Introduction
Industrial policy is a vital instrument through which governments shape the industrial landscape to achieve economic development, employment generation, and technological progress. India’s journey from a primarily agrarian economy to a diverse industrialized nation has been profoundly influenced by its industrial policies.
The Industrial Policy Resolution of 1956 reflected India’s post-independence emphasis on a socialist-inspired planned economy with significant state intervention. In contrast, the Industrial Policy of 1991 marked a paradigm shift towards liberalization, deregulation, and globalization in response to an economic crisis.
Understanding these two landmark policies provides critical insights into India’s economic evolution, policy environment, and challenges in balancing growth with equity and efficiency.
1. Industrial Policy Resolution, 1956
1.1 Historical Context
Post-independence, India faced severe challenges including poverty, low industrial base, and economic backwardness. The government adopted a mixed economy model with a strong focus on public sector-led industrialization to accelerate growth and reduce dependence on imports.
The 1956 policy built upon the earlier 1948 resolution and laid down a comprehensive framework for industrial development in the Second Five Year Plan.
1.2 Objectives
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Rapid Industrialization: Accelerate industrial growth to achieve self-reliance and economic modernization.
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Balanced Development: Promote balanced growth across regions and sectors to reduce inequalities.
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Public Sector Leadership: Establish a strong public sector in key industries to drive growth and fill gaps left by private capital.
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Promotion of Small-Scale Industries: Support small and cottage industries for employment generation and equitable development.
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Regulation and Control: Ensure planned industrial growth through licensing and regulation to avoid monopolies and duplication.
1.3 Key Features
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Three-fold Classification of Industries:
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Schedule A: Industries exclusively reserved for the public sector (e.g., defense, atomic energy, heavy machinery).
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Schedule B: Industries where the public sector would have an important role but private sector participation was permitted.
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Schedule C: All other industries left open for the private sector with regulation.
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Emphasis on Public Sector: The policy envisaged that large-scale and heavy industries would be primarily developed by the state.
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Industrial Licensing: Mandatory licensing system to regulate investment, location, and capacity expansion.
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Import Substitution: Promotion of indigenous production to reduce imports through protective tariffs and import restrictions.
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Small-Scale Industry Reservation: Certain products were reserved exclusively for small-scale industries to protect them from large-scale competition.
1.4 Impact
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Growth of Public Sector: India developed key industries such as steel, heavy engineering, and chemicals under the public sector.
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Mixed Results on Industrial Growth: While the policy led to the establishment of core industries, overall industrial growth remained moderate due to bureaucratic delays and inefficiencies.
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Small-Scale Sector Growth: The reservation policy helped small industries but sometimes led to inefficiencies and lack of competitiveness.
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Regulatory Burden: The license raj led to complex regulations, limiting entrepreneurship and innovation.
2. Industrial Policy, 1991
2.1 Historical Context
By the late 1980s, India’s economy faced severe fiscal deficits, balance of payments crisis, and low growth—termed as the “Hindu rate of growth.” The economic crisis of 1991 compelled India to rethink its industrial strategy.
The 1991 Industrial Policy was a landmark reform that shifted India’s industrial framework from heavy state control to liberalization, privatization, and globalization.
2.2 Objectives
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Economic Liberalization: Remove controls and promote market-driven industrial growth.
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Global Integration: Open the economy to foreign investment, technology, and competition.
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Encouragement of Private Sector: Reduce state dominance and encourage private entrepreneurship.
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Enhancement of Competitiveness: Improve industrial efficiency through competition and modernization.
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Simplification of Regulations: Abolish the licensing system and reduce bureaucratic hurdles.
2.3 Key Features
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De-licensing of Industries: Most industries were freed from the compulsory licensing system, except a few in strategic sectors.
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Disinvestment and Privatization: Initiatives to reduce public sector monopoly and invite private investment.
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Foreign Direct Investment (FDI): Allowed automatic approval for foreign investment in many industries, boosting capital inflows and technology transfer.
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Removal of Industrial Monopoly: Sectors previously reserved for the public sector were opened to private and foreign firms.
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Small-Scale Industry Reforms: Gradual phasing out of product reservations to improve competitiveness.
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Trade Liberalization: Reduction of tariffs and import restrictions to expose domestic industries to international competition.
2.4 Impact
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Acceleration of Industrial Growth: Post-1991, industrial growth rates improved significantly due to increased investments and efficiency.
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Rise of the Private Sector: Private enterprises expanded rapidly, contributing to diversification and innovation.
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Increased Foreign Investment: FDI inflows brought capital, technology, and global best practices.
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Competitiveness and Export Growth: Indian industries became more competitive globally, contributing to export diversification.
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Challenges Remain: Despite reforms, infrastructural bottlenecks, labor rigidities, and regulatory complexities continue to pose challenges.
3. Comparative Analysis of 1956 and 1991 Industrial Policies
| Aspect | 1956 Industrial Policy | 1991 Industrial Policy |
|---|---|---|
| Economic Model | Mixed economy with state-led industrialization | Market-oriented, liberalized economy |
| Role of Public Sector | Central and dominant role in core and heavy industries | Reduced dominance, promotion of private and foreign firms |
| Industrial Licensing | Extensive licensing and control system (License Raj) | De-licensing of most industries, except few strategic ones |
| Foreign Investment | Restricted and controlled | Liberalized, with automatic approval in many sectors |
| Small-Scale Industry | Reserved products for protection | Gradual removal of reservations to improve competitiveness |
| Trade Policy | Protectionist, import substitution | Liberalization, tariff reduction, integration into global markets |
| Focus | Self-reliance, import substitution, planned growth | Efficiency, competitiveness, export promotion |
4. Conclusion
India’s industrial policies of 1956 and 1991 represent two contrasting but complementary phases in the country’s economic development. The 1956 policy laid the foundation for a planned and state-led industrial base necessary for a newly independent nation grappling with resource constraints and socio-economic challenges. However, its over-regulation and inefficiencies necessitated a radical shift.
The 1991 policy ushered in an era of liberalization, opening up the economy to competition, private investment, and globalization, setting India on a path of rapid industrialization and economic integration with the world.
Both policies have shaped India’s industrial landscape significantly, and understanding their nuances is essential for policymakers, economists, and stakeholders aiming to foster sustainable and inclusive industrial growth in the future.