Q.What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?

The Industrial Policy of 1991 fundamentally shifted India's approach from a licence-permit-quota regime to one of liberalisation, privatisation, and globalisation. The government abolished industrial licensing for all projects except for a short list of industries related to security, strategic concerns, and hazardous chemicals. It also drastically reduced the number of industries reserved exclusively for the public sector, opening most sectors to private participation.

The policy allowed foreign direct investment (FDI) up to 51 percent in high-priority industries automatically, and removed the requirement for prior government approval for foreign technology agreements. The MRTP Act was amended to eliminate the need for large companies to seek government permission for expansion, effectively freeing them from the restrictive "monopoly" watch. …

The year 1991 marks a watershed in India’s economic history. Faced with a severe balance of payments crisis, the government under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh launched a comprehensive set of economic reforms. The Industrial Policy of 1991 was the cornerstone of this shift, moving India away from decades of state-led, protectionist socialism toward a market-oriented, liberalised economy. The policy was not merely a tweak; it was a fundamental rethinking of the state’s role in production and enterprise.

At its heart, the 1991 Industrial Policy abolished the system of industrial licensing, often called the “licence raj,” for all but a handful of industries related to security, strategic concerns, and environmental hazards. Before 1991, an entrepreneur needed a government permit to set up a factory, expand capacity, or even change the product mix. This choked innovation and bred corruption. The new policy freed businesses to decide what to produce, how much to produce, and where to set up operations, based on market signals rather than bureaucratic approval.

The policy also drastically reduced the role of the public sector. Many industries earlier reserved exclusively for the public sector were dereserved, and the role of the public sector was limited to only four industries of strategic importance. Sectors like telecommunications, power, and civil aviation were opened to private players. This ended the monopoly of public sector undertakings (PSUs) and invited private capital and management into areas once considered the sole preserve of the government.

Another pillar was the automatic approval of foreign direct investment (FDI) up to 51 percent in a wide range of industries. Previously, every foreign investment proposal required case-by-case government clearance, which was slow and uncertain. The new policy allowed foreign companies to hold majority stakes without seeking prior permission in many sectors. This was a clear signal that India was open for business. The Foreign Investment Promotion Board (FIPB) was set up to fast-track larger proposals.

The impact on business and industry was profound and multi-layered. First, competition intensified sharply. Protected domestic firms, accustomed to a seller’s market, suddenly faced rivals from within India and abroad. Many inefficient units closed down, but the survivors became leaner, more quality-conscious, and customer-focused. The consumer gained access to a wider variety of goods — from cars and electronics to packaged foods — at better prices.

Second, the services sector, particularly telecommunications, banking, insurance, and information technology, experienced explosive growth. Private banks and foreign insurers entered the market, improving service standards. The IT and IT-enabled services industry, which had barely existed in 1991, became a global powerhouse, creating millions of jobs and earning billions in foreign exchange.

Third, Indian companies began to restructure. Many diversified into unrelated businesses during the licence raj because licences were valuable assets. After 1991, firms shed non-core businesses, merged with competitors, or acquired foreign companies. The corporate landscape transformed from a collection of family-run conglomerates to more focused, professionally managed enterprises. …