What is Industrial Licensing?

Industrial policy means rules, regulations, principles, policies and procedures laid down by government for regulating, developing and controlling industrial undertakings in the country. It prescribes the respective roles of the public, private, joint and co-operative sectors for the development of industries.

Incorporates fiscal and monetary policies, tariff policy, labour policy and government attitude towards foreign capital, and role to be played by multinational corporations in the development of the industrial sector. Government of India has formulated policies for industrial growth and development.

History of Industrial Licensing
Pre- Independence
1. 2. 3.

East India company First World War Second world war

East India company

The Britishers came to India in the year 1600 as traders of the East India company. During the British rule in India, government policy towards industry and business was indifferent. The first century of British rule saw the decline of nearly all indigenous industries for many reasons – technological, economic and political. Modern industrial enterprises in India developed after 1850.Its earliest manifestations came in the wake of the construction of railways, which made it essential to have modern workshops for repair and maintenance of the rolling stock.

First World War

The outbreak of the First World War brought an end to the policy of hostility between British Bengal Chamber of Commerce and the government and forced on the government a more progressive policy that included selective encouragement of some industries and protective tariff. In 1916 the famous Indian Industrial Commission was set up to examine and report the possibilities of further industrial development in India, and submit recommendations for a permanent policy of industrial stimulation. Its proposals were based upon the fundamental principles that in the future the government must play an active part in the industrial development of the country.

Second World War

This was the time when major watershed in the development of government business relations in India. India became the main base of the Allied War efforts in the Far Eastern and Middle Eastern fronts its industrial development received a tremendous boost from the substantial orders for locally manufactured goods and through setting up of a large number of new industrial units in fields hitherto in conceivable. During the two brief years that intervened between the end of the war(1945) and independence(1947), government efforts were mostly directed at dealing with shortages that developed in large numbers of items both consumers goods and essential war materials.

Post Independence
Government's Role
Pandit Jawaharlal Nehru laid the foundation of modern India The goal and objectives set out for the nation by Pandit Nehru on the eve of independence were :  Rapid agriculture and industrial development of the country  Rapid expansion of opportunities for gainful employment  Progressive reduction of social and economic disparities  Removal of poverty and attainment of self –reliance

Objectives of Industrial Policies
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Achieving a socialistic pattern of society. Achieving industrial growth. Achieving economic growth. Developing heavy and capital goods industry. Providing opportunities for gainful employment . Alleviating poverty. Achieving a self-sustained economy . Protecting and developing a healthy small-scale sector. Updating technology and modernization. Liberalization and globalization of economy.

Five Year Planning
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First Five Year Plan Second Five Year Plan 62) Third Five Year Plan Fourth Five Year Plan Fifth Five Year Plan Sixth Five Year Plan Seventh Five Year Plan 1989-90) Eight Five Year Plan Ninth Five Year Plan Tenth Five Year Plan

(1951-52 to 1956-57) (1951-57 to 1961(1961-62 to 1965-66) (1969-70 to 1973-74) (1974-75 to 1978-79) (1978-79 to 1982-83) (1985-86 to (1992-93 to 1996-97) (1997-98 to 2001-02) (2001-02 to 2005-06)

First Five Year Plan (1951-52 to 1956-57)

Prioritized agriculture, irrigation and power projects in order to reduce the country’s dependence on food grain imports, solve the food crisis and ease raw material problem, particularly in jute and cotton. Almost 45% of the resources was allocated to agriculture, while industry got a paltry 4.9%

Second Five Year Plan (1956-57 to 1961-62)

Agriculture was given a complementary role and emphasis was on industrial sector, especially heavy goods industry. Agricultural programs were aimed at meeting raw material requirements of industry besides meeting the food needs of the increasing population. Industrial sector was perceived as the leading sector which could enable the economy to grow at a rapid pace.

Third Five Year Plan (1961-62 to 1965-66)

Agricultural production was once again given top priority as it was found that growth in agricultural production was the limiting factor in economic growth. Allocation to power sector was enhanced considerably to 14.6% of the total outlay, as power generation was considered an important factor in ensuring rapid growth of the industrial sector which could lead to self sustaining economic growth.

