The Institutional Framework PDF

Chapter : The Institutional Framework
Paper XVIII Indian Economy: Performance and Policies

Unit: I Basic Issues in Economic Development
Chapter 2: The Institutional Framework
Fellow:Dr.Kawal Gill, Associate Professor

Department/ College: Department of Commerce, Sri
Gobind Singh College of Commerce, University of Delhi
Author: Dr. Poonam Bewta

Department/ College: JDM College, University of Delhi
Reviewer: Dr. Uma Kapila (Retd.)

Department/ College: Miranda College, University of Delhi
Institute of lifelong learning, University of Delhi

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Table of Contents
o The Institutional Framework

o 2.1 Institutional Reforms for Agricultural Growth
o 2.1.1 Land Systems at the time of Independence
o 2.1.2 The Rationale for Land Reforms
o 2.1.3 Land Reform Policies
o 2.2 Impact of Land Reforms on the Agrarian Structure
o 2.2.1 Farm Size and Distribution of Holdings
o 2.2.2 Impact of Tenancy Reforms
o 2.2.3 Impact of Reform measures on Land Ceiling
o 2.2.4 Land Consolidation and Wastelands
o 2.2.5 Future Directions in Land Reforms
o Summary
o 2.3 Industrial Control Regime
o 2.3.1 The Beginning
o 2.3.2 Performance of the Industrial Licensing System
o 2.4 New Economic Policy
o 2.4.1 Major Policy Reforms in Industry and Trade
o Summary
o Exercises
o Glossary
o References

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The Institutional Framework

This chapter covers the institutional changes that have taken place since independence in the
field of agriculture and industry. The chapter is divided in two parts. The first two sections (Part
I) discuss the changes in the pattern of asset ownership in agriculture and the next two sections
(Part II) discuss the policies that have regulated the pattern of investment and concentration of
economic power in the Indian industrial sector. Section I covers the land systems that existed at
the time of independence and the various types of land reforms that were introduced in the 1950s
and 1960s. Section II covers the impact of the land reforms on the size of land holdings and the
agrarian structure in rural India. Section III broadly covers the Plan documents, policies,
guidelines and the various strategies that the government followed in the industrial sector till
1991. Section IV briefly covers the New Economic Policy introduced in 1991 and the subsequent
changes that it brought about in the Indian economy, particularly those affecting the industrial
sector.
2.1 Institutional Reforms for Agricultural Growth

Land is a key productive resource. The ownership and management of land has very significant
implications for equity, growth and removal of poverty and has been the focus of considerable
policy attention in India. India, since independence, has undergone a lot of institutional and
technological changes which have contributed significantly to the evolving production conditions
and production relations of the Indian agriculture.
2.1.1 Land Systems at the time of Independence
India had a semi- feudal agrarian structure with tedious tenancy arrangements when it became
independent. A few powerful landlords and intermediaries owned and controlled bulk of the
land. The main purpose of this group was to get the maximum rent from the tenants, either in
cash or in kind. These tenants often divided their plots into smaller portions and sublet them to
working cultivators. This resulted in increasing the number of smaller holdings. In such a
scenario, there was no incentive to develop the farm land for increasing production or to improve
the economic conditions of the cultivators. On the other hand, the working cultivators had no
surplus money left to invest for farm improvement after paying high rents. Also, they had neither
the resources nor the knowledge for increasing agricultural production. Thus, according to
S.K.Ray (2006) the agricultural land resource of India along with its operators, was gradually
impoverished because economic motivation tended toward exploitation rather than toward
investment and improvement.

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The working cultivators found their size of farm land becoming smaller as the pressure of
population on land began to increase. The insecurity of the occupants of the land also increased.
The cultivators were often shifted from one plot to another according to the whims of a bigger
cultivator. The objective of the cultivator was survival and therefore land was divided into small
fragments, each owned or leased by the cultivator. Over time, due to the small size of the
holding, many of these farms became uneconomical. A large number of such cultivators began to
work as hired help in order to supplement their incomes. Therefore, by the time India became
independent, there were serious imbalances in man- land relationship among the three main
groups in the agricultural sector, that is, proprietors, working cultivators and labourers.
Historical context
Types of Land Tenure Systems
Source: Ravi Srivastava, N. C. Saxena, and Sukhadeo K. Thorat (2008). ―Land Institutions,
Policy, and Reforms in India‖ in Ashok Gulati and Shenggen Fan (eds), The Dragon & The
Elephant- Agricultural and Rural Reforms in China and India, Oxford University Press, New
Delhi.
During the colonial period, the British introduced three main types of tenure systems in India: the
Zamindari, the Ryotwari and the Mahalwari system.Under the Zamindari system, land revenue
was fixed in perpetuity and the land was permanently ―settled‖ with zamindars. This system
prevailed over most of eastern India. In the other two forms of tenure, the ―settlement‖ with a
class of proprietors was temporary and revenue was periodically revised. In the parts of India
that were under indirect sovereignty of the British and were part of various kingdoms, different
parts of feudal tenure system prevailed. In almost all parts of India, those who possessed superior
rights over land mostly leased it out. Direct proprietary cultivation, with or without the help of
labourers, was rare. However, subinfeudation (with several layers of tenants and subtenants) was
the most common in the zamindari areas, thus imposing the highest burden on the direct
producers. Indebtedness of tenants due to the rental burden and highly inequitable access to land
led to waves of peasant revolts in many parts of the country in the late nineteenth and early
twentieth century.
2.1.2 The Rationale for Land Reforms
The three major goals of any land reform programme are equity, growth and poverty reduction.
Land reforms are expected to lead to a reduction in unemployment and underemployment and to
increase the income level of the poor living in the rural areas. This will lead to growth and an
increase in production. A better distribution of land (not only increases income and wealth) and
with sharecroppers and tenants having more control of the land would lead to higher levels of
employment, improve consumption standards of the rural poor and thus enlarge the size of the
market for consumer products. In areas where the landless constitute a significant proportion of
rural population, it also reduces the chances of social tensions, unrest and conflicts.

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The criticism of the reforms are based on the negative effects these will have on growth,
efficiency and farmer enterprise.
The Five Year Plans have placed a lot of emphasis on land reforms from the very beginning. The
Indian Constitution has placed agriculture and land reforms under the purview of the state
governments. The two basic objectives of land reforms were
 To remove the obstacles (impediments) on agricultural production that have arisen from
the character of agrarian structure inherited from the past.
 To reduce exploitation and social injustice of landless and small cultivators and to ensure
equal status and opportunity to all strata of population.
Image
Land to the Tiller
2.1.3 Land Reform Policies

Starting in the 1950s, four main sets of land reforms were implemented:
1. Abolition of Intermediaries- who were rent collectors under pre independent land revenue
system. They were abolished within a few years after independence. The main idea behind this

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was that the ownership of land be clearly identified with management and ownership of land.
The owner himself should operate and manage the farm business.
2. Tenancy Reforms-
The tenancy reforms included-
a) Regulation of rents
b) Tenure security
c) Confirm the right of occupancy of tenants
The objective was to expand the base of land ownership, that is, to give ―land to the tiller‖. This
would help in restricting tenancy and also increase tenure security. The tenancy legislation was
enacted in a number of states to confer ownership rights on tenants or allow cultivating tenants to
acquire ownership rights on payment of reasonable compensation to the landlords, subject to
limited rights of resumption for self- cultivation to the landowners. In some states the
government acquired the land from the landlords and gave it to the tenants on receipt of a certain
payment from them. The national policy, however, permits landowners who are members of the
Defence Services, widows, unmarried women, minors, and persons suffering from physical and
mental disability to lease out lands to tenants without loss of ownership. Provisions for security
of tenure have been made even in states which do not provide for conferment of ownership rights
on tenants, sub-tenants, and sharecroppers.
Some states which passed the tenancy laws put several restrictions under which landowners
could lease out land. This led to a virtual ban on leasing. These restrictions included imposing a
limit on rents which could be anywhere between one-fifth and one- fourth of the gross produce
and guaranteeing security of tenure to the tenants.
3. Ceiling on landholdings- It was designed to offset the extremely uneven distribution of

agricultural land. The policy measures were-
a) To meet the land requirement of working cultivators

b) To reduce differences in agricultural incomes, both in ownership and in use of land
c) To increase employment opportunities in the rural areas
The ceiling size was related to the size of an ―economic holding‖ that a family could cultivate
with its own resources which included traditional animal- power- based plowing technology. The
ceiling size also varied between irrigated and non- irrigated land. There were, however, certain
exceptions given to different categories of cultivated land, for example orchards. The landowners
tried to bypass these measures by distributing their land among real or fictitious relatives.
4. Land Consolidation and Wastelands – A very large number of very small holdings posed
one of the biggest problems in agricultural reorganization. The small and scattered land holdings
were consolidated into compact economic holdings.
Cooperative farming- the idea was that the farmers having very small holdings should join hands

