 1947 – Sec 2A, the policy of liberalization and globalization under FEMA, 1999 affected self-reliance and balanced growth.

2. Growth of Monopoly and Economic Inequality

Policy encouraged privatization and liberalization which led to concentration of wealth in few industrial houses and growth of monopoly. Foreign companies dominated Indian market, leading to economic inequality and exploitation. Rich became richer and poor remained poor. Welfare state concept was weakened. Though Competition Act, 2002 – Sec 3 & Sec 4 was enacted to prevent abuse of dominance and anti-competitive agreements, in practice income disparity increased, violating spirit of Constitution – Art 38 and 39(b)(c) for social justice.

3. Increase in Unemployment and Labour Problems

Due to modernization, automation and capital intensive technology brought by MNCs, requirement of labour reduced. Disinvestment of public sector and closure of inefficient units led to retrenchment and job insecurity. It created labour unrest and social problems. Protection under Industrial Disputes Act, 1947 – Sec 25N & 25O, Factories Act, 1948 – Sec 11 and Social Security Code, 2020 became insufficient. Policy failed to generate enough employment opportunities as aimed under Constitution – Art 41.

4. Neglect of Public Sector and Social Welfare

New policy reduced importance of public sector and gave priority to private profit motive. Many PSUs were disinvested or privatized, affecting public interest and balanced regional development. Social sectors like health and education were neglected. Government control over essential industries decreased. Though regulated by Companies Act, 2013 – Sec 2(45) [Government Company] and Sec 135 [CSR], and Industries (Development and Regulation) Act, 1951, the policy shifted focus from social welfare to profit maximization, against Preamble and DPSP.[Socialist]

5. Threat to Economic Sovereignty

Excessive dependence on FDI, foreign technology and MNCs under FEMA, 1999 – Sec 6 and LPG reforms created threat to economic sovereignty and self-reliance. Foreign companies repatriated huge profits, affecting Balance of Payments. Indian culture and Swadeshi concept was harmed. Domestic industries became dependent on foreign collaborations. Though regulated by Foreign Trade Policy and RBI Act, 1934, criticism is that policy made India vulnerable to global fluctuations and reduced control of State over economy, contrary to Industrial Policy Resolution, 1956 objective.