Liberalising industry: deregulation and delicensing

Detail

1. What "deregulation" and "delicensing" mean

• Deregulation of industry means removing government rules on who can make things, how much they can make and at what price.

• It was the post-1991 package of four moves:

  • industrial licensing was abolished for most products;
  • the areas kept only for the public sector were cut;
  • items kept only for small units were slowly dereserved;
  • prices were decontrolled.

• Delicensing is narrower. It is the removal of the need for an industrial licence (written government permission to set up, expand or close a factory) in most industries.

• A licence is still needed in a few sectors that are strategic, hazardous or environmentally sensitive.

• Key distinction: delicensing is one part of deregulation. Deregulation also covers public-sector reservation, SSI reservation and price controls.

2. The four pre-1991 controls and what reform did to each

Pre-1991 control	What it meant	Post-1991 change
(i) Industrial licensing	Government permission was needed to start a firm, close it or decide how much to produce	Abolished except for a short list
(ii) Public-sector reservation	Private firms were barred from many industries	Reservation cut to part of atomic energy and core railway activities
(iii) SSI reservation	Some goods could be made only by small-scale industries (SSI)	Progressively dereserved. The list was scrapped in 2015
(iv) Price and distribution controls	The government fixed prices and decided who received supplies	In most industries, the market now sets prices

3. Control (i): Industrial licensing and the "permit-licence raj"

• Permit-licence raj: a popular name for the pre-1991 system, in which a firm needed many government permits and licences before it could act.
• What it was meant to do (Class 11, Indian Economy 1950-1990):
• steer investment into the industries the Plan wanted;

• spread 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 instead of by producing, for example through bribes to get a permit).
• Captive markets (markets where buyers have no other seller, so the firm need not improve quality or cut prices).

• Pre-emption: big firms took licences they never used, only to block rivals from entering.

• What 1991 changed:

• It removed the entry barrier. A firm no longer needs permission to enter most industries.
• It did not remove all regulation. Rules on environment, safety, labour and location still apply, and sector regulators still exist.

4. The licensing list: from 18 industries to a handful

• 1991: 18 industries were kept under compulsory licensing.
• Class 11 list: alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs & pharmaceuticals.
• Correction to NCERT: drugs & pharmaceuticals were later delicensed. The scaffold puts today's list at about 5:
• alcoholic drinks;
• tobacco cigars and cigarettes;
• electronic aerospace and defence equipment;
• industrial explosives;

• specified hazardous chemicals.

• Official position: a Department for Promotion of Industry and Internal Trade (DPIIT) press note says that, after the 1991 policy and later amendments to Notification No. 477(E) dated 25 July 1991, only four industries remain under compulsory licensing. One of them is cigars and cigarettes of tobacco and manufactured tobacco substitutes [2]. (Scaffold: "about 5". The number depends on whether hazardous chemicals are counted as a separate entry. Check the current DPIIT list.)

• Legal basis: licences are issued under the Industries (Development & Regulation) Act, 1951 (IDRA). For defence items, the Arms Act, 1959 also applies [3].
• 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 [3].

5. Control (ii): Public-sector reservation

• Before 1991: many core industries were closed to private firms. The State was meant to hold the "commanding heights" (the most important industries).
• Now: only atomic energy (part of it) and core railway operations remain reserved for the public sector.

• Private firms can now enter sectors such as coal mining, telecom, airlines and power, which were once state-dominated.

• CPSE policy and the Ratna criteria are covered in the industrial-policy-psu-msme note.

6. Control (iii): SSI reservation and dereservation

• SSI reservation: some products could be made only by small units. The aim was to protect jobs and small entrepreneurs from big firms.
• Problem: small firms could not grow beyond the size limit without losing their protection. Big firms could not bring in scale or technology. Output stayed small and quality stayed low.
• Dereservation path:
• The reserved list fell from over 800 items to 20 over the years [4].
• On 10 April 2015, the government dereserved the last 20 items by Notification S.O. 998(E) [4].
• The 20 items included pickles and chutneys, bread, mustard oil, wooden furniture, exercise books, wax candles, laundry soap, safety matches, fireworks, agarbattis, glass bangles, padlocks, and stainless steel and aluminium utensils [4].

• Result: from that date, no item was reserved for exclusive manufacture by the micro and small enterprise (MSE) sector [4].

