Deregulation of Industrial Sector

Under the old regime, the Indian industrial sector was controlled by the government in several overlapping ways. Understanding these controls makes it clear why deregulation became a central plank of the 1991 reforms.

The regulatory mechanisms that existed earlier:

1. Industrial licensing — every entrepreneur had to obtain permission from government officials merely to start a firm, to close a firm, or even to decide how much of a good could be produced. Nothing could be done freely; a licence was needed at almost every step.
2. Reservation for the public sector — the private sector was simply not allowed to operate in many industries; those areas were kept exclusively for government-owned enterprises.
3. Small-scale reservation — certain goods could be produced only by small-scale industries, which limited the size and scale at which firms in those lines could operate.
4. Price and distribution controls — the government fixed prices and controlled the distribution of selected industrial products, leaving little to the market.

What the reforms changed:

The policies introduced in and after 1991 removed most of these restrictions. Industrial licensing was abolished for almost all industries, leaving only a short list of product categories that still require a licence, namely alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals. These are retained because they involve public health, safety, security or strategic concerns.

The number of industries reserved exclusively for the public sector was cut drastically. Now only a part of atomic energy generation and some core activities in railway transport remain reserved for the public sector; the rest are open to private enterprise.

Many goods that were earlier reserved for production only by small-scale industries have since been dereserved, allowing larger firms to enter and produce them and thereby take advantage of economies of scale. …