Fourth Five Year Plan (1969-70 to 1973-74)

Emphasis shifted towards providing necessary consumption benefits to the less privileged and weaker sections of the society through employment and education. The plan also aimed at accelerating the momentum of economic development and improving stability of food grain production.

Fifth Five Year Plan (1974-75 to 1978-79)

Concentrated on reigning inflation faced during the Fourth Plan and achieving stability in the economic situation. Aimed at improving the quality of life of especially the downtrodden section of economy. Several new economic and non-economic such as nutritional requirements, health and family planning, were incorporated in the planning process.

Sixth Five Year Plan (1978-79 to 1982-83)

Formulated by the Janata Government, sought to achieve higher production targets with the concomitant increase in employment opportunities for the poorest section of the society. Emphasis on irrigation and power and the shift in approach was laudable, the government lacked political will to forge ahead.

Seventh Five Year Plan (1985-86 to 1989-90)

Food grain production grew by 3.2% despite severe drought conditions during the first three years of the Plan. Policies aimed at rapid growth in food grain production, higher employment levels etc, and several special programs like Jawahar Rozgar Yojana were introduced.

Eight Five Year Plan (1992-93 to 1996-97)

Launched immediately after the severe balance of payment crisis, accentuated by the Gulf War in 1990. Several structural adjustments policies such as a substantial devaluation in the value of rupee, dismantling of licensing requirements, reducing trade barriers, reforms in the financial sector and tax systems were introduced in order to put the country on higher growth path and remedy the precarious balance of payments situation.

Ninth Five Year Plan (1997-98 to 2001-02)

Key task was to improve the living conditions of the poop and provide them with adequate employment opportunities. It made serious efforts raise the level of agricultural and rural incomes and target programs at small, marginal farmers and landless laborers. Also aimed to check the growth of population.

Tenth Five Year Plan (2001-02 to 2005-06)

Formulated keeping in line with the Prime Minister’s vision of doubling per capita income in the country and creating 100 million employment opportunities in the next 10 years.


Industrial policy Resolution of 1948,government recognized the need for a mixed economy and reserved national monopolies only for atomic energy, and rail & road industries. while many industries held by private firm could continue, the government had the exclusive right to initiate project in six other industries –coal, iron, and steel, aircraft manufacturing, shipbuilding, telephone, and minerals. Yet it could seek the aid of the private sector if necessary. Moreover, the government could regulate and license 18 other industries of national importance.



The main thrust of the (1948) industries policy was to lay the foundation of a mixed economy in which both private and public enterprises could march hand in hand to accelerate the process of industrial development.

The role of government was, enlarged tremendously under the new industrial policy announced in April, 1956. This policy expanded the area Of operation of public sector by bringing in 17 Industries under the exclusive monopoly of this Sector and adding another 12 industries to the Domain of public sector. The classification of industries policy 1956 is discussed below:

Classification of Industries
The industrial policy of 1956 adopted the Following classification of industries into Three categories,

(1). Schedule A industries (2). Schedule B industries (3). Schedule C industries

This category included 17 industries. The Future development of these industries Was to be the exclusive responsibility of The state. These industries include arms And ammunition, atomic energy, railways, Aircraft building, ship building, iron and Steel, coal, heavy electricals, etc.

There were 12 industries placed in schedule B. In regard to the developed of these Industries, the state was generally to take Initiative in setting up new undertaking. However, the private was also expect to Supplement the effort of the state in this Category of industries Some industries in

All the remaining industries fell in the schedule C, the future development of which was left to the initiative of the initiative of the private sector. The state, however, was to provide necessary assistance to private sector for development of industries. It is thus clear that the public sector was assigned a Dominant role in industrial development with 29 industries Sector under it.The public sector was given a commanding Position in the industrial sector. With this, the government Assumed the role of the major partner’s in the country’s Industrialisation process. The scope of private sector in Industrial programmes was thus not only limited to a few Spheres, but was also rigidly controlled by the licensing

System which was a part of government’s industrial policy. This industrial policy of1956, with minor modifications in 1977 and 1980, continued to govern India’s industrial development till July 1991 when the new Industrial policy was announced.