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and pool their lands for the purpose of cultivation. It was felt that if these smaller holdings are
grouped into larger units and farmed cooperatively then the advantage of large scale organization
would become available. Larger financial resources for agricultural development could be
provided and employment increased. However, not much progress was made. There were
problems of motivation and organization. Also, the cultivators were reluctant to give up their
newly won rights to land, hindering cooperative farming. The failure of cooperative farming as a
policy was tacitly admitted in the Fourth Five Year Plan when no additional programmes were
proposed (Ray 2006).
The small sized, fragmented and scattered plots with a person or family at different places were
identified and an equivalent consolidated land was given at one place. It was initially started on a
voluntary basis but later on made compulsory. Consolidation of holdings in a village could be
done after two- third of the landowners gave their consent. Land of different quality was pooled
and redistributed among the landowners in consolidated plots. This reduces land fragmentation
and enhances the possibility of adopting new and better technology.
According to Ray (2006), the land policy in the First Five Year Plan was formulated without
enough knowledge about the size and distribution of land holdings in the rural areas. A lot of
data was collected on the size and distribution of land holdings for the first time in the Eighth
Round (1954) of the National Sample Survey (NSS). The draft report of the NSS Eighth Round
was only submitted to the central government in January 1960, a good six years later. Hence, it
did not serve the purpose of planners to assess the magnitude of the problem involved in
structural reorganization.
It was during the implementation stage that the defects in policy planning became apparent.
Legal, administrative and other factors became major bottlenecks. The policy makers erred in not
taking into account the importance of the time factor for the success of these reforms. A go slow
programme of implementation did not make any impact on the working cultivators.
2.2 Impact of Land Reforms on the Agrarian Structure
Appu (1995) in his comprehensive study has made a critical appraisal of policy, legislation and
implementation of land reforms in India since independence. He observed:
 All laws had a slow pace of legislation

 There were inadequacies in the content of the legislation
 Time consuming procedures were laid down
 The judiciary did not help in the implementation of the enacted laws.
Notwithstanding these serious limitations, Appu was of the opinion that ― the implementation of
the laws for the Abolition of Intermediary interests was far more satisfactory than the
implementation of the laws enacted in later years for the Reform of Tenancy and the imposition
of Ceilings on Agricultural Holdings‖. The abolition of intermediaries enabled the principal
tenants to become owners of land. It put an end to the system of parasitic intermediaries and
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brought about 25 million former tenants into direct contact with the government. This led to a
change in the rural power structure as they now acquired a higher social and political status.
On tenancy reforms, Appu found that taking the country as a whole, by 1992, ownership rights
had been conferred on (or tenancy rights had been protected of) some 11 million tenants on 14.4
million acres of land. This was about 4 percent of the operated area.
 It is interesting to note that the seven states of Assam, Gujarat, Himachal Pradesh,
Karnataka, Kerala, Maharashtra and West Bengal account for 97 percent of the
beneficiaries. Practically no benefits accrued to the tenants in the other states. Even in
these seven states tenancy reforms led to the large scale eviction of tenants.
 Except in West Bengal, share-croppers by and large remained outside the purview of
tenancy reforms. The implementation of land reforms largely benefitted the lowest rungs
of the peasant society only in West Bengal and Kerala. The rights of about 14 lakh share-
croppers were protected in West Bengal and about 2.84 lakh rural poor, mostly
agricultural labourers in Kerala became owners of homesteads.
 As a result of tenancy reform there has been a sharp decline in the area of land under
tenancy. At the eve of reforms, more than one half of the operated area was under
tenancy. This had come down to 15 percent of the operated area by the 1990s. The
tenants acquired ownership rights or were made secure in only about 4 percent of the
operated area. Thus the reforms led to the rural poor losing access to about 30 percent of
the operated area.
Implementation of Ceiling on Agricultural Holdings- The performance was even more

disappointing. By 1992, as a result of the implementation of the old and the new laws on ceiling,
only 2 million hectares of surplus land could be distributed to some 4.76 million beneficiaries. In
other words, the efforts spread over a period of three and half decades to enforce ceilings and
take over surplus land led to the redistribution of less than 2 percent of the operated area. If we
look at the performance of individual states, Appu (1995) found
 That the area distributed as a percentage of total area operated was 17.4 for Jammu and
Kashmir, 6.36 in West Bengal, 5 in Assam.
 In all the other states only less than one per cent of the operated area could be distributed.
 Obviously, the imposition of ceiling and the redistribution of surplus land made no
impact on the agrarian structure in most states.
The land reforms implemented since independence (Appu, 1995);
 It did not lead to any significant re-distribution of land.

 It did not lead to the removal of all the obstacles to increasing agricultural production.
 The laws for the abolition of intermediary interests were implemented fairly well.
 In the case of tenancy reform and ceiling on holdings, the policies adopted were vague
and there were large gaps between policy and legislation and between legislation and
implementation.

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 Tenants became owners of or acquired rights in only 4 percent of the operated area.
 The enforcement of ceiling led to the redistribution of less than 2 percent of the operated
area.
Thus these two measures taken together led to the redistribution of only about 6 percent of the
operated area.
2.2.1 Farm Size and Distribution of Holdings
D. Narasimha Reddy (2006) has shown the impact of land reforms on the agrarian structure in
terms of changes in the distribution of operational holdings in India for the period 1950-51 to
1995-96.
TABLE 2.1
CHANGES IN THE DISTRIBUTION OF OPERATIONAL HOLDINGS IN INDIA
(Percent share of each group)
Years Marginal Small Semi- Medium Large Average Gini

Farms Farms Medium Farms Farms Size( Hects) Ratio
(<1 Hect.) (1-2 Hects) (2-4 Hects) (4-10 (Above
Hects) 10 Hects)
No Area No Area No Area No Area No Area
1950- 38.4 6.0 21.7 10.2 19.2 18.2 15.3 31.6 5.4 34.0 N.A N.A
51
1960- 40.7 6.7 22.3 12.2 18.9 20.0 13.4 30.4 4.7 30.7 2.69 0.58
61
1970- 50.6 9.0 19.1 11.9 15.2 18.5 11.2 29.7 3.9 30.9 2.30 0.59
71
1976- 54.6 10.7 18.0 12.8 14.3 19.9 10.1 30.4 3.0 26.2 2.0 -
77
1980- 56.4 12.1 18.1 14.1 14.0 21.2 19.1 29.6 2.4 23.0 1.84 0.63
81
1985- 57.8 13.4 18.4 15.6 13.6 22.3 8.2 28.6 2.0 20.1 1.69 -
86
1990- 59.0 14.9 19.0 17.3 13.2 23.2 7.2 27.2 1.6 17.4 1.57 0.64
91
1995- 61.6 17.2 19.0 18.8 12.3 23.8 6.1 25.3 1.2 14.8 1.41 0.64
96
Source: D. Narasimha Reddy (2006), ―Changes in Agrarian Structure and Agricultural

Technology: Is Peasant Farming Sustainable under Institutional Retrogression‖ in R.
Radhakrishna, S. K. Rao, S. Mahendra Dev and K. Subbarao (eds) India in a Globalising World:
9
Some Aspects of Macroeconomy, Agriculture and Poverty, Essays in Honour of C. H.

