Industrial Policy in India: Evolution, State Intervention, Reforms, and Contemporary Strategy
Industrial policy refers to the conscious and deliberate actions taken by the state to influence the structure, growth, and direction of industrial development in an economy. In India, industrial policy has been a central instrument of economic transformation since independence, shaping the transition from a colonial, agrarian economy to a diversified industrial and services-based system. For the UPSC Civil Services Examination, industrial policy is a high-yield topic that directly intersects with GS Paper III (Industry, Infrastructure, Economic Development), GS Paper II (Governance and Public Policy), and the Essay paper.
The evolution of industrial policy in India reflects changing economic realities, ideological orientations, and global contexts. From a state-dominated, inward-looking model based on planning and import substitution to a liberalised, market-oriented framework after 1991, and further to a calibrated return of strategic industrial intervention through schemes like Make in India and Production Linked Incentives (PLI), India's industrial policy journey provides rich material for analytical evaluation.
Key Concepts and Definitions
📚 Key Industrial Policy Concepts
Industrial Policy
Industrial policy is the framework of laws, regulations, incentives, and institutional mechanisms through which the government guides industrial development to achieve objectives such as economic growth, employment generation, self-reliance, technological capability, and balanced regional development.
Industrial Licensing
Industrial licensing is a regulatory system under which firms require prior government approval to establish industrial units, expand capacity, diversify products, or import capital goods. It was a defining feature of India's pre-1991 Licence Raj.
MRTP Act
The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 was enacted to prevent concentration of economic power, regulate monopolistic enterprises, and curb restrictive and unfair trade practices.
FERA
The Foreign Exchange Regulation Act (FERA), 1973 regulated foreign exchange transactions and foreign ownership with the objective of conserving scarce foreign exchange and maintaining economic sovereignty.
LPG Reforms
LPG reforms refer to the post-1991 strategy of Liberalisation, Privatisation, and Globalisation aimed at reducing state controls, improving efficiency, and integrating the Indian economy with global markets.
FDI Policy
Foreign Direct Investment (FDI) policy defines sectoral limits, entry routes, and approval mechanisms for foreign investment in India, including the automatic route and government approval route.
Make in India
Make in India is an industrial and investment promotion initiative launched in 2014 to boost manufacturing, attract domestic and foreign investment, improve ease of doing business, and integrate India into global value chains.
PLI Scheme
The Production Linked Incentive (PLI) scheme provides output-linked financial incentives to firms based on incremental production or sales in targeted sectors to enhance scale, competitiveness, and exports.
Evolution of Industrial Policy in India
📜 Evolution of India's Industrial Policy
Pre-1991 Phase: State-Led and Regulated Industrialisation
From independence until 1991, India followed a state-led model of industrialisation rooted in central planning, import substitution, and extensive regulation. This approach was shaped by the colonial legacy of under-industrialisation, scarcity of private capital, technological backwardness, and the political objective of achieving economic self-reliance.
The state assumed a commanding role in heavy industries, infrastructure, and strategic sectors, while private enterprise operated under close supervision. Industrial policy during this period prioritised equity, regional balance, and long-term capacity creation over short-term efficiency.
Post-1991 Phase: Market Orientation and Strategic Intervention
The post-1991 phase marked a decisive shift towards market-oriented reforms, competition, and global integration. The role of the state transitioned from direct controller to facilitator and regulator. In recent years, however, industrial policy has re-emerged in a more targeted and incentive-based form, reflecting global trends and domestic strategic needs.
Industrial Policy Resolution, 1948
The Industrial Policy Resolution (IPR) of 1948 was India's first comprehensive industrial policy statement after independence. It laid the foundation of a mixed economy by defining the respective roles of the public and private sectors.
- Strategic industries such as arms, atomic energy, and railways were reserved exclusively for the state.
- Key basic industries like coal, iron and steel, aircraft manufacture, and shipbuilding were brought under state control or strict regulation.
- The private sector was permitted to operate in consumer goods and light industries under regulatory oversight.