1. It was decided that compulsory export obligations, merely for ensuring the foreign exchange balance of the project, would no longer be insisted upon while approving new industrial capacity. 2. In the areas of price control of agricultural and Industrial products, the prices would be regulated to ensure an adequate return to the investor.

3. Within the small scale sector, a tiny sector was also defined with investment in machinery and equipment up to Rs.1 lakh and situated in towns with a population of less than 50,000 according to 1971 census figures, and in villages. 4. Special legislation to protect cottage and household industries was also proposed to be introduced.

5.Accorded the highest priority to the generation and transmission of power. 6.An exhaustive analysis of industrial products was made to identify products which are capable of being produced in the small scale sector. 7.The list of industries exclusively reserved for the small scale sector was expanded from 180 items to more than 500 items.

In December 1977, the central government Announced a new industrial policy by way of a Statement in the Parliament. The industrial policy, despite some desirable elements, resulted in certain distortion viz.,” Unemployment increased rural-urban disparities widened .”and real investment stagnated. On an average, the growth of industrial sector was not more than three to four percent per annum. The incidence of industrial sickness also become wide spread.



The trust of the industrial police statement of December 1977 was on effective promotion of the cottage and small industries widely dispread in rural areas and small towns. Emphasized that the whatever can be produced by small and cottage industries must only be so produced. The focus point of development of small scale industries were taken away from the big cities to districts.



The concept of district industries Centers was introduced for the first time. Each district would have such a district center which would extend all the support and services required by the small entrepreneurs. These included economic investigations of the districts, supply of the machinery and equipments, raw material and other resources, arrangement for credit facilities, call for quality control, research.



Within the small scale sector, a tiny sector was also defined with investment in machinery and equipment up to Rs.1 lakh and situated in towns with a population of less than 50,000 according to 1971 census figures, and in villages. Special legislation to protect cottage and household industries was also proposed to be introduced. It was also decided that compulsory export obligations, merely for ensuring the foreign exchange balance of the project, would no longer be insisted upon while approving new industrial capacity. In the areas of price control of agricultural and Industrial products, the prices would be regulated to ensure an adequate return to the investor.




The industrial policy statement of 1980 focused on the need for promoting competition in the domestic market, technologies up gradation modernization. The policy laid the foundation for an increasingly competitive export base and for encourage foreign investment in hi-tech areas. The policy, therefore suggested the following measures:

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Effective operational management of the public sector. Integrating industrial development in the private sector. Regularization of unauthorized access capacity installed in the private sector. Encouragement of merger and acquisition of sick units.



The industrial policy 1980 was guided merely by considerations of growth. It liberalized licensing for large and big business but by blurring the distinction between small scale and large scale industries. It sought to promote the latter at the cost of the farmer. Broadly speaking, the industrial policy chose a more capital intensive path of the development and thus, it underplayed the employment objective.

The new industrial policy was announced on 24th July 1991 by Mr. P.V. Narasimha Rao which was a kind of revolution due to the drastic changes in the previous policies which opened up our economy from its closed/secured state The main changes made in industrial policy 1991 included following :
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Industrial licensing policy Foreign investment policies Foreign technology policies Public sector policies EXIM

The features of the New Industrial Policy are:

Self Reliance Grater emphasis placed on developing our ability to pay for imports from our own foreign exchange earning Government is committed to the development of indigenous capabilities in technology and manufacturing as well as up gradation of living standards. To encourage entrepreneurship To bring new technology Dismantling regulatory system Reformation of PSU Manufacturing activity to be thrown open to private competition

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Now lets discuss the following in brief :
A. B. C. D. E.

Industrial Licensing Foreign Investment Foreign Technology Agreements Public Sector Policy MRTP


Automatic clearance if (where imported capital good is required) In case for-ex availability is assured through foreign equity If CIF (corporate investment funding) value of imported capital good required is less than 25% of total value up to maximum value of Rs 2 crore If population of cities is less then 1 million then no government is required (25 KM)

i) ii)

Phase manufacturing program will not be applicable to new projects. Existing unit will be provided a new broad banding facility to enable them to produce any article without any additional investment. All existing registration scheme will be abolished (Delicensed registration Exempted Industries Registration, DGTD) Entrepreneur will henceforth only be required to file an information on new projects and substantial expansion.