Hanumantha Rao, Academic Foundation, New Delhi
Table 2.1 reveals that:
a)There has been a general tendency of increase in the share of households and the area
cultivated by small marginal farmers
b) There has been a reduction in the share of holdings as well as the area cultivated by the large
farmers,
c) The average size of holdings in all size-classes is on the decline.
d) The land concentration ratios, though have increased marginally and it would be higher if non
land assets like farm machinery, buildings etc are included.
e) The rural landless households increased only marginally from about 10 percent in 1970-71 to
11 percent in 1991-92.
f) The ‗near landless households‘ are those households who own less than half an acre of land.
The proportion of ‗near landless households‘ and landless households has increased from about
30 percent in 1970-71 to about 48 percent by 1990-91.These are the households which constitute
the vast and growing rural underclass.
All the households with 4 hectares and more constitute the rich peasantry (Reddy, 2006). The
rich peasantry has emerged as the ‗masters of the countryside‘. Table 2.1 shows that there was no
significant change either in the share of households or in the share of land operated till 1970-71.
They still constituted 15 to 20 percent of the households and owned about 60 to 65 percent of the
operational holdings. But in 1970-71, this rich peasantry had firmly established itself and
exercised a lot of power in the countryside. They also influenced public policy and manipulated
it to their advantage. The reforms pertaining to land ceiling did not have much impact on their
landholdings till 1960s.
The central government in 1972 introduced a second round of land ceiling legislation in which
the ceiling was lowered and some of the loopholes of previous round were removed. But by then,
the rich peasant class was well entrenched and subverted the land reforms with impunity. They
kept the surplus land available after ceiling to the minimum and often this land which was
surrendered was of poor quality. Even the substandard surplus land that was made available for
redistribution to the poor farmers was only about 2 percent of the total cultivated land in India.
This is very insignificant if we compare it to the similar figure of about 25 to 40 percent in East
Asian countries. They not only retained the better quality land but also the productivity of their
land increased progressively because they benefitted from the government‘s investment in

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infrastructural facilities like irrigation and power. The land available with the rich peasantry was
thus ready to receive the better technology along with the significant dose of government
subsidies.
Thus, at the end of 1960s, the top 15 percent of households were operating about 50 percent of
the land, which was highly productive land while the small marginal farmers who constituted
about 80 percent of the households were operating only about 30 percent of the land, a large
portion of which was of near poor quality. It was only after the second round of land ceiling
reforms were passed in the 1970s, which were more stringent, that there appeared a tendency
towards a shift in the proportion of households as well as area operated under the large peasant
category.
Image
Share of Holdings from 1960-61 to 2010-11
2.2.2 Impact of Tenancy Reforms

The land reform legislation provided scope for the rich landowners to dilute, if not defeat, the
purpose of the legislation. A large number of tenants were evicted from the land that they were
cultivating due to the provision of ―voluntary‖ surrender and due to the right of land resumption
for self cultivation in tenancy laws. Since the demand for leased land was high, a number of
unrecorded tenancies continued to exist and charged rents which were higher than those
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stipulated by the law. Transfers of land, under the forewarning impact of tenancy and ceiling
legislation, to the resident landowners was on a much larger scale in the dry than in the irrigated
areas. The result of shifts in land from the absentee to resident landowner was a decline in
tenancy.
Although agricultural tenancies are banned in most States, the incidence of some type of tenancy,
particularly in various forms of crop sharing, is still prevalent significantly in some areas. The
tenancy in most cases is contracted orally and in violation of the law. Thus, the tiller‘s position is
uncertain and he has no incentive to cultivate land efficiently. In several regions the landowners
prefer to keep the land fallow. They do so because of the fear of losing their rights, given the
existing provisions under the law. It also restricts access to land through leasing in by the poor
people. Experience has shown that measures to ban tenancy are not usually effective and large
amount of oral or concealed tenancies continue to exist among all categories of rural households.
Thus, a decrease in lease market participation with economic growth is indicative of the fact that
tenancy restrictions are constraining the supply of land in the rental market. Tenancy legislation
has actually ended longer term contractual arrangements and even seasonal tenancy is seen in
some areas. This discourages the use of manure, fertilizers and investments which affects
productivity.
In a majority of states, landless and marginal farmers are renting land. On the other hand, in
some of the states, large and medium farmers lease in land from smaller farmers, giving rise to
‗reverse tenancy‘. This indicates that the transactions for leasing in and leasing out occurs in all
farm sizes and it appears that it is economic factors rather than power relationships which are
defining these leasing arrangements.
Interesting Fact
Tenancy Reforms
Source: V. M. Rao (1992), ―Land Reform Experiences: Perspective for Strategy and
Programmes‖, Economic and Political Weekly, June 27
The Tenancy legislation, apparently had the objective of transferring land to the cultivator (with
the exception of tenants under the Zamindars and other intermediaries who were abolished in
1950s), has never been nearer the objective of ‗land to the tiller‘.
Andhra Pradesh- There has been faster growth of unrecorded tenancy in the relatively better-
endowed parts of Andhra Pradesh with hardly any protection but with intensification of growing
exploitation.
West Bengal- The famous tenancy reforms of West Bengal, the operation ‗Barga‘, only helped
in formalizing the share cropper-owner relations.
Kerala- It made the owners keep their land fallow as otherwise they would lose it to tenants if
leased out.

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Punjab and Haryana- It made the rich farmers richer while the smaller farmers became
landless.It is the classic instance of how the capitalist farmers were the net beneficiaries of both
the ill implemented and well implemented agrarian reform programmes.
Contemporaries
Conditions of tenancy permitted in different states of India
Source: Ravi Srivastava, N. C. Saxena, and Sukhadeo K. Thorat (2008). ―Land Institutions,
Policy, and Reforms in India‖ in Ashok Gulati and Shenggen Fan (eds), The Dragon & The
Elephant- Agricultural and Rural Reforms in China and India, Oxford University Press, New
Delhi.
State or Region Who is permitted to lease out Consequent landlord and tenant
rights
Telangana Smallholders with fewer than Right of resumption
(Andhra Pradesh) three ―family holdings‖ in
restricted categories; renewable
period of five years
Andhra area No restrictions Right of resumption of up to
(Andhra Pradesh) two- thirds of the ceiling area,
but the tenant should be left
with half the leased area
Assam No restrictions The landlord has the right of
resumption if the land is
required for bona fide self-
cultivation
Bihar Restricted categories. Under the Right of resumption
Bihar Tenancy Act, persons
with fewer than five acres of
irrigated land
Saurashtra Restricted categories Unauthorized leasing subject to
(Gujarat) fines
Haryana Permitted No consequent rights to tenants
Himachal Restricted categories Right of resumption
Jammu and Not permitted
Kashmir
Karnataka Restricted categories
Kerala Not permitted
Maharashtra Permitted The tenant acquires the right to
purchase land after a year unless
owner is in s restricted category
Orissa Restricted categories and

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―privileged ryots‖
Punjab Permitted No consequent rights to tenants
Rajasthan Permitted but restrictions on
period, except for restricted
categories
Tamil Nadu Permitted; agreements have to
be recorded
Uttar Pradesh Restricted categories
West Bengal Permitted Hereditable bargadari rights
accrue to tenants; landlords can
resume land under specified
conditions and subject to a
maximum area of holding for
themselves and a minimum area
to be left with tenants
Nonetheless, the legislation abolishing landlordism brought about a considerable transformation

of the countryside. It widened the base of landownership and created three kinds of landholders:
 Those with inheritable and transferable rights over land

 Those with permanent occupancy rights (which were to gradually transform into the first
category)
 Those with an obligation to pay rent to those in one of the first two categories.
As a result of the implementation of these laws, the ownership of nearly 40 percent of cultivable
land was transferred to the direct producers and nearly 12.4 million tenants obtained secure
rights or ownership rights over an area of 6.15 million hectares, which is about 4.4 percent of
cultivable area of India (Srivastava, Saxena and Thorat, 2008).
2.2.3 Impact of Reform measures on Land Ceiling
One of the basic objectives of land reforms was to bring about a more equitable distribution of
land. The main instrument for realizing this objective was the imposition of ceiling on land. In
line with the proposals of the five year plans, laws on imposition of ceiling on agricultural
holdings were enacted by several states during the 1950s and 1960s. These were implemented
with varying degrees of effectiveness in different states. The amount of land declared surplus is
far short of land which was estimated to be surplus on the basis of various national surveys.
Thus, it is clear that reform measures have not been able to achieve the desired impact. The total
area declared surplus so far has been 73.5 lakh acres only, of which 53.9 lakh acres have been
distributed. The distribution of the remaining area of land declared surplus is held up mainly due
to litigation.

