License Raj, IDA Act and Other Policies Till 1991

Industrial Policy (1956) was reformed several times before the new Industrial policy 1991 was launched. This was a watershed moment for Indian Economy ending the license Raj and ushering India into liberalization, privatisation and globalization. Before we move ahead, it’s our duty to understand what happened in these four decades with respect to industries in particular.

License Raj

License Raj refers to regulations and accompanying bureaucracy that were required to set up and run Indian businesses in India between 1951 and 1991. The Government resorted to  licensing system so that it can maintain control over industries as per the Industries Development and Regulation Act, 1951.

What is a License?

A license refers to a written permission granted by government to a firm which mentions what product can be manufactured by the firm. Further, license also includes various other particulars such as the place where factory is to be located; what products to be produced; what is maximum quantity that can be produced; what are conditions about expansion of production etc.

Example: India’s automobile sector is most suitable to recall the heydays of license raj. In those days, only a few brands such as Bajaj, Rajdoot (of Escorts), Vespa (of Bajaj later), Chetak (of Baja), Lambretta etc. existed . Bajaj was market leader and its Chetak brand was so popular that people used to book it and wait for months to get it delivered. The reason was that the Industrial License stipulated what quantity of scooter they could produce and also that they could produce only up to 25 per cent in excess of its licensed capacity. If they wanted to expand beyond this, they needed prior permission.

What was compulsion for licensing?

The licensing policy made it necessary to obtain licensing in the following conditions:

• The existing industrial units (prior enactment of IDR act 1951) needed to obtain registration under the act.
• For new industrial units to be set up in category of licensed industries. If the industry is not covered under compulsory licensing but the investment was above Rs. 10 crore; the firm was required to file a memorandum of information with the department of industries.
• If any article is reserved for small scale industries and a firm wanted to manufacture these items, it needed a license.
• If a firm wants to increase its production capacity beyond 25%, it needed to obtain prior approval.
• An industrial license was needed to set up a manufacturing unit in metro city. Prior approval was needed to change the location of the manufacturing unit.

To obtain the license, the entrepreneur had to file an application with the government. After receiving application, government would make necessary investigation, and if government found that industrial unit is not against public interest, then it will grant licence. The license could be revoked if the industrial unit was not complying with provisions of Industrial Licensing Policy.

Analysis of the Licensing Policy

The Government had pursued the licensing policy to allocate the production targets set out in the five years plans to the firms. The stated objectives of the licensing policy were as follows:

• To regulate the industrial sector, particularly private sector in desired direction as per objectives of the five year plans.
• To check the concentration of ownership of Industries in few hands
• To emphasize on balanced Regional Development.
• To encourage small-scale industry
• To encourage the new entrepreneurs to set up industries.

But the bureaucratic red tape imposed substantial administrative burden and there was no certainty that an application for a license would be approved within or in what timeframe.  More than one third applications were rejected which meant a loss of investments. This was a big hurdle in rapid industrialization. The issues created by License Raj are:

• The entrepreneurs needed to run from pillar to post to obtain industrial license. They needed to deal with various government departments and officers; and spent more time in Delhi than their factories.
• The licensing policy was a conflict of objectives. The stated objective was to increase industrial production but on ground it restricted expansion, production of new articles etc. Similarly, the stated objective of was to check the concentration of economic power in few hands, but actually it did the same. New licenses were granted to big houses thanks to all pervasive corruption. They were also allowed to grow at cost of new players. Bribery was a culture in license raj. For bribe, the license was issued in areas reserved for public sector or small scale industries.
• There was an excessive control as one needed to obtain licences for setting up new unit, starting production of new product, substantial expansion, change of location etc.

This mess brought the license regime under the constant review and appraisals. A number of committees and commissions were set up. The series of reforms finally culminated in abolishment of industrial Licensing in 1991.

Reforms in the Licensing System

A series of reforms in Licensing System was initiated after the second five year plan in the form of studies by some committees and commissions in the 1960s.  The key questions were:

• Are the five year plans really increasing the income level of the people?
• What was the extent and effect of concentration of power in private hands?
• What was the extent and effect of monopolistic tendencies in Indian industries?
• To what extent and how the licensing regime should be liberalized?

First such committee was Mahalanobis committee on ” Distribution of Income and Levels of Living” to find who was benefitted in first and second five year plans because there was no substantial increase in per capita income of the people under these two plans. This committee found that big financial and development institutions helped only big industrial houses and helped in ‘monopolistic growth’ in the country and aided in concentration of economic power in few hands.

Monopolies Inquiry Commission

On the basis of recommendation of this committee, a Monopolies Inquiry Commission was established headed by Justice KC Dasgupta. This committee also iterated the dangers of monopolistic tendencies by reporting that the Industrial licensing system enabled big business houses to obtain disproportionately large share of licenses.

Hazari Committee

The process for review of the licensing system began with Hazari committee in 1967 headed by Dr. R K Hazari. This committee threw light on the failure of the Industrial licensing in almost every stated objectives. It termed license as ‘passport’ to do business in India.