The 1948 resolution reflected immediate post-independence priorities of national security, planned development, and regulation of private capital while still recognising entrepreneurial initiative.
Industrial Policy Resolution, 1956
🏛️ Industrial Policy Resolution, 1956
"Socialistic Pattern of Society" Framework
The Industrial Policy Resolution of 1956 was a landmark document that entrenched the public sector as the backbone of India's industrial strategy. It was closely aligned with the Second Five Year Plan and the goal of establishing a socialistic pattern of society.
- Schedule A industries were reserved exclusively for the public sector.
- Schedule B industries had a dominant public sector role with limited private participation.
- Schedule C industries were left to the private sector but subject to licensing.
This policy led to the expansion of public sector undertakings (PSUs) in steel, heavy engineering, power, and infrastructure. While it succeeded in creating a diversified industrial base, it also entrenched bureaucratic control and limited competition.
Industrial Licensing and the Licence Raj
🔒 The Licence Raj – Problems
Industrial licensing became the principal instrument of state control over industry in the pre-1991 period. Firms required licences for entry, expansion, diversification, and imports of machinery and technology.
Although licensing aimed to prevent monopolies and align investment with planning priorities, over time it led to delays, corruption, rent-seeking, lack of innovation, and low productivity. The system discouraged entrepreneurship and prevented firms from achieving economies of scale.
Public Sector Dominance
The public sector was envisaged as the driver of industrialisation, especially in capital-intensive and strategic sectors. PSUs helped build basic industrial and infrastructure capacity, but many suffered from low efficiency, overstaffing, political interference, and mounting financial losses.
Public sector dominance also crowded out private investment and limited technological dynamism, contributing to structural rigidities in the industrial sector.
MRTP Act, 1969
The MRTP Act was enacted to prevent concentration of economic power and regulate large business houses. Firms exceeding prescribed asset limits required government approval for expansion, mergers, or diversification.
While the Act addressed concerns of inequality and monopolistic practices, it discouraged scale expansion and hindered the emergence of globally competitive Indian firms.
FERA, 1973
FERA imposed stringent controls on foreign exchange transactions and foreign ownership. Multinational corporations were required to dilute equity and operate under strict technology transfer conditions.
This led to technological isolation, reduced foreign investment, and limited integration with global markets, further constraining industrial growth.
Industrial Stagnation and the Crisis of the 1980s
By the late 1970s and 1980s, India's industrial sector faced stagnation due to low productivity, outdated technology, fiscal stress, and external shocks such as oil crises. Partial liberalisation measures in the 1980s improved growth temporarily but did not address deep structural problems.
The balance of payments crisis of 1991 exposed the limitations of the existing industrial and economic model.
New Industrial Policy, 1991
🚀 New Industrial Policy, 1991
Paradigm Shift – End of Licence Raj
The New Industrial Policy of 1991 marked a paradigm shift in India's industrial strategy. Introduced in the context of a severe economic crisis, it dismantled the Licence Raj and opened the economy to competition and investment.
- Abolition of industrial licensing for most industries.
- Reduction of public sector monopoly to a small strategic list.
- Liberalisation of foreign direct investment norms.
- Removal of MRTP asset limits.
The policy aimed to enhance efficiency, competitiveness, and integration with the global economy.
LPG Reforms: Liberalisation, Privatisation, Globalisation
🌐 LPG Reforms – Three Pillars
Liberalisation reduced regulatory controls, privatisation sought efficiency through disinvestment and private participation, and globalisation integrated India with global trade, capital, and technology flows.
Together, these reforms transformed the industrial landscape and shifted policy focus from control to competition.
Delicensing, FDI Liberalisation, and Disinvestment
Post-1991 reforms removed licensing in most sectors, expanded the automatic route for FDI, and initiated disinvestment of PSUs to improve fiscal health, efficiency, and market discipline.
National Manufacturing Policy, 2011
The National Manufacturing Policy aimed to raise manufacturing's share in GDP to 25 percent and create 100 million jobs. It proposed National Investment and Manufacturing Zones, skill development, and environmentally sustainable manufacturing.
