IDA Act and Industrial Licensing

The Industries (Development and Regulation) Act, 1951 (commonly abbreviated as the IDR Act) is a central legislation in India which provides for the development and regulation of certain industries considered to be of national importance. It establishes the legal framework under which the government exercises control over specified industries, including licensing, registration, reservation for small-scale units, and other regulatory measures.

Background and Context

After independence, India adopted a development strategy that emphasised industrialisation under state guidance. The IDR Act (enacted on 31 October 1951) gave the Union Government power to regulate important industries that affect the nation as a whole, with the aim of promoting balanced industrial growth, preventing monopolies, and ensuring that industrial development aligned with broader economic policy.The Act applies throughout India and initially covered various industries specified in the First Schedule of the Act.

Key Provisions of the Act

Scheduled Industries and Definition

The Act defines an “industrial undertaking” belonging to a scheduled industry as one carried out in one or more factories and falling under the First Schedule. This allows the government to focus regulatory oversight on industries deemed strategically significant.

Licensing of New Undertakings

Under the Act, no person (other than the Central Government) may establish a new industrial undertaking pertaining to a scheduled industry after its commencement unless a licence is issued by the Central Government. The licence may include conditions regarding location, size, inputs, etc.Similarly, any change in the articles manufactured by an existing licensed undertaking may require an amended or new licence.

Registration of Existing Undertakings

Industrial undertakings covered by the Act that exist at the commencement or are about to be established must register their business with the government within the timeframe specified. Registration facilitates record-keeping and regulation.

Reservation for Small Scale / Ancillary Units

Section 11B of the Act empowers the government to specify requirements that small-scale and ancillary industrial undertakings must fulfil in order to receive favourable treatment or exemptions. The Act also introduced the policy of reservation of products for exclusive manufacture by the small-scale sector under amendments.

Development Councils and Advisory Bodies

The Act provides for the establishment of a Central Advisory Council and Development Councils for specific industries to advise the government on development and regulatory matters.

Powers to Issue Directions, Conduct Investigations, and Impose Cess

The government may issue directions to regulated undertakings, investigate their affairs, control supply/distribution/pricing of certain articles, and impose cesses on scheduled industries if needed.

The Industrial Licensing Regime

Purpose

The licensing mechanism was designed to ensure that new industrial undertakings in scheduled industries proceeded in alignment with national policy, avoided excessive concentration of industrial capacity, preserved balanced regional development, and met standards of size and technology.

Scope and Requirements

• A licence is required to establish a new industrial unit in a scheduled industry; it may include conditions relating to the location, minimum size, product, technology, or inputs.
• An existing undertaking wishing to begin manufacturing a new article (i.e., product) may need a new licence.
• The regulatory process is administered by the Secretariat of Industrial Assistance (now part of the Department of Promotion of Industry & Internal Trade) which processes applications.

Post-Liberalisation Evolution

Since India’s economic liberalisation beginning in 1991, the scope of mandatory licensing has been substantially reduced. Many industries were de-licensed; now licensing is required only for a limited set of industries—particularly those related to defence, strategic goods, and highly regulated sectors (public health, safety, etc.).Thus, the licensing regime under the IDR Act remains in force but covers only selected industries rather than the broad range that applied previously.

Significance and Impact

• The Act provided the legal basis for India’s early industrial controls and planning, enabling the government to guide industrial policy, ensure regional dispersion of firms, and promote small-scale industry.
• It formed a key part of the “Licence-Raj” era: the extensive system of industrial licensing controls, approvals and regulation that bureaucratised much of industrial investment prior to liberalisation.
• Post-1991 reforms gradually dismantled much of the licensing regime, but the IDR Act remains relevant for the residual regulated industries and for policy instruments such as reservation of items for small-scale industry.

Advantages and Disadvantages

Advantages

• Enables coordinated industrial development in line with national priorities and economic planning.
• Helps prevent uncontrolled clustering of industries in certain regions through licensing and location conditions.
• Provides special treatment and support to small-scale and ancillary units to promote inclusive industrial growth.Disadvantages
• The licensing regime became cumbersome, time-consuming and created entry barriers, limiting entrepreneurial initiative and competitive pressures.
• Excessive regulation and approvals contributed to inefficiency, rent-seeking and slowed industrial expansion.
• The rigidity of product, size and location conditions sometimes discouraged innovation and rapid adaptation to market changes.

Criticism and Reforms

Critics argue that the licensing system under the IDR Act impeded flexibility and growth, and that the administrative burden unduly restricted private sector participation and innovation. In response, the Indian government introduced reforms from 1991 onwards—abolishing or reducing licensing requirements across many sectors, liberalising foreign investment and simplifying regulatory frameworks. As a result, the licensing requirement now applies only to a narrow list of industries of national or strategic importance.

Current Relevance

Although the licensing regime has been pared back, the IDR Act remains the underlying legislation for certain regulated industries in India requiring an industrial licence. The government continues to process licence applications through its online portal for those covered by the Act. The Act also continues to serve as a legal tool for reservation of items for small-scale units, regulation of existing undertakings, and for government interventions in scheduled industries.