Delicensing

Topic: The 1991 Crisis and LPG Reforms: An Appraisal · NCERT: Beyond NCERT

Meaning

Delicensing means removing the rule that a firm must get an industrial licence (written government permission to set up, expand or close a factory) before it can operate in most industries. A licence is still needed only in a few sectors that are strategic, hazardous or environmentally sensitive.

It matters because it removed the main entry barrier of the pre-1991 "permit-licence raj". Firms could now decide for themselves what to make and how much to make. This was a central part of the 1991 LPG (Liberalisation, Privatisation, Globalisation) reforms.

Explanation

How licensing worked before 1991

• Permit-licence raj: a popular name for the pre-1991 system. A firm needed many government permits and licences before it could act.
• Under industrial licensing, a firm needed government permission to:
• start a new unit;
• expand output beyond the approved amount;

• close down.

• What it was meant to do (Class 11, Indian Economy 1950-1990):

• push investment into the industries the Five-Year Plan wanted;
• spread industry to backward regions, so regions developed more evenly.

Why the system failed

• Delay: files moved slowly, so projects started late.
• Rent-seeking (earning money by working the system instead of by producing):

• officials had the power to say yes or no → firms paid bribes to get permits → corruption grew.

• Captive markets (markets where buyers have no other seller):

• there were few rivals → the firm had no need to improve quality or cut prices → consumers lost out.

• Pre-emption:

• big firms took licences they never used → this blocked rivals from entering → competition stayed low.

What delicensing changed and what it did not

• It removed: the need for permission to enter most industries. A firm can now start, grow or close without a licence.
• It kept: compulsory licensing for a short list of industries. In 1991 this list had 18 industries.
• The Class 11 NCERT list: alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs & pharmaceuticals.

• Correction: drugs & pharmaceuticals were later delicensed. The NCERT list is out of date.

• It did NOT remove:

• environmental clearance;
• safety and labour laws;
• locational rules (for example, limits on polluting units near large cities);

• sector regulators such as SEBI, TRAI and CERC.

• Simple count: 18 industries (1991) → about 4-5 industries (today).

• Takeaway: India moved from permission before entry to rules after entry.

In India

• Legal basis: industrial licences are issued under the Industries (Development & Regulation) Act, 1951 (IDRA). For defence items, the Arms Act, 1959 also applies [2].
• Administering body: the Department for Promotion of Industry and Internal Trade (DPIIT) issues licences and notifies changes through press notes.
• The 1991 list: compulsory licensing was notified by Notification No. 477(E) dated 25 July 1991 [1].
• Current position: a DPIIT press note says that, after the 1991 policy and later amendments, only four industries still need a compulsory licence. One of them is cigars and cigarettes of tobacco and manufactured tobacco substitutes [1].
• Our scaffold puts the list at "about 5": alcoholic drinks; tobacco cigars and cigarettes; electronic aerospace and defence equipment; industrial explosives; specified hazardous chemicals.

• The count depends on whether hazardous chemicals are treated as a separate entry.

• Pruning continues: the list of defence products that need a compulsory DPIIT licence was cut further by DPIIT Press Note 1 (2019 Series), dated 01.01.2019 [2].

Don't confuse with

• Deregulation: this is the wider package. Delicensing is only one part of it. Deregulation also covers cutting public-sector reservation (now only part of atomic energy and core railway operations), SSI dereservation, and price decontrol.
• SSI dereservation: this ended the rule that some products could be made only by small units. It is not about licences. The last 20 items were dereserved on 10 April 2015 by S.O. 998(E) [3].
• Removal of MRTP pre-entry scrutiny: under the MRTP Act, 1969, large firms needed prior approval to expand or merge because of their size. In 1991 this approval step was removed. That is a competition-law change, not delicensing. The MRTP Act was later replaced by the Competition Act, 2002 [4].
• Privatisation / disinvestment: this changes who owns a firm (the State sells its shares). Delicensing changes who may enter an industry. It does not sell any public-sector unit.

Prelims Hooks

• Industrial licences are issued under the IDRA, 1951, not under a 1991 law. Defence items also fall under the Arms Act, 1959 [2].
• The 1991 compulsory licensing list was notified by Notification No. 477(E), 25 July 1991 [1].
• Compulsory licensing: 18 industries (1991) → four today, including cigars and cigarettes [1].
• Trap: drugs & pharmaceuticals have been delicensed, even though the NCERT list still shows them.
• Defence licensing was pruned by DPIIT Press Note 1 (2019 Series) [2].
• Trap: delicensing did not end environmental clearance, labour laws or sector regulators. It only removed the permission needed to enter an industry.

Mains Points

• Ex-ante permission → ex-post regulation: delicensing replaced approval before you act with rules and penalties after you act, enforced by bodies such as the CCI, SEBI and TRAI. Hurdles over land, labour and environmental clearance still remain. This explains why "ease of doing business" reforms were needed decades later (GS-III).
• Delicensing as governance reform: the licence raj gave officials the power to approve or refuse, and that power made bribery, captive markets and pre-emptive licences possible. Removing licences cut this power and the rent-seeking that came with it (GS-II / GS-IV link).
• Balancing freedom and safeguards: licences are kept only where the risk to society is high, such as tobacco, explosives, hazardous chemicals and defence equipment. This shows the post-1991 principle: let the market decide in most sectors, and let the State control only strategic or harmful ones (GS-III).

Related concepts

• Deregulation of industry

Read more

• Liberalising industry: deregulation and delicensing