Make in India Initiative
Make in India sought to transform India into a global manufacturing hub by improving ease of doing business, developing infrastructure, reforming regulations, and promoting key sectors.
Production Linked Incentive Schemes
💰 Production Linked Incentive (PLI) Schemes
Output-Based Incentives for Strategic Sectors
PLI schemes provide output-based incentives in sectors such as electronics, pharmaceuticals, automobiles, solar modules, and semiconductors. They represent a shift from protectionist policies to performance-linked support.
Ease of Doing Business Reforms
Reforms include digitisation of approvals, single-window clearances, insolvency reforms, labour law rationalisation, and logistics modernisation to improve industrial competitiveness.
Industrial Corridors and SEZs
Industrial corridors integrate manufacturing, logistics, and urban development, while Special Economic Zones promote exports through fiscal incentives and regulatory flexibility.
Challenges Facing Indian Industry
⚠️ Key Challenges for Indian Industry
- Stagnant manufacturing share in GDP.
- High logistics and energy costs.
- Skill mismatches and informality.
- Technological disruption and global competition.
Way Forward
India's industrial policy must focus on technology, scale, sustainability, and integration with global value chains while ensuring inclusiveness, federal cooperation, and policy stability.
UPSC Previous Year Questions
UPSC PYQ
Question: Industrial policy in India has undergone significant changes since independence. Examine.
Approach: Trace evolution from IPR 1948 and 1956 to 1991 reforms and recent initiatives like PLI.
UPSC PYQ
Question: Discuss the role of the public sector in India's industrial development.
Approach: Evaluate achievements, inefficiencies, and post-1991 disinvestment reforms.
UPSC PYQ
Question: What were the objectives and outcomes of the New Industrial Policy, 1991?
Approach: Link objectives with delicensing, FDI liberalisation, and competition.
UPSC PYQ
Question: Production Linked Incentive schemes represent a new approach to industrial policy. Discuss.
Approach: Explain rationale, design, benefits, and limitations.
Practice MCQs
-
Which Industrial Policy Resolution formally adopted the goal of a socialistic pattern of society?
- A. Industrial Policy Resolution, 1948
- B. Industrial Policy Resolution, 1956
- C. New Industrial Policy, 1991
- D. National Manufacturing Policy, 2011
Answer: B. Industrial Policy Resolution, 1956 explicitly aligned industrial development with socialist objectives.
-
The MRTP Act was primarily aimed at:
- A. Promoting foreign investment
- B. Preventing concentration of economic power
- C. Encouraging industrial licensing
- D. Supporting small industries
Answer: B. It regulated monopolies and restrictive trade practices.
-
FERA was enacted mainly to:
- A. Promote exports
- B. Conserve foreign exchange
- C. Liberalise FDI
- D. Support manufacturing
Answer: B. It imposed strict controls on foreign exchange transactions.
-
Which reform abolished industrial licensing for most sectors?
- A. Industrial Policy Resolution, 1956
- B. MRTP Act, 1969
- C. New Industrial Policy, 1991
- D. Make in India, 2014
Answer: C. Delicensing was a core feature of the 1991 reforms.
-
Make in India was launched in:
- A. 2010
- B. 2014
- C. 2017
- D. 2020
Answer: B. 2014. It aimed to promote manufacturing and investment.
-
PLI incentives are linked to:
- A. Capital investment
- B. Incremental production or sales
- C. Employment generation
- D. Research expenditure
Answer: B. Incentives are output-based, not input-based.
-
SEZs are primarily designed to:
- A. Promote domestic consumption
- B. Promote exports
- C. Support agriculture
- D. Regulate imports
Answer: B. SEZs provide fiscal incentives for export-oriented units.
-
National Manufacturing Policy targeted manufacturing share of GDP at:
- A. 15 percent
- B. 20 percent
- C. 25 percent
- D. 30 percent
Answer: C. 25 percent. The NMP 2011 set this explicit target.