Industry

What was the License Raj?

• Before 1991, Indian industry ran under a system nicknamed the License Raj.
• A business needed government permission to start, expand, or even change what it produced.
• Up to 80 different government offices could have a say before a factory got its go-ahead.
• Licences and controls limited capacity, slowed new entry and bred red tape.
• A family that paid in full for a new car or scooter could still wait years on a list. The maker had no licence to produce more.
• The system protected existing firms. But it kept industry small and uncompetitive.

The Industrial Policy Resolution of 1956

• It divided industries into three groups.
• Some sectors were reserved exclusively for the public sector. Examples are railways, atomic energy and defence production. The state judged them too strategic or too capital-heavy for private hands.
• Others had a mixed role. The state led, but private firms could still operate. Iron and steel is an example.
• The rest, including most consumer goods and light manufacturing, were left open to private business.
• The state led the reserved list because heavy industry needed capital and scale it argued only it could fund at the time.
• Picture two entrepreneurs in the 1960s. One wants a steel plant. That is on the reserved list, so only the government can build it. The other wants to make bicycles. That is on the open list, so the entrepreneur can apply for a licence and compete, though still under quota controls.

What changed in 1991

• The 1991 New Industrial Policy abolished licensing for most industries, except a small strategic list.
• It opened many sectors to private and foreign investment for the first time in decades.
• A balance-of-payments crisis forced the shift.
• By May 1991, India’s cash reserves could barely cover three weeks of imports.
• To avoid defaulting, India secretly flew about 67 tonnes of its gold reserves to banks in London and Switzerland. The gold was collateral for emergency loans.
• Private and foreign firms entered. The state retreated from running everything.
• Read more: Evolution of India’s Industrial Policy and Effects of Liberalization: Investment, Trade and Debates.

Who wrote the early blueprint?

• In 1944, before independence, a group of India’s biggest industrialists wrote their own economic plan for the future country.
• Signatories included JRD Tata and G.D. Birla. So it is called the “Bombay Plan”, and also the “Tata-Birla Plan”.
• They proposed doubling per capita income in fifteen years, with a five-fold rise in manufacturing.
• This was not the state forcing planning on business. Big capitalists themselves asked for a planned, state-led economy.
• That explains why the License Raj faced so little business resistance at first.

What is a PSU?

• A PSU (Public Sector Undertaking) is a company the government owns a majority of.
• Many were built before 1991 to create heavy industry the private sector could not fund.
• Steel, power, telecom, banks and oil were all dominated by PSUs.
• Real examples are SAIL (steel), ONGC (oil and gas), BHEL (heavy electrical equipment), Coal India (coal mining) and BSNL (telecom).
• They were needed because, in the 1950s and 60s, private Indian capital was too small and too risk-averse for plants of this scale. Foreign investment in core industry was politically unwelcome.
• PSUs delivered strategic capacity. But they also ran chronic losses and inefficiency.
• Reform has meant letting them run better, selling stakes, or closing the bad ones.
• Read more: Public Sector Enterprises.

Disinvestment versus privatisation

• Disinvestment is the government selling part or all of its stake in a PSU.
• Full privatisation gives up government control entirely.
• Disinvestment may sell only a slice, with control staying in government hands.
• Selling stakes raises money and can improve management through private ownership. Not every stake sale is privatisation.
• In 2001, the government sold a 51% stake in BALCO (Bharat Aluminium Company) to Sterlite Industries. That is privatisation. Control passed to a private owner.
• In the 2022 LIC IPO, the government sold only about 3.5% of its shares and kept roughly 96.5%. That is disinvestment. The government stayed firmly in control.

• Micro, Small and Medium Enterprises (MSMEs) are classified by investment and turnover.
• Since April 2025, a micro unit can invest up to ₹2.5 crore, a small unit up to ₹25 crore, and a medium unit up to ₹125 crore.
• The matching turnover limits are ₹10 crore, ₹100 crore and ₹500 crore.
• Over 7.47 crore registered enterprises employ more than 32.82 crore people.
• That makes MSMEs the second-largest employer after agriculture.
• The sector gives roughly 30% of India’s GDP and about 45% of exports by value.
• Each unit is small. But their sheer number makes them a big employer. They absorb workers that factories do not, especially in services and light industry.
• A home-based bakery with a few lakh rupees in equipment counts as micro. A garment export unit with a few crore in machinery counts as small.
• Most of the 7.47 crore units are tiny, not factories.
• Read more: MSMEs and Industrial Policy.