Approval will be given for FDI up to 51% in high priority industry. There shall be no bottleneck of any kind in this process. A special empower board would be constituted to negotiate with large international firm and approve FDI in selected area The import of component ,raw material and intermediate good, and payment of know-how fee and royalties will be governed by the general policy applicable to other domestic units.


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Automatic permission in high priority industry up to lump sum payment of Rs1 million( 5% royalty on domestic sale & 8% royalty sale on export sale) No permission on hiring foreign technician Testing of indigenously developed technologies allowed In respect of industries other than those in automatic permission will be given subject to the same guidelines as above if no foreign exchange is required for any payment.

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Private sector to be allowed in PSU reserved area To encourage wider participation a large part of government share holding in the public sector would be offered to mutual fund, FI’s, general public & worker. Board of PSU will be given greater power. PSU enterprise which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation scheme, be referred to the Board of Industrial and Financial Reconstruction (BIFR)or other similar high level institutions created for the purpose.


The MRTP Act will be amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertaking. i.e., no prior approval required for establishment of new undertaking expansion, merger, amalgamation and takeover and appointment of director under certain circumstances. Emphasis will be placed on controlling and regulating monopolistic, restrictive, and unfair trade practice. MRTP act is restructured by eliminating the legal requirements.

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Industrial Licensing

License is a written permission issued by the Central Government to an industrial undertaking stating such details as the location, the articles to be manufactured, production capacity, change in product and other relevant particulars. In India, an industrial license is normally issued after approved application and if further clearances like foreign collaboration, capital goods imports and further conditions are fulfilled. A license is initially valid for two years and production as per the licensed capacity must start within the specified period.

Objectives of Industrial Licensing

The basic objectives of industrial licensing are as follows: Planned industrial development through appropriate Regulations and controls. Directing industrial investment in accordance with plan Priorities. Ensuring government control over industrial activities In India Regulating the industrial capacity as per targets set for Planned economy. Preventing concentration of industrial and economic Power and monopoly.

Objectives continues….

Checking unbalanced growth of industrial establishments and ensuring economic size of industrial units. Balanced industrial growth through regulation of proper location of industrial units. Utilizing appropriate technology . Protecting of small scale industries against undue competition of large scale industries . Broadening the industrial base in India through new entrepreneurship development and ensuring industrial dispersion. Utilizing full capacity of large scale industries .

Industrial Licensing Policy

The industrial licensing policy was laid down to be complementary to the industrial policy resolution as announced by the Government of India. Industrial licensing in India can be studied in the following stages:The Industries (Development & Regulation) Act, 1951 Industrial Licensing Policy 1951-60 Industrial Licensing Policies for 1960-70 Industrial Licensing policies 1970-77 Industrial policy Statement 1980-90 Liberalization in industrial licensing 1991 and after.

1. 2. 3. 4. 5. 6.

The Industries (Development & Regulation) Act, 1951

This Act came into effect on May 8, 1952. This Act has been described as “the single most important piece of economic development legislation”, in Indian legal structure. It had three important objectives. They are: To implement the industrial policy, To ensure regulation and development of important industries, To ensure planning and future development of new undertaking.

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Main provisions of Act 1951
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Sec. 6 states that Development Councils are to be constituted in respect of each scheduled industry or group of industry. All existing industrial undertakings in the industries listed in the First Schedule of this Act, should be registered with the government within the prescribed period and issued with a certificate of registration. (sec.10) sec. 11 of the Act says that no new industrial undertakings of a major size can be started in the scheduled industry. Sec. 12 states that the Central government can revoke the registration of license in case of any misrepresentation. Under sec.15 of the Act, the government can order an investigation into the working of an industrial undertaking. Under sec. 16 the government can issue directions to the management in respect of prices, production, quality, and other areas of its performance for the progress of industry and country’s economic devt.

Industrial Licensing policy 1951-60

Industrial Licensing prior to 1960 aimed at achieving the following among others: Development of industries and encouraging industrial activity in accordance with the plan priorities Checking the concentration of economic power Reduction of regional disparities Proper allocation of foreign exchange Development, protection, and encouragement of small scale industries Modernization of technology and achievement of industrial growth.