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There were also extensive complaints that the plot of land allotted to the rural poor under the
ceiling laws were not in their possession. In some cases, it was alleged that though the pattas
were issued to the beneficiaries, they were not given possession of that land nor were the
corresponding changes in the records books made. It has also been noticed that the rural poor
allottees of surplus land are often dragged into litigation by the erstwhile landowners. The
allottees find it difficult to defend themselves against this. Besides, a number of benami and
concealed transactions have resulted in illegal possession of significant amounts of lands above
ceiling limits. Hence, the implementation of the ceiling laws is far from satisfactory. The land
ceiling legislation met with very limited success in all except for a few states (Srivastava, Saxena
and Thorat, 2008). The main reasons were
 The exemption made for plantations as well as land held by religious and charitable
institutions.
 Fake transfers
 Misclassification of lands
 Non- application of appropriate ceilings on lands newly irrigated by public investment
 Reluctance of states to enforce land ceiling vigorously
By March 2002, 3 million hectares of land (less than 2 percent of the cultivated area) was
declared surplus. The government took possession of about 2.63 million hectares (that is 88.2
percent) and distributed an area of 2.18 million hectares to 5.65 million rural poor. But, due to
collusive litigation, a large portion of land (0.46 million hectares) out of the declared surplus is
under litigation at various levels and has not been made available for distribution (Srivastava,
Saxena and Thorat, 2008).
2.2.4 Land Consolidation and Wastelands

By 2002, consolidation had taken place on 66.1 million hectares out of the 142 million hectares
of cultivable area, but many states had stopped the process earlier. The maximum land had been
consolidated in the northwestern states of Punjab, Haryana and Uttar Pradesh and in the western
state of Maharashtra. The distribution of government wasteland was most vigorously
implemented in the states of Andhra Pradesh (1.7 million hectare or 28.5 percent of the total land
distributed in the country), which has a very high percentage of landless labourers and Uttar
Pradesh (1 million hectares or 16.9 percent of total land distributed in the country) (Srivastava,
Saxena and Thorat, 2008).
Image
Distribution of Wastelands in Andhra Pradesh

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Did you know

Operation Barga
Source: Maitreesh Ghatak(2007), ―Land Reform‖ in Kaushik Basu (ed.), The Oxford
Companion to Economics in India, Oxford University Press, New Delhi
http://econ.lse.ac.uk/staff/mghatak/landref.pdf
A study that focuses on West Bengal, a state where tenancy reforms were implemented very
thoroughly, showed that tenancy reforms improved agricultural productivity. Within a year of
being elected in 1977, the left-wing administration launched Operation Barga, a program
designed to implement and enforce the long-dormant agricultural tenancy laws that regulated
rents and security of tenure of sharecroppers. Under these laws, if tenants registered with the
Department of Land Revenue, they would be entitled to permanent and inheritable tenure on the
land they sharecropped as long as they paid the landlord at least 25 percent of output as rent. In
the decade following the launching of Operation Barga, there was a significant improvement in
the terms of tenants‘ contracts and more secure tenure.
The notable achievers were the left-wing administrations in Kerala and West Bengal which
showed that the success of land reforms had been driven by the political will of specific state
administrations.
2.2.5 Future Directions in Land Reforms

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Land is the prime resource of the vast majority of the poor in India deriving livelihood from
agriculture. The land administration is plagued by many infirmities. The productivity has been
adversely affected due to unclear titles, informal tenancy arrangements, and other related
problems. This has also forced rural population, both landless and marginal farmers, to migrate
to urban areas in search of employment, giving rise to absentee landlordism, who do not lease
out land for fear of losing the land titles. Therefore, an efficient and corruption free land
administration, combined with a dynamically adaptive land policy, can play a vital role in
increasing agriculture growth and in reducing poverty. The key elements of an effective land
policy that will be discussed here are (Planning Commission, 2007):
 Modernization of management of land records.

 Reforms relating to land ceiling.
 Reforms relating to tenancy laws.
Modernization of management of land records and titles
Correct and updated land records are essential for the security of land rights and to encourage
investment. These result in fewer disputes and conflicts, allow land to be used as collateral,
lower transaction costs and corruption, ensure efficient land markets, and help in implementation
of land reforms.
The efforts so far have focused on computerizing the land records that exist in the books. But, if
the records are not accurate and updated, then computerization on its own serves no purpose.
The process of registration and mutation should be integrated into one function of registration of
deeds. Before registering the deed, the concerned officer should check the legality of the
transaction and competence of parties to take part in the transaction. Computerization should also
be taken up of records of the previous 50 years, or such length of time as may be prescribed in
this regard in the relevant state laws, so that the title being registered is clear and uncontested.
The computerization of spatial records should be taken up in all the states. Setting up a system on
the above lines in all States and Union Territories would facilitate citizen services based on land
data, such as providing records of rights with maps to- scale; other land-based certificates such as
caste certificates, income certificates (particularly in rural areas), domicile certificates, etc.;
information for eligibility for development programmes; land passbooks with the relevant land
information for access to agricultural credit; and access to the data to the co-operative banks and
other credit institutions.
Reforms related to land ceilings
The following measures can be taken up:

17
 Since large areas of good quality ceiling surplus land are unlikely to be available for
distribution to the landless poor, efforts must be made to take steps to release and
distribute the land locked in litigation through speedy disposal of court cases.
 In such cases where the land has been distributed but the beneficiary is not in a position
to enjoy the land due to being dispossessed or not having a well-defined title to the land,
these cases should be surveyed and reopened and such land be restored.
 A special squad of revenue functionaries and Gram Sabha members should be set up for
identification of benami and fictitious transactions in a time bound manner.
 There should be a survey of the government land encroached by ineligible persons and
such land should be identified and distributed to the landless. An inventory of the
government lands should be made and wherever surplus land is available, it should be
distributed to the landless persons.
 Asset in the form of land can lead to poverty reduction. However, to the extent that
distributing government lands is not an option, acquisition of land through purchase by
the State and distribution to the poor as individuals or in a group may be considered.
Did you Know

Security of Homestead Right
Source: Planning Commission (2008), Eleventh Five Year Plan, 2007-12, Volume III, Chapter I
An estimated 13 to 18 million families in rural India today are reported to be landless, of which
about 8 million lack homes of their own. They either live in a house constructed on the land of
others or provided by landowners in return for some forced labour. Some of these persons do not
have land to construct a house, while others may have small patches of land but no resources to
build a hutment.
The right to a roof over one‘s head needs to be seen as a basic human right, along with the right
to freedom from hunger and right to education. The Supreme Court, held that right to shelter is a
fundamental right. The Eleventh Five Year Plan provides the opportunity to realize this vision.