Dutt Committee

The 1967 “Industrial Licensing Policy Inquiry Committee” was set up under the chairmanship of Mr. Subimal Dutt. This committee reported that due to the license raj, a very strong nexus had developed between the Industrial houses, politicians and bureaucrats. Corruption prevailed in the system and the licensing authorities were bought over by the large industrial houses. Its key recommendations were:

• The industries should be reclassified into core sector, non-core sector, reserved sector etc. Licensing should continue with necessary reorientationand larger houses should be given license to set up industry in only core and heavy investment sectors.
• A monopolies commission should be established with necessary teeth to deal with the problems of concentration of economic power or product monopolies.

MRTP Act 1970

On the basis of recommendation of Dutt Committee, MRTP Act was enacted in 1969 to ensure that concentration of economic power is not in hands of few rich. The act was there to prohibit monopolistic and restrictive trade practices. This act is not in force now as it was repealed in 2009 and was replaced by Competition Act 2002 with effect from September 1, 2009. It established a MRTP commission; which is now replaced by Competition Commission of India. The key points from this act are as follows:

• This act was not applicable to the Public Sector Companies, Trade Unions, Cooperatives and Financial Institutions.
• Any other company with assets more than Rs. 25 Crore was tagged as MRTP company. This limit was raised several times later and finally removed in 1991. Under the current provisions, no MRTP companies exist in India. Under the current provisions, any company which has more than 25% of the market share is called Monopoly company.

MRTP Commission

This MRTP act established MRTP Commission (MRTPC) as an organ of Department of Company Affairs as a quasi-judicial body. Its major function was to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. It is now replaced with Competition Commission of India (CCI).  We shall be studying the Competition Act later in these modules, here we note the two main differences between the two:

• The object of the MRTP Act was to prevent the economic concentration in few hands, the competition act aims to promote and sustaining Competition in the market and to ensure the freedom of trade and to protect the interest of the consumer in whole.
• The MRTP commission had an advisory role while the CCI has been provided teeth to initiate suo moto[on its own motion] actions and impose punishments to the entities having some adverse effect in the market.

Industrial License Policy in 1970 and emergence of core and non-core sectors

In the backdrop of Dutt committee and MRTP Act; the government launched its new Industrial License Policy in 1970 whereby the industries were re-classified into four groups viz. Core Sector, Middle Sector, Non-core Heavy Investment Sector and Delicensed sector. Core sector comprised basic, critical and strategic industries such as atomic energy, cement, Iron, Steel etc. requiring investment of Rs. 5 Crore or more. This sector would be exclusively developed under public sector. Non-core heavy investment sector or joint sector comprised of those core industries which required investment below 5 Crore. Middle Sector comprised the investment of Rs. 1 Crore to 5 Crore.  Delicensed Sector, in which investment was less than ` 1 Crore and was exempted from licensing requirements.

Thus, the role of the large business houses was confined to the core, heavy and export oriented sectors. The small industries were deregulated and this was first major step towards freedom from license Raj. The government released further licensing policies in 1975, 1978, 1980, 1985, 1991, 1999 and 2006 gradually liberalising the licensing system and making it much simpler.

Industry Policy Statement 1973 and emergence of Core Industries / PPP concepts

The Government came up Industrial Policy Statement 1973 which for the first time defined the term “Core Industries” keeping six industries within this category viz. Iron and Steel, Cement, Coal, Crude Oil, Oil Refining and Electricity.

Currently, we have eight core industries viz. Fertilizers, Electricity, Refinery Products, Natural Gas, Steel, Coal, Crude Oil and Cement.  You can remember these with mnemonics → FERNS-C3

This policy also allowed limited entry to MNCs and emphasized on a prototype of Public Private Participation.

Industrial Policy Statement 1977

This policy was announced by Janata Government led by Janata Government led by Morarji Desai. The Janata Government had a different approach and planning philosophy from Congress, and it reflected in its Industrial policy also. This policy gave highest priority to the small scale and tiny industries.

• For the first time, it defined a “tiny unit” as a unit with investment up to Rs. 1 Lakh, located in towns or villages with a population < 50,000.
• The policy declared to establish one District Industries Centrein each district to meet the requirement of industries within that district.
• To open a separate cell in Industrial Development Bank of India (now IDBI) to cater to the need of the small industries. It emphasized on more attention to marketing, standardisation, quality control etc. in small industries. It expanded the list of items reserved for exclusive production in the small scale sector from 180 to more than 500.
• The policy emphasized on the viability, efficiency and profitability of the public sector units.
• It declared that government will selectively take over sick industries to bear minimum possible loss; and will take immediate measures to rehabilitate and manage the units taken over.
• Focus on indigenous capital and technology; Self sufficiency, Minimum imports and maximum exports.

The policy declared that the foreign investment in the “unnecessary areas” (means those which had not role to play in development of the country), was prohibited. This was virtually a complete NO to the foreign investment.