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Policy 1951-60 continues…
This policy in early 1960s came to be the object of criticism from two opposite angles: i) The left wing politicians and academicians criticized it as having unduly helped the growth of large business houses and thus furthered the concentration of economic power to common detriment. ii) Leaders of private business and their academic criticized it as stifling the industrial growth of the country and creating unemployment and large production gaps.

Industrial Licensing Policy 1960-70
The industrial licensing policy came in for sharp criticism from various committee and commission. The main criticism leveled against it were:

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This policy had not been consistent with the industrial policy Resolution of 1956.i.e., no specific instruction had been given to the licensing authorities about keeping in view the general objective of preventing concentration of economic power and monopolistic tendencies Promotion of large industrial houses, and Usage of some unethical practices followed by a section of large business houses, for example, multiple applications in different names for the same items.

Industrial Licensing Policies1970-1980
Industrial licensing Policy of 1970

Government of India announced a new industrial policy in February 1970. Several restrictive policies are followed in this policy. They are: It banned the entry of large industrial houses and foreign companies into any field except core industries, heavy investment projects, and export oriented projects. The government accepted the policy of convertibility of term loans granted to industry by public financial institutions into equity. Companies with foreign holding of 75 percent and above had to issue fresh equity equivalent to 40 percent.

Industrial licensing policy of 1973
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This policy was announced in February 1973, which refined the 1970 policy. It refines the 1970 policy in following aspects: Assets exceeding Rs. 35 crore, was abandoned, in its place the definition adopted by sec. 20 of the MRTP Act, i.e., the assets of a company by itself or along with assets of inter connected undertakings amounting to Rs. 20 crore and above was accepted. The list of the core industries defined by the 1970 policy also substantially enlarged. There were also some procedural changes in October 1973, creating a Project Approval Board (PAB) to deal with composite applications Seeking approval under the four major hurdles, i.e., licensing, MRTP, capital goods, and Foreign Investment Board.

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Industrial Licensing Policy of 1977

Janata party government, which came to power after the General Elections of 1977, announced a new industrial policy statement on December 23, 1977. The 1977 licensing policy provided thrust mainly in two respects:

Priority to small scale, village, and tiny sector industries in future industrialisation, and Geographical dispersal of industries from metropolitan centers to rural and backward areas.

Industrial Policy Statement 1980-90

The General Elections of 1980 and the return to power of the Congress party brought about the Industrial Policy statement of 1980 and 1982. Major steps taken under this policy are as follows: Licensing was not required for an existing licensed undertakings if the total investment did not exceed Rs. 3 crore and if it did not require foreign exchange excess of 10 percent of ex- factory value of Rs. 25 lakh, whichever is less. An existing licensed undertaking did not require a fresh license to manufacture any new item from schedule I to the maximum of the licensed capacity and also expand or manufacture a new product making use of its own wastes or effluent on the recommendation of the administrative ministry

Policy 1980-90 continues…

No industrial license was required for small-scale units to produce any of the items reserved for the sector under the following conditions: The unit should not belong to any dominant undertaking as defined in MRTP Act, The unit and other interconnected unit together should not possess assets exceeding Rs. 20 crore. In respect of foreign ownership, there should not be over 40 percent equity owned by foreign companies or subsidiaries or foreign individuals. The items produced should not belong to the schedule A category.





Liberalizations in Industrial Licensing 1991 and After

Due to the changing Industrial scene in the country, the policy has undergone modifications. Industrial licensing policies and procedures have been liberalized from time to time. Major policy initiatives & procedural reforms were called for to encourage & assist the Indian entrepreneur to exploit & meet domestic & global opportunities & challenges

Policy Decisions

To unshackle the Indian industrial economy from unnecessary bureaucratic control. the series of measures taken by government in the areas of trade policy, exchange rate management, fiscal policy, financial sector reform, overall macroeconomic management.