18
The homestead vegetables gardens have helped families overcome poverty and achieve
economic self-reliance.
Several State Governments have already taken steps to provide each family with a minimum size
of land (10–15 cents), so that they have enough space to live and, also a little space extra for
supplementary livelihood activities, such as growing fodder and keeping livestock, planting fruit
trees or vegetables, or undertaking other land-based economic activities (farm or non-farm) to
improve their food, nutrition, and livelihood security. Kerala has a scheme of providing 10 cents
of land to each landless family and this has had a notable impact on poverty reduction in the
State.
Similarly, in 2005, the governments of Karnataka and West Bengal initiated schemes to give
homestead-cum garden plots to landless families. These experiments should be generalized
across all States.
Did you Know

Access to Agricultural Services
Small and marginal farmers often lack access to major agricultural services, such as credit,
extension, insurance, and markets. This is especially true of women farmers since there is
pervasive male bias in provision of such services. With almost all sharecroppers and most
marginal farmers unable to access credit from the formal system, a key issue relating to

19
agricultural credit is the utter lack of financial inclusiveness. Recent suicides by farmers in many
parts of India are linked with increase in indebtedness to non institutional sources.
Small and marginal farmers, particularly women, have lower literacy levels compared to the
bigger farmers. This limits their access to information sources like media, TV, etc. The
government extension machinery also tends to focus on progressive or bigger farmers. Small and
marginal farmers are also deprived of MSP because of low surpluses, and at times pledge of
produce to moneylenders at less than market price. ize this vision.
Tenancy reforms
Eleventh Five Year Plan recommends the following reforms in tenancy legislation for protecting
the interests of tenants and landowners and also to increase agricultural productivity:
 Tenancy should be legalized in a limited manner. It should provide security to the tenant
for the contractual period which could be long enough to encourage long term investment
by him. It should also protect the rights to the land of the landowner so that he has an
incentive to lease the land and not leave it fallow or unutilized. Long-term tenure
arrangements should thus maximize agricultural production and increase the returns to
both the farmer, the landlord, and the tenant.
 An upper and lower bound of rents may be prescribed at the state level. If these bands are
wide enough, this will do away with the need for illegal arrangements, ensure that the

20
rents are determined by market forces within the prescribed band, and thus increase
efficiency and cooperation of both the willing parties.
 Legalizing of tenancy will result in increasing the supply of land. This will encourage all
categories of rural households to participate in the lease market based upon resource
endowment, education, employment prospects, prevailing wage levels, and the
institutional backup available.
 As agrarian conditions are different across states, a one size fit all prescription cannot be
used. In cases where the landlords are dominant and there is strong likelihood that
interests of tenants may not be safeguarded, special clauses could be necessary.
 Small landowners who would otherwise have to operate small uneconomic holdings
should have the opportunity to legally lease out land to other farmers. They should be
assured that they will get the possession of land at the end of the stated period of tenancy.
 The marginal and small landowners should be assisted with adequate institutional support
and rural development schemes. This will ensure that they are not compelled to lease out
to big farmers or corporate houses, thereby creating conditions for involuntary reverse
tenancy. In the case of sharecroppers, credit should be made available to them they once
they enter into long-term contracts
Intellectual context
Gender Equity
With the share of female workforce in agriculture increasing, and increased incidence of female-
headed households, there is an urgent need to ensure women‘s rights to land and infrastructure
support:
 Women‘s names should be recorded as cultivators in revenue records on family farms

where women operate the land having ownership in the name of male members.
 The gender bias in functioning of institutions for information, extension, credit, inputs,
and marketing should be corrected by gender-sensitizing the existing infrastructure
providers.
 Women‘s co-operatives and other forms of group effort should be promoted for the
dissemination of agricultural technology and other inputs, as well as for marketing of
produce.
 Wherever possible a group approach for investment and production among small scale
women farmers, be it on purchased or leased land, should be promoted. Women farmers
are typically unable to access inputs, information, and market produce on an individual
basis. A group approach would empower them.
Did you Know

Group Action

21
The most potent vehicle that can empower the poor is group action. Among success stories, the
Deccan Development Society has provided subsidized credit to landless scheduled caste (SC)
women‘s groups for land purchase using an Andhra Pradesh government scheme. Many groups
have purchased land through this scheme and are farming it collectively. This has enhanced
agricultural output, food security, and employment for poor women and their families. Many
have brought uncultivated land into productive use.
Another example is a Government of India–United Nations Development Programme (GoI-

UNDP) programme which covered 1357 villages and 50000 women in Andhra Pradesh, UP, and
Orissa promoting group access to land and collective cultivation by women. This involved
collective cultivation on land acquired in many ways: leasing in, releasing mortgaged land, etc.
Undertaken in partnership with State Governments, women‘s groups, and NGOs, support for this
programme has ended. It needs revising and extending.
Summary
Land reform usually refers to redistribution of land from the rich to the poor. Broadly, it includes
the regulation of ownership, operation, leasing, sales, and inheritance of land. In an agrarian
economy like India with great scarcity, and an unequal distribution, of land, coupled with a large
proportion of the rural population below the poverty line, there are undeniable economic and
political arguments for land reform. Therefore, it received top priority on the policy agenda at the
time of Independence. In the decades that followed, India passed a significant number of land
reform legislation. The 1949 Constitution left the adoption and implementation of land and
tenancy reforms to state governments. This led to a lot of variation in the implementation of
22
these reforms across states and over time.
Land reform legislation in India consisted of four main categories: abolition of intermediaries
who were rent collectors under the pre-Independence land revenue system; tenancy regulation
that attempts to improve the contractual terms faced by tenants, including crop shares and
security of tenure; a ceiling on landholdings with a view to redistributing surplus land to the
landless; and finally, consolidation of different landholdings. Abolition of intermediaries is
generally agreed to be one component of land reforms that has been relatively successful. The
record in terms of the other components is mixed and varies across states and over time. The
landowners obviously resisted the implementation of these reforms by directly using their
political clout and also by using diverse methods of evasion and coercion. These included
registering their own land under names of different relatives to bypass the ceiling, and shifting
tenants around different plots of land, so that they would not acquire incumbency rights as
specified in the tenancy law. The major proportion of agricultural land in India is privately
owned and operated. In 1995-96, the number of total holdings was more than 115 million, with
more than 80 percent of the holdings being of small and marginal sizes, that is, less than 2
hectares plot. The success of land reform has been driven by the political will of specific state
administrations, the notable achievers being Kerala and West Bengal.The implementation of land
reforms requires the maintenance and regular up dating of land records. These unfortunately
have been inadequate and badly managed in most parts of the country. The central government
has started schemes for the creation and maintenance of land records since 1988-89 in areas
where they were non-existent. The records are also being computerized in order to improve
maintenance and to make it more transparent. The computerization of records is now operative in
all districts except in places where there are no land records. This, along, with renewed focus on
reforms on tenancy and land ceiling have been recommended by the Eleventh Five Year Plan for
protecting the interests of tenants and landowners and also to increase agricultural productivity.
2.3 Industrial Control Regime
Before Independence, the policy of the British Government was against encouraging industrial
development in India. There were no incentives offered to Indian industries for their growth.
Whatever industrial development took place in India was in spite of the negative and hostile
attitude of the British Government. Therefore, credit must be given to pioneers like Jamshedji
Tata, Walchand Hirachand, Lala Sriram, G.D.Birla and others, who laid the foundations of
modern industry in India.
At the time of independence, the Indian economy was an under developed economy having one
of the lowest per capita consumption and income levels among the countries of the world.
 The industrial sector was extremely underdeveloped and had a very weak infrastructure.
 An important reason for the underdevelopment was thought to be the lack of government
intervention in the sector.
23
 The structure of ownership was highly concentrated.

 The export pattern did not conform to the country‘s interest.
 The technical and managerial skills were in short supply.
It was therefore felt that for the economy to grow at a fast rate, rapid industrialization including
particularly the promotion of industrial infrastructure was imperative.
2.3.1 The Beginning
The Statement of Industrial Policy 1945, the Industrial Policy Resolution (IPR) of 1948, the
enactment of the Industries Development and Regulation Act 1951, the First and the Second Five
Year Plan documents and the Industrial Policy Resolution of 1956 tell us the thought process
about the direction of industrial development at that time.
The 1945 Statement of Industrial Policy of the then Government of India is the precursor of all
the thinking that became enshrined in the main industrial policy resolutions after independence.
The concept of industrial licensing was also mentioned in that Statement. The development of
steel, heavy engineering, machine tools and heavy chemical industries were given special
importance. This emphasis has been the trademark of the Indian industrial policy thinking since
then. The idea that the government should actively participate in establishing certain important
industries was also suggested in the Statement of 1945. The government could either set up these
industries directly or subscribe to the shares of such industrial undertakings. The purpose of
licensing was expected to be two-fold:
 It would help in the dispersal of industries

