The Indian economy has been a highly regulated and controlled economy since independence. This is the evidence from the first Industrial Policy Resolution which was adopted in April 1948. The government took the responsibility of developing basic and key industries under its ownership and management in the public sector. Other important industries were allowed to be developed in the private sector but under strict control and regulation of the government. This gave rise to the “ License and Permit Raj” in the country. Thereafter, the Industrial Policy Resolution of 1956 which was regarded as Economic Constitution of India further expanded the role of public sector and put the whole of the private sector under the regulation and control of the government. At the beginning of 1970s the regulatory framework for the private sector further tightened with the enactment of MRTP Act 1969 ( Monopolies and Restricted Trade Practices Act ) and New Licensing Policy of 1970.
In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops. As a part of economic reforms, the Government of India announced a new industrial policy in July 1991.
The broad features of new industrial policy are as follows:
(a) The Government reduced the number of industries under compulsory licensing to six.
(b) Many of the industries reserved for the public sector under the earlier policy, were dereserved. The role of the public sector was limited only to four industries of strategic importance.
(c) Disinvestment was carried out in case of many public sector industrial enterprises.
(d) Policy towards foreign capital was liberalised. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.
(e) Automatic permission was now granted for technology agreements with foreign companies.
(f) Foreign Investment Promotion Board (FIPB) was set up to promote and channelize foreign investment in India.
The focus of the policies of the government shifted from regulations and controls to that of increased liberalisation.
Liberalisation: The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence-pemit-quota raj. Liberalisation of the Indian industry has taken place with respect to:
(i) abolishing licensing requirement in most of the industries except a short list,
(ii) freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities,
(iii) removal of restrictions on the movement of goods and services,
(iv) freedom in fixing the prices of goods services,
(v) reduction in tax rates and lifting of unnecessary controls over the economy,
(vi) simplifying procedures for imports and exports, and
(vii) making it easier to attract foreign capital and technology to India.
The reform were not restricted to the industrial sector but extended to almost all the areas of the economy such as reform in the area of the financial sector, banking sector and trade reforms. Capital Issues (control) Act1947 was abolished and replaced by more liberal Securities and Exchange Board of India Act (SEBI Act).
The main objectives of India’s development plans were:
(a) Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;
(b) Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;
(c) Reduce inequalities of income and wealth;
(d) Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man.
All these reforms have given boost to the economy. The economy which was characterized as an economy of scarcities suddenly became vibrant and started showing signs of buoyancy with increased competition and more active play of market forces.