Industrial Licensing Policy :

industrial licensing abolished for all projects except for short list of industries related to security, strategic concerns, social reasons, hazardous chemicals, overriding environmental reasons, items of elitist consumption

Industries reserved for small scale sector will continue to be reserved , areas where security & strategic concerns predominate will be reserved for public sector Automatic clearance is given where foreign capital goods availability is ensured through foreign equity, else required clearance from secretariat of industrial approvals in the department of industrial development In location of more than 1 million population, no need of industrial approval from the central government except for those subject to compulsory licensing, appropriate incentives & design of investments in infrastructure development will be used to promote dispersal of industry to backward areas System of phased manufacturing run on administrative case-by-case basis will not be applicable to new projects, existing units will be provided new broad banding facility to enable them to produce any article, exemptions from licensing is applicable to substantial expansions of existing units.

Foreign Investment :
 Approval given to direct foreign investment up to 51% foreign equity in high priority industries ,import components, intermediate goods, payment of fees royalties governed by general policy, payment of dividends made through RBI.  Foreign equity proposals need not be accompanied by foreign technology agreements, majority foreign equity holding up to 51% will be allowed for trading companies engaged in export activities.  Special empowered board constituted to negotiate with number of international firms & approve direct foreign investment in select areas so as to give access to high-Tech & world markets.

Foreign Technology Agreements :

Automatic permission to high priority industries upto payment of 1 crores,5% royalty for domestic sales,8% for export & if no free foreign exchange is needed for payments. Other proposals need approval under general procedure, no permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies.

Public Sector :

Focus on strategic, high-Tech, infrastructure, no bar for areas of exclusivity to be opened up to private sector ,public sector will be allowed to entered in unreserved areas.

Sick public enterprises were referred to BIFR ,social security mechanism created to protect interest of workers affected. Part of government share holding in public sector offered to mutual funds, financial institutions ,general public ,workers. Boards of public sector companies made more professional with more powers, more thrust on performance improvement through MOU, up gradations of technical expertise to make MOU negotiations more effective.


To remove threshold limits ,eliminating the need of prior approval of central government for establishing & expansions of new undertakings, merger, amalgamation, takeover & appointments of directors . Control & to regulate monopolistic restrictive unfair trade practices, newly empowered MRTP commission authorized to investigate on complaints received Necessary comprehensive amendments will be made in the MRTP Act in this regard and for enabling the MRTP Commissions to exercise punitive and compensatory powers.

Exemptions from Licensing

27 broad categories of industries are exempted from licensing include automotive ancillaries, agricultural implements, cycles, leather goods, glassware. Export-oriented industries, import substitution items, latest technology industries, capital goods industries are exempted if not MRTP or FERA or not reserved for small-scale sector. Multinationals are permitted to hold equities up to 49% in selected small scale industries & 82 bulk drugs. Items relating to an industries which is not included in the first schedule of the act .

Exemptions continues…

Items to be manufactured in an undertaking which does not come under the definition of a “factory” under the industries (D and R ) Act , 1951. Items to be manufactured in the de-licensed sector of investment up to Rs. 25 crore in fixed assets in non-backward areas and up to Rs. 75 crore in backward areas. Expansions which does not come under substantial expansion ,that is , up to 25% of the existing capacity. Small scale units subject to certain conditions . Items which do not fall under the definition of “ new article”.

Industrial Licensing: CRITICISM

Most of the objectives could not be achieved, industrial investment could not be fully streamlined. It could not fully succeed in preventing concentration of monopoly & economic power. Licensing could not provide a clear cut guidelines about industrial location thereby resulting in unbalanced industrialization. Foreign investments was restricted time to time affecting inflow of capital, technology.


INDUSTRIAL LICENSING constituted the key element Government of India’s industrial policy since 1951. Several important controls such as MRTP ACT, capital goods import control and government policy regarding foreign investments and foreign collaborations have been taken. Government continues to provide necessary control measures for the development of economy and infrastructure of the nation . It is expected that the new industrial policies would be reviewed from the Government from time to time.

Thank You !
Submitted By :

Submitted To: Mrs. Shilpa Jain

Anshul Goyal 62 Uma Sharma 72 Sanjay Gaur 82 Rituja Thakur 92 Amber 102 Id Mohammad

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