 It would also ensure that excess capacity is not created in the industries ―which promise
quick returns‖.
The list of industries which were proposed to be brought under central controls bears a strong
resemblance to the original schedule of industries brought under the control of the central
government through the Industries Development and Regulation Act 1951. Hence, there was
significant continuity in the thought process between the pre and post- independence
governments as reflected in the IPR of 1948 and 1956.
The Government of India in their Resolution dated 6 April, 1948 announced the policy that they
would pursue in the industrial sector. The IPR pointed out that the state must play a
progressively active role in the development of industries. It laid down that arms and
ammunition, atomic energy and railway transport would be the monopoly of the central
government. The state would be exclusively responsible for the establishment of new
undertakings in six basic industries such as coal, iron and steel aircraft manufacture, ship-
building, aircraft manufacturing, manufacture of telephone, telegraph and wireless apparatus and
minerals. But if in the national interest, the state itself found it necessary to secure the
cooperation of private enterprise, it could do so. The rest of the industrial field was left open to

24
private enterprise though it was made clear that the state would also progressively participate in
this field.
The First Five Year Plan (1951-56) outlined that the objective of the industrial planning was to
try to overcome the shortages in the production of major industrial items and to start the process
of development that would enable the economy to expand this basic production. The scope and
the need for the development of India‘s industries was thought to be so much that it was
necessary for the public sector to develop those industries ―in which the private enterprise is
unable or unwilling to put up the resources required and to run the risk involved‖. The idea was
that the rest of the field could be left free for private enterprise.
After 1948, India adopted a democratic constitution, guaranteed fundamental rights and also
enunciated certain directives of state policy. The Parliament accepted the socialistic pattern of
society as the objective of social and economic policy. 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 is as below:
 Schedule ‗A‘ 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
 Schedule ‗B‘ industries
 There were 12 industries placed in schedule B. In regard to the development of these
industries, the state was generally to take initiative in setting up new undertaking.
However, the private sector was also expected to supplement the effort of the state in this
category of industries. This sector was called the joint sector.
 Schedule ‗C‘ industries
 All the remaining industries fell in the schedule C. the future development of which was
left to the initiative of the private sector. The state, however, was to provide necessary
assistance to private sector for development of industries.
Historical Context
Industries covered under Schedule-A of IPR 1956
Source: The report of National Commission on Labour
http://eaindustry.nic.in/handbk/chap001.pdf
1. Arms and ammunition and allied items of defence equipment.
2. Atomic energy.
3. Iron and Steel.
4. Heavy castings and forgings of iron and steel.
5. Heavy plant and machinery required for iron and steel production, for mining, for
25
machine tool manufacture and for such other basic industries as may be specified by the
central government.
6. Heavy electrical plant including large hydraulic and steam turbines.
7. Coal and lignite.
8. Mineral oils.
9. Mining of iron ore, manganese ore, chrome-ore, gypsum, sulphur, gold and diamond.
10. Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram.
11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use)
Order, 1953.
12. Aircraft.
13. Air transport.
14. Railway Transport.
15. Ship Building.
16. Telephones and telephone cables, telegraph and wireless apparatus (excluding radio
receiving sets).
17. Generation and distribution of electricity.
Historical Context
Source: Report of the National Commission on Labour, http://www.labour.nic.in/lcomm2/2nlc-
pdfs/Chap3.pdf
In 1951, the Industrial (Development and Regulation) Act was passed by the Parliament. The
main provisions of the Act were:
1. All existing undertakings at the commencement of the Act, except those owned by the
central government were compulsorily required to register with the designated authority.
2. No one except the central government would be permitted to set up any new industrial
undertaking ―except under and in accordance with a licence issued in that behalf by the
central government.‖
3. Such a licence or permission prescribed a variety of conditions, such as, location,
minimum standards in respect of size and techniques to be used, which the central
government may approve.
4. Such licenses and clearances were also required in cases of ‗substantial expansion‘ of an
existing industrial undertaking.
5. The industries to be brought under regulation were divided into two parts, Part I and II in
the Schedule to the Act.
In regard to the industries listed in Part I of the Schedule, the central government could issue
necessary directions in respect of quality of its products, falling production, rise in prices etc.
Government could transfer industries specified in one part to another.
Implementation of the Industrial Development and Regulation Act, 1951 (IDR):

26
The IDR Act gave very wide powers to the Government. This resulted in more or less complete
control by the bureaucracy on the industrial development of the country. They had full control
over:
1. Approval of any proposal on capacity, location, expansion, manufacture of new products.

2. Approval of foreign exchange expenditure on the import of plant and machinery.
3. Approval for the terms of foreign collaboration.
The thinking concerning the public sector had changed during the course of the 1950s. It seemed
that in the original thinking, the public sector was to be used for investing in those industries
where the private sector would find it difficult to invest. But by 1956, this thinking had changed.
The public sector was assigned a dominant role in industrial development with 29 industries
under it. The public sector was given a commanding position in the industrial sector. The
government, thus, assumed the role of the major partner 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.
The Second Five Year Plan is always seen as the conceptual basis of Indian planning. But, a
close reading of the First Five Year Plan suggests that the problems associated with a mixed
economy were better appreciated by the earlier planners and policy makers. There was better
appreciation of the need for indicative planning in the First Plan and the need for coordination of
industrial planning with the formulation of other economic policies such as customs and excise
tariff structure, import and export policy, investment and technology policy, monetary and
financial policy. The Second Plan and later plans have been concentrating more on the allocation
of public resources and less on the policies to direct the whole economy in desired directions.
The system of industrial licensing, therefore, has its origins in a combination of thinking
resulting from the exigencies and requirements of a war situation, Indian nationalistic aspirations
and the scholastic leanings of some of the founding fathers of the country. The private sector at
that time also favoured strong governmental assertion. The industrial licensing system has
operated in the country along with the other schemes of governmental allocations and controls
such as:
1. Five Year Plan documents

2. Import and Export controls
3. Control of capital issues
4. Control of foreign exchange
5. Transport controls including allocation of raw materials
6. Price controls
7. Allocations of credit

27
This shows that the planners and policy makers in India understood the need for using a wide
variety of instruments and controls to guide Indian industrial development in the desired
direction. However, there has always been a mismatch between the intentions expressed and the
licensing instruments available for realizing these planning intensions. It is also important to note
that the purpose for which licencing was started changed over time. The original intention of
licensing was to use this power selectively for the promotion of selected important industries.
But it was later used to control almost all industries, with the result, that regulation rather than
development became the more important feature of the system.
2.3.2 Performance of the Industrial Licensing System
zThe establishment and operation of an industrial enterprise in India required approvals from the
central government at almost every step. An entrepreneur, before making an investment, had to
first obtain approval in principle from the Ministry of Industry. If the project was approved, then
the Ministry issued a Letter of Intent (LoI). After the LoI was obtained, the entrepreneur could
then tie up other requirements for setting up the project.
 If the project required importing of a capital good, then he needed to go to Chief

Controller of Imports and Exports (CCI&E) in the Ministry of Commerce in order to
obtain a capital goods import license. Though the application is given in the Ministry of
Commerce, the approval of import was, however given by a committee set up in the
Ministry of Industry.
 If the entrepreneur needed foreign technology collaboration agreement, he had to obtain a
specific approval for this, known as the Foreign Collaboration approval, from a
committee chaired by the Finance Secretary but serviced by the Ministry of Industry.
 If the entrepreneur needed to raise funds and wanted to go to the capital market, then he
required a separate approval from the Controller of Capital Issues in the Ministry of
Finance.
 If the project required import of raw materials and components, then a separate license
had to be obtained from CCI&E on an annual basis. In each case, indigenous non
availability and an ‗essentiality‘ clearance had to be given by the technical wing of the
Ministry of Industry, that is the Directorate General of Technical Development.
Once everything was fixed up and the unit was about to begin the production process, the
entrepreneur had to go back to the Ministry of Industry for an ―industrial licence‖.
In 1969, the Monopolies and Restrictive Trade Practices (MRTP) Act was passed by the
government. In addition to these approvals, the firms covered under this Act needed to obtain
separate MRTP clearances from the Department of Company Affairs.
The Policy Statement of 1973 drew up a list of industries to be started by large business houses
so that the competitive effort of small industries was not affected. The large industries were
permitted to start operations in rural and backward areas with a view to developing those areas
and enabling the growth of small industries around. A Secretariat for Industrial Approvals (SIA)
28
was set up in November 1973, and all industrial licenses, capital goods, import licenses, terms of
foreign collaboration were brought under the SIA.
The focus of the Industrial Policy Statement of December 1977 was on effective promotion of
Cottage and Small Industries widely dispersed in rural areas and small towns. It emphasized that
―whatever can be produced by small and cottage industries must only be so produced.‖ The focal
point of development of small-scale industries (SSIs) was taken away from the big cities to
districts. The concept of District Industries Centres was introduced for the first time. The policy
statement considerably expanded the list of reserved items for exclusive manufacture in the
small-scale sector. This concept was recommended by the Karve Committee and was introduced
in 1967 with 47 products. The list of such reserved items was 504 till 1977 and the new policy
expanded this list to 807.
It was clear since the early 1960s that the licencing system was not able to direct investments in
the way it had been perceived. The government appointed one committee after another in the
1960s to examine the industrial licencing system. Some of these were:
 The Swaminathan Committee, 1964