Make in India

• Launched in 2014.
• It aims to boost domestic manufacturing and pull foreign investment into factories.
• It is meant to create jobs and cut dependence on imports.
• It covers sectors beyond services, from autos to electronics.

How a PLI scheme works

• Production Linked Incentive (PLI) schemes pay companies a subsidy tied to how much they actually make in India.
• A payment linked to output pushes firms to manufacture at home, not just import.
• They target areas like electronics, pharmaceuticals and solar modules.
• The subsidy rewards production above a threshold, so it pays for extra output.
• PLI carries a total outlay of about ₹1.97 lakh crore across 14 sectors.
• By the end of FY 2025-26, it had attracted about ₹2.4 lakh crore in actual investment.
• It generated production and sales worth roughly ₹22.66 lakh crore.
• That gap is the whole point. A modest subsidy is meant to unlock spending several times its own size.

Today’s manufacturing push

• Policy now leans on Make in India, PLI and a National Manufacturing Mission.
• These aim to lift manufacturing’s share of GDP and create many factory jobs.
• A bigger factory base is seen as the path to well-paid formal employment.
• Building it is hard because of infrastructure, skills and global competition.

Why has industry’s share stayed flat?

• Industry’s share of GDP stayed roughly stable for decades, even as the economy grew fast.
• This is unusual. Many economies see industry’s share rise sharply during rapid growth.
• In India, services grew faster, even before industry matured. That diluted industry’s share.
• Think of the economy as a pie. Industry’s slice stayed about the same size while the whole pie grew many times over.
• Services added a bigger slice of their own. Industry’s slice simply never grew to match.

Did India skip a manufacturing stage?

• Economists ask whether India skipped a normal manufacturing-heavy stage.
• South Korea and China built broad manufacturing bases before services grew large.
• India’s pattern was different. Services grew early and large.
• This matters because manufacturing is the biggest source of formal factory jobs.
• A young worker in 1990s South Korea likely headed for a factory in electronics or shipbuilding. A young worker in 1990s India more likely headed for a shop, a call centre or informal trade.
• Decades later, Korea’s factories still employ a large share of its workers. India’s employ a much smaller share, though both economies got richer.
• The PLI and Mission push is an attempt to build that missing stage.

Industrial sickness

• Industrial sickness means firms, often in textiles or jute, became chronically loss-making.
• They could not modernise and kept using up capital and jobs.
• The Industrial Reconstruction Corporation of India (IRCI) tried to revive them for decades.
• Handling sick units means choosing between revival, sale or closure. It has been a recurring problem since the 1980s.

Import substitution or export orientation?

• Import substitution means building local factories to replace imported goods, protected by tariffs.
• Export orientation means building factories to sell to the world.
• India, like much of Latin America, chose import substitution from the 1950s.
• Japan, South Korea and the other “Asian Tigers” pushed industries to compete abroad early, forcing them to improve fast.
• Competing for export orders forces efficiency and innovation. A protected home market does not.
• Many economists trace India’s slower industrial growth partly to this early choice.
• Read more: Development and Structural Change Since Independence.

The National Manufacturing Mission

• Budget 2025-26 announced the National Manufacturing Mission.
• It aims to lift manufacturing to 25% of GDP by 2035.
• It targets 143 million new jobs and about $1.2 trillion in merchandise exports.
• It is the headline industrial policy push of this period. (Source: PIB)

What the latest factory data shows

• India’s Index of Industrial Production grew 6.7% in July 2026. Manufacturing was up 7.3%.
• Capital goods output rose 16.1%.
• That is a sign firms are investing in new machinery, not just selling more of what they already make.
• (Source: MoSPI, Index of Industrial Production)