• Why it became pointless: an advisory committee noted in October 2014 that all remaining reserved items could already be freely imported. Big foreign producers could sell them, but big Indian producers could not make them [4].

• Simple count: 800+ items → 20 items → 0 items (2015).
• SSI → MSME: the "small-scale industry" label was replaced by Micro, Small and Medium Enterprises (MSME). Details are in the industrial-policy-psu-msme note.

7. Control (iv): Price and distribution controls

• Before 1991: the government fixed prices and decided who received supplies (distribution) for goods such as steel, cement and fertiliser.

• Result: shortages, black markets and long queues.

• After 1991: in most industries the market sets prices through demand and supply.

• Link to Class 9 (The Problem of Choice): the move is a shift towards a market economy, where prices signal what to produce and how much.

8. From MRTP to the Competition Act: size-based control to conduct-based control

• MRTP Act, 1969 (Monopolies and Restrictive Trade Practices Act):
• Large firms ("MRTP companies") needed prior approval before they could expand, merge or set up new units.
• The law treated large size itself as suspect.

• 1991: this pre-entry scrutiny was removed.

• Competition Act, 2002:

• It repealed the MRTP Act because policy had shifted from curbing monopolies to promoting competition [5].
• Its stated aims are to prevent practices that harm competition, promote and sustain competition, protect consumers and ensure freedom of trade [5][6].

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

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

• Being dominant is not an offence. Abusing dominance is [5].

• The Act also targets cartels (rival firms secretly agreeing to fix prices or share markets).

• Per se offences vs rule of reason:

• The MRTP Act had 14 per se offences (acts treated as illegal automatically, without checking their effect). The new law has only 4. All other cases are judged by the rule of reason (checking whether the act actually harmed competition) [5].

9. What liberalisation did NOT remove

• Environmental clearance (for example under environment laws administered by MoEFCC).
• Safety and labour laws (factory safety, wages, industrial relations).
• Locational rules (restrictions on setting up polluting units near large cities).
• Sector regulators: SEBI, TRAI, CERC and others.
• Takeaway: 1991 changed India from a system of permission before entry to a system of rules after entry.

Prelims Hooks

• Delicensing removes the need for an industrial licence. Deregulation is wider and also covers public-sector reservation, SSI reservation and price controls.
• Industrial licences are issued under the Industries (Development & Regulation) Act, 1951, not under a 1991 law [3].
• The 1991 compulsory licensing list was notified by Notification No. 477(E), 25 July 1991. Today only four industries need a licence, including cigars and cigarettes [2].
• Industries under compulsory licensing: 18 (1991) → about 4-5 (today). Drugs & pharmaceuticals have been delicensed; the NCERT list is outdated.
• Sectors still reserved for the public sector: atomic energy (part) and core railway operations.
• The last 20 SSI-reserved items were dereserved on 10 April 2015 by S.O. 998(E). The list had once held over 800 items [4].
• MRTP Act 1969 → Competition Act 2002, enforced by the CCI. Trap: dominance is not illegal; abuse of dominance is [5].
• Per se offences: 14 under MRTP vs 4 under the Competition Act [5].
• Defence licensing was pruned by DPIIT Press Note 1 (2019 Series) [3].

Mains Points

• Entry barrier gone, regulation stays: 1991 replaced ex-ante permission (approval before you act) with ex-post regulation (rules and penalties after you act) through bodies like the CCI, SEBI and TRAI. Remaining hurdles such as land, labour and environmental clearance explain why "ease of doing business" reforms were still needed decades later (GS-III).
• SSI reservation was protection without growth: reservation kept firms small. Once imports were freed, it protected foreign producers more than Indian small units. Dereservation (completed in 2015) shows the policy shift from protecting small size to promoting growth through credit, technology and market access (GS-III: MSME, inclusive growth).
• Size vs conduct in competition policy: MRTP punished bigness and slowed investment. The Competition Act punishes cartels and abuse of dominance, so efficient large firms can grow as long as they do not hurt consumers. The next debate is digital markets, where the Committee on Digital Competition Law (2024) has examined the gatekeeper role of big platforms (GS-III / GS-II regulation).
• Rent-seeking and governance: the licence raj shows how discretionary controls breed corruption and captive markets. Delicensing is also a governance reform because it cuts the officials' discretion that makes bribery possible (GS-II / GS-IV linkage).