 The Mahalonobis Committee, 1964
 The Hazari report 1967
 The Dutt Committee report, 1969
 The Administrative Reform Commission, 1969
 Industrial Licensing Policy Inquiry Committee , 1969
The most comprehensive description, evaluation and indictment of this system is by Bhagwati
and Desai (1970). Some of the Hazari Committee‘s conclusions were:
 That industrial licensing has served to channelize investment into desired directions
appears extremely doubtful.
 The gains in terms of balanced regional development and wider distribution of
entrepreneurship were at best moderate.
 There is very little follow-up of licensing to see that approved projects fructify on time.
 In attempting to cover almost the whole range of large-scale industrial development
licensing, the act inevitably loses sight of relative importance of different projects/
products. i.e., whether critical to the economy or otherwise, all applications will undergo
similar processing.
In July 1969, an Industrial Licensing Inquiry Committee was appointed to examine the
shortcomings in licensing policy. The Committee felt that:
 The licensing policy had not succeeded in preventing the practice of pre-empting capacity
by large houses
 It had not ensured development of industries according to announced licensing policies
 It did not prevent investment in non-priority industries etc.

29
Image
The licencing system had failed practically on all counts, whether it was regional dispersal,
import substitution or preventing concentration of economic power. It did not even ensure that
the development of industries occurred according to plan priorities. Moreover, the licencing
system could not attain even its specific objectives. The licences were issued in excess of
capacity targets even in non-essential industries. The influential parties and large houses were
permitted to pre-empt capacities. The follow-up of licences were unsystematic and licences
remained unimplemented for long periods. It was very clear from the findings of most of these
early committees, that the licencing mechanism was not serving its purpose of channelizing
investments into desired directions. Despite this, the government continued with the licencing
system, seeming unable to do much to bring any substantive changes to this system.
Despite the adverse comments, it is interesting to note that the committee concluded that ―with
all its defects, the industrial licencing system did have a useful role to play though its limitations
needed to be borne in view.‖ The committee recommended that:
 There should be list of reservations for small scale industry production.

 Bans on further capacity creation should be utilized to prevent the creation of
―undesirable industries‖, particularly the production of ‗non- essential luxury goods‘.
The committee also recommended a whole range of other measures which would lead to more
detailed rather than reduced control of industry. Thus, despite all the gathered evidence pointing
30
towards the failure of the licencing system, there was a persistent reluctance to learn from
experience and change course.
It seemed that having a protected home market had a common appeal to the bureaucratic
authoritarian state, urban manufacturers and multinationals that supplied technology and capital.
The government‘s objective of trying to maximize revenue was also fulfilled by imposing
maximum revenue tariffs and export tariffs.
Intellectual Context
Protection to Indian industries
Source: Report of the National Commission on Labour, http://www.labour.nic.in/lcomm2/2nlc-
pdfs/Chap3.pdf
India is probably one of the few countries in the world which used its import policy for the
development of local industries. Barring the first few years after independence, the country was
facing a shortage of foreign exchange, and because of this shortage, imports had to be restricted.
The imports of consumer goods were, therefore, disallowed. A good number of restrictions were
put on the import of industrial goods, and the effort of the government was to encourage the
production of these goods indigenously. The local industries were encouraged to have foreign
collaborations and to import the technical know-how needed to produce what was being
imported into the country.
Levying higher tariffs restricted imports, and there was also a total or partial physical ban on the
imports of such products. This gave a much needed sheltered market for Indian goods, and many
industries thrived within these protective walls. Initially, products produced by Indian industries
were not of good quality. But as years went by, industries acquired experience in manufacturing
and turned out quality products comparable with imported products. There was a continuous
effort to improve quality.
During the Second and Third plans, the emphasis was on the development of capital goods
industries. India wanted to make machines that helped to produce other machines. Therefore,
greater emphasis was given to the development of machine tools, textile machinery, power
equipment and so on. We were importing these mother machines, and the new effort was to
produce them in India, to achieve self sufficiency. As a result of this policy, encouragement was
given to import technical know-how and to enter into foreign collaborations to undertake
manufacture of capital equipment locally. This gave further fillip to industrial development.

31
The emphasis was on the development of capital goods industries.
Protection from imports encouraged Indian industry to undertake the manufacture of a variety of
products. There was a ready market for all these products. The government also gave
encouragement to industries to import parts and components that were required for indigenous
production. The import policy was meant to serve two categories of importers - actual users and
established importers. Actual users of imported raw materials or products were given preference
over the category of established importers i.e. traders. Certain items that were scarce and not
available were channelized through the State Trading Corporation, Mines and Minerals Trading
Corporation and such other government bodies. They arranged for the import of such products
and distributed them to indigenous industries according to their requirement. Thus, imports were
strictly controlled by the import policy announced every year by the Government of India.
Apart from strict control over imports and the physical ban on the imports of many products,
customs tariffs were raised in some cases to 200 to 300 percent on imported products. This gave
protection to local industries. The price of local products was comparatively cheaper than those
of imported goods. The government also followed a policy of low tariffs on the import of raw
materials, parts and components compared to those on finished products. This encouraged Indian
industries to import parts and components, and to manufacture or assemble final products in
India.

32
Thus the interests of politicians, bureaucrats, multinationals, as well as domestic industrial

houses all coincided to keep Indian industry sheltered through the operation of industrial control
system.
The industrial production in India stagnated between the mid 1960s to late 1970s. The consensus
that emerged was that the slowdown was the result of low productivity, high costs, low quality of
production and obsolete technology. The government set up three important committees in the
early 1980s-
 The Abid Hussain Committee on Trade Policy

 The Narasimham Committee on the shift from Physical to Fiscal controls
 The Sengupta Committee on Public Sector
The committees recommended-
 An easing up of trade policy

 The substitution of physical and quantitative controls by fiscal and other means of
macroeconomic management
 The promotion of greater public sector autonomy in business and operating decisions and
the need for measures for enhancing productivity, efficiency and modernisation
After 1980, an era of liberalisation started, and the trend was gradually to dilute the strict
licensing system and allow more freedom to the entrepreneurs. The steps that were taken in
accordance with the policy included:
a. Re-endorsement of licenses: The capacity indicated in the licenses could be re-endorsed,

provided it was 25 percent more than the licensed capacity (1984).
b. Automatic re-endorsement of licensed capacities (1988).
c. Broad banding and selective delicensing (1985-86) extended to 25 industries.
d. Liberalisation of 31 May 1990. This policy included
o Exemption from licensing for all new units and those having an investment of
Rs.2.5 crores in fixed assets, and an entitlement to import up to 30 percent of the
total value of plant and machinery.
o Investment of foreign equity up to 40 percent was freely allowed.
o Location restrictions were removed.
o Investment ceiling for small industries were removed.
On the trade policy front, the main change was increasing access to exporters of inputs at
international prices. However, the tariff protection to the industrial sector increased during the
1980s as compared to the past decades. The trade policy was characterized by high tariffs and
persistent import restrictions before the reforms were introduced. The imports of manufactured
consumer goods were completely banned. In case of capital goods, raw materials and
intermediates, certain goods were freely importable. But imports were only possible with import
licenses where domestic substitutes were being produced. The criteria for issue of licenses were

