Industry and trade 1950-1990

After independence, the public sector led industrial growth. Private businesses had too little capital to build big industries, and the market was small. Besides, the government wanted to control the commanding heights of the economy.

The Industrial Policy Resolution of 1956 (IPR 1956) divided industries into three categories: those only the state could set up, those where the state would lead and private firms could follow, and the rest, open to private firms. Private industry was controlled by licences: a firm needed a government licence to start a new factory, and even to expand its output. Licences were given more easily for factories in backward regions, to spread industry across the country.

Small-scale industry got special support. The Karve Committee (1955) recommended using small industries to develop the villages. An industry was 'small-scale' if its investment was below ₹5 lakh (in 1950; the limit was later raised to ₹1 crore). Some products were reserved for small industries, and they got concessions such as lower taxes. (The definition of MSMEs was changed in 2020 and the limits raised again from 1 April 2025.)

To protect Indian firms from foreign competition, India followed import substitution: making at home the goods it used to import. Imports were restricted by tariffs (taxes on imports) and quotas. Protected industry grew about 6 per cent a year, and its share of GDP rose from 13 per cent to 24.6 per cent by 1990-91.

But there were costs:

• Many public sector units made losses year after year.
• The licensing system became a 'permit licence raj': getting permission took time, contacts and sometimes bribes.
• With imports blocked, firms had a captive market, and had little reason to improve quality or cut costs.
• Exports stayed weak.

These problems led to the economic reforms of 1991.