Deregulation of industry

Topic: The 1991 Crisis and LPG Reforms: An Appraisal · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"

Meaning

Deregulation of industry is the post-1991 removal of government controls over who may produce a good, how much they may produce and at what price. It had four parts:

• industrial licensing was abolished for most products;
• the list of industries reserved for the public sector was cut to part of atomic energy and core railway activities;
• items reserved for small-scale industry were gradually dereserved;
• prices were decontrolled.

It matters because it replaced the "permit-licence raj" (the system of asking permission before entry) with rules that apply after entry. This made the market, not the official, the main force deciding investment and prices.

Explanation

The four controls that were removed

Pre-1991 control	What it meant	Post-1991 change
Industrial licensing	A firm needed written government permission to set up, expand or close a factory, and to decide how much to produce	Abolished for most products. 18 industries stayed under compulsory licensing in 1991, and the list has since been cut to a handful
Public-sector reservation	Private firms were barred from many core industries (the "commanding heights")	Now only part of atomic energy and core railway operations
SSI reservation	Some goods could be made only by small-scale industries (SSI)	Dereserved step by step. The list went from 800+ items to 20, then to 0 in 2015 [4]
Price and distribution controls	The government fixed prices and decided who received supplies of goods such as steel, cement and fertiliser	In most industries, the market now sets prices through demand and supply

• Delicensing is only one part of deregulation. Deregulation is the whole package of four moves.

Why the old controls failed

• What licensing was meant to do (Class 11, Indian Economy 1950-1990):
• steer investment into the industries the Plan wanted;

• take industry to backward regions, so that regions developed more evenly.

• What happened in practice:

• Delay: files moved slowly, so projects started late.
• Rent-seeking (earning money by working the system, for example through bribes for a permit, instead of by producing).
• Captive markets (buyers have no other seller, so the firm has no reason to improve quality or cut prices).

• Pre-emption: big firms took licences they never used, only to keep rivals out.

• Price controls led to shortages, black markets and long queues.

• SSI reservation meant protection without growth:
• a small firm lost its protection if it grew past the size limit, so it stayed small;
• big firms were not allowed in, so they could not bring scale or technology;
• as a result, output stayed small and quality stayed low.

From size-based control to conduct-based control

• MRTP Act, 1969 (Monopolies and Restrictive Trade Practices Act):
• large firms needed prior approval before they could expand, merge or open new units;
• the law treated being big as suspect in itself;

• the 1991 reforms removed this pre-entry scrutiny.

• Competition Act, 2002:

• it repealed the MRTP Act, because policy had shifted from curbing monopolies to promoting competition [5];

• it set up the Competition Commission of India (CCI), an expert body that regulates anti-competitive practices [6].

• Conduct-based control (the law judges what a firm does, not how big it is):

• being dominant is not an offence, but abusing dominance is [5];
• it also targets cartels (rival firms secretly agreeing to fix prices or share markets).

A simple count: how far the controls shrank

• Compulsory licensing: 18 industries (1991) → four today, as per DPIIT [2]. Other lists count "about 5", depending on whether hazardous chemicals are counted as a separate entry.
• SSI reserved items: over 800 → 20 → 0 on 10 April 2015 [4].
• Public-sector reserved areas: many core industries before 1991 → 2 today (part of atomic energy and core railway operations).
• Per se offences (acts that are illegal automatically, without checking their effect): 14 under MRTP → 4 under the Competition Act. All other cases are judged by the rule of reason, which checks whether the act actually harmed competition [5].

In India

• Legal basis for licensing: licences are issued under the Industries (Development & Regulation) Act, 1951 (IDRA). For defence items, the Arms Act, 1959 also applies [3].
• 1991 notification: the compulsory licensing list comes from Notification No. 477(E) dated 25 July 1991 and its later amendments. Today only four industries need a compulsory licence, including cigars and cigarettes of tobacco and manufactured tobacco substitutes [2].
• Industries commonly listed as still licensed:
• alcoholic drinks;
• tobacco cigars and cigarettes;
• electronic aerospace and defence equipment;
• industrial explosives;

• specified hazardous chemicals.

• The NCERT list is outdated: drugs and pharmaceuticals were in the Class 11 list but have since been delicensed.

• Defence pruning: the list of defence items needing a DPIIT licence was cut further by DPIIT Press Note 1 (2019 Series), dated 01.01.2019 [3].
• End of SSI reservation: on 10 April 2015, Notification S.O. 998(E) dereserved the last 20 items [4].
• These included pickles, bread, mustard oil, wooden furniture, agarbattis, safety matches, glass bangles, padlocks and steel utensils [4].

• In October 2014, an advisory committee noted that all these items could already be freely imported. Big foreign producers could sell them in India, but big Indian producers could not make them [4].

• Private entry: coal mining, telecom, airlines and power were once dominated by the state. Private firms can now enter them.

• What was NOT removed:
• environmental clearance (MoEFCC);
• factory safety and labour laws;
• locational rules for polluting units near big cities;
• sector regulators such as SEBI, TRAI and CERC.

Don't confuse with

• Delicensing: this only removes the need for an industrial licence. Deregulation is wider. It also covers public-sector reservation, SSI reservation and price controls.
• Privatisation: this transfers ownership or management of public-sector units to private hands. Deregulation does not sell any firm. It only lets private firms enter and removes controls on output and price.
• "No regulation": deregulation removed ex-ante permission (approval before you act). Ex-post regulation (rules and penalties after you act) stays, through bodies such as the CCI, SEBI and TRAI, and through environmental and labour laws.
• MRTP Act vs Competition Act: MRTP controlled firms by size. The Competition Act controls conduct, which means cartels and abuse of dominance. Dominance by itself is legal [5].

Prelims Hooks

• Industrial licences are still issued under the IDRA, 1951, not under a 1991 law. Defence items also need clearance under the Arms Act, 1959 [3].
• The 1991 licensing list was notified by Notification No. 477(E), 25 July 1991. Today only four industries need a compulsory licence, including cigars and cigarettes [2]. Trap: drugs and pharmaceuticals are no longer on the list.
• Sectors still reserved for the public sector: atomic energy (part) and core railway operations only.
• The last 20 SSI-reserved items were dereserved on 10 April 2015 by S.O. 998(E). The list once had over 800 items [4].
• MRTP Act 1969 → Competition Act 2002, enforced by the CCI [6]. Trap: dominance is not illegal. Abuse of dominance is [5].
• Per se offences: 14 under MRTP vs 4 under the Competition Act. All other cases are judged by the rule of reason [5].

Mains Points

• Entry barrier gone, but regulation stays:
• 1991 replaced permission before entry with rules after entry, enforced by the CCI, SEBI and TRAI.
• Hurdles such as land, labour and environmental clearance still remain.

• This is why "ease of doing business" reforms were still needed decades later (GS-III).

• From protecting small size to promoting growth:

• SSI reservation kept firms small.
• Once imports were freed, it protected foreign producers more than Indian small units [4].

• Dereservation, completed in 2015, shifted MSME policy towards credit, technology and market access (GS-III: MSME, inclusive growth).

• Deregulation as a governance reform:

• Discretionary licensing gave officials power to decide, and that power bred rent-seeking and captive markets.
• Delicensing cut this discretion, and with it the scope for bribery (GS-II / GS-IV link).
• The next debate is digital markets. The Committee on Digital Competition Law (2024) has examined the gatekeeper role of big platforms.

Related concepts

• Delicensing

Read more

• Liberalising industry: deregulation and delicensing