33
nontransparent, delays were inevitable and corruption unavoidable. The progressive reduction in
tariffs became essential in order to avoid a high cost economy. Foreign trade policy issues
became the focus of discussion in the early 1980s. It came to be realised that a scheme of import
licensing under which imports were permitted only to the extent that domestic production fell
short of domestic demand irrespective of difference in cost and prices would lead to inefficiency.
The view gained ground that a more liberal policy of imports of capital goods and technology
would enable India to reap the benefits of international division of labour. The attempt, therefore,
was to move away from import substitution per se towards efficient import substitution, so that
considerations relating to cost and efficiency were incorporated in the overall policy framework.
Also, the aim was to liberalize the imports and bring about a closer link between imports and
exports. While the industrial licensing system underwent some changes in terms of threshold
levels and types of products, it formed an essential part of Government policy until the end of the
1980s.
The need to restructure the systems of economic management had become unavoidable if India
was to emerge as a vibrant and internationally competitive economy in the 1990s. The systems of
control and regulation, developed for good reasons in the past had outlived their utility and some
actually stood in the way of further progress. Such dysfunctional systems had to be overhauled in
view of the emerging realities.
2.4 New Economic Policy

According to Rangarajan (2002) the year 1991 is an important landmark in the economic history
of post-Independent India. The country went through a severe economic crisis triggered by a
serious balance of payments situation. The crisis provided an opportunity to introduce some
fundamental changes in the content and approach to economic policy. The government
responded to the crisis by putting in place a set of policies aimed at stabilisation and structural
reform. The aim of the stabilisation policies was to correct the weaknesses that had developed on
the fiscal and the balance of payments fronts, while the structural reforms sought to remove the
rigidities that had entered into the various segments of the Indian economy. The structural
reforms introduced in the early 1990s broadly covered the areas of industrial licensing, foreign
trade, foreign investment, exchange rate management and the financial sector. The problems
associated with industrial licensing were noted even before the onset of reforms.
The approach document of the Eighth Plan (1991-1996) submitted in May 1990 had remarked:
―A return to the regime of direct, indiscriminate and detailed controls in industry is clearly out of
question. Past experience has shown that such control system is not effective in achieving the
desired objective. Also the system is widely abused and leads to corruption, delays and
inefficiency‖
One early step that was undertaken as part of the structural reform process was to dispense with
licensing. Changes in foreign trade policy focused on reducing the tariff rates and dismantling
quantitative controls over imports. The tariff rates have been brought down in stages. Some
caution in this regard had become necessary to enable the Indian industries set up behind high
34
protective tariff walls to adjust to the changed situation. The policy towards foreign investment
underwent a significant change with foreign investors given the freedom to own majority
shareholding over a wide spectrum of industries.
The common thread running through the various policy measures introduced since 1991 has been
the improvement of the efficiency of the system. The thrust of the New Economic Policy has
been towards creating a more competitive environment in the economy as a means to improving
the productivity and efficiency of the system. This was to be achieved by removing the barriers
to entry and the restrictions on the growth of firms.
2.4.1 Major Policy Reforms in Industry and Trade
From the point of view of industrialisation, changes in the areas of licensing and foreign trade
and investment had important implications. We will briefly discuss the major policy changes in
these areas.
Industrial policy Reforms

Industrial policy has seen the greatest change, with most central government industrial controls
being dismantled. The New Industrial Policy (NIP) announced on July 24, 1991 and subsequent
amendments have brought a lot of changes in the policies affecting industrial investment.
1. The NIP dismantled the Industrial licensing (or approval) system that regulated the
industrial investment in the country by abolishing the requirement of obtaining an
industrial license from the government in all but five product categories. These needed to
be regulated because they were considered to be hazardous and environmentally sensitive
industries.
2. The list of industries reserved solely for the public sector—which used to cover 18
industries, including iron and steel, heavy plant and machinery, telecommunications and
telecom equipment, minerals, oil, mining, air transport services and electricity generation
and distribution—has been drastically reduced to three industries: defense aircrafts and
warships, atomic energy generation and railway transport. These are those that are
considered sensitive from national security considerations. Thus a large number of
industries like telecommunication, roads, ports, power generating, petroleum refining
were opened to the private sector.
3. The requirement that investments by large industrial houses needed a separate clearance
under the Monopolies and Restrictive Trade Practices Act to discourage the concentration
of economic power was abolished. The act itself was to be replaced by a new law that
would attempt to regulate anticompetitive behavior in other ways.]
Privatization

35
Initially, the government adopted a limited approach of selling a minority stake in public sector
enterprises (PSEs) which enabled the government to retain management control. This policy was
described as ―disinvestment‖ to distinguish it from privatization. The main aim was to mobilize
revenue for the budget and at the same time there was hope that private shareholders would
increase the commercial orientation of public sector enterprises. This policy had very limited
success. The idea of purchasing shares in public sector companies in which government
remained in control of management did not appeal to many people.
In 1998, the government changed its policy and announced it was willing to reduce its
shareholding to 26 percent and would also transfer management control to private stakeholders
purchasing a substantial stake in all central public sector enterprises, except in a limited group of
strategic areas. The definition of ―strategic‖ for this purpose covers enterprises related to
defense, atomic energy and the railways. The first such privatization occurred in 1999, when 74
percent of the equity of Modern Foods India Ltd. (a public sector bread-making company with
2000 employees) was sold with full management control to Hindustan Lever, an Indian
subsidiary of the Anglo-Dutch multinational Unilever.
The government has decided to use the proceeds received from the sale of PSEs to finance
additional expenditure on social sector development and for retirement of public debt. Many
states have also started privatizing state-level public sector enterprises. These are mostly loss-
making enterprises that are unlikely to make any profits, but privatization will at least put a stop
to the recurring burden of financing losses.
Did You Know

Central Public Sector Enterprises- The Turnaround
Source: Government of India, Economic Survey 2009-10, chapter 9
The Government has been delegating enhanced financial and operational powers to the Navratna,
Miniratna and other profit-making Central Public Sector Enterprises (CPSEs). There are 18
Navratna enterprises. Six more CPSEs, namely the Airport Authority of India Limited, Ennore
Port Ltd, Tehri Hydro Development Corporation, Security Printing and Minting Corporation Ltd,
Satluj Jal Vidut Nigam Ltd and Indian Railway Catering and Tourism Corporation Ltd. were
granted Miniratna status during the year, raising the total number of Miniratna CPSEs to 62.
Besides trying to professionalize the Boards of Directors of these enterprises, the Government
has issued guidelines on corporate governance of CPSEs. The Board for Reconstruction of
Public Sector Enterprises established to advise the Government on revival / restructuring of sick
and loss-making CPSEs, made recommendations on 58 cases until December 31, 2009. The
Government has approved proposals for the revival of 37 CPSEs and closure of two. The total
assistance approved in this regard up to March 31, 2009 was Rs 15,275 crore, which comprised
Rs 2,935 crore as cash assistance and Rs 12,340 crore as non-cash assistance.

36
Did You Know

Abolition of licensing leading to deceleration in some States
Source: Ahluwalia, Montek S. (2000). ‗State Level Performance Under Economic Reforms in
India‘ , Paper presented at the Centre for Research on Economic Development and Policy
Reform Conference on Indian Economic Prospects: Advancing Policy Reform; Stanford
University
The dismantling of industrial licensing provides another example where economic reform could
generate differential outcomes leading to a deceleration in some states. The abolition of licensing
eliminated the central government's ability to spread investment evenly across the country, which
was a common practice earlier, leading to fragmented capacities which were not only sub-
optimally located but also could not benefit from economies of scale.
With liberalization of investment control and much stronger pressure of competition, including
especially competition from imports, investment size began to be determined on economic
grounds and location also was decided to a much greater extent on the basis of economic
considerations. It is very likely that in practice this led to a reallocation of investment in favour
of states perceived as having better infrastructure facilities, better labour skills and work culture,
and a more investor friendly environment.

37
The resulting reallocation of investment in the post-reforms period could lead to a substantial
increase in investment in the better performing states, and a consequent increase in their growth
rate, with a corresponding reduction in investment in less well endowed or well governed states
and a deceleration in their growth.
Trade Policy Reforms
Trade liberalisation was accompanied by a movement to a flexible exchange rate which allowed
a gradual exchange rate depreciation to offset the effects of import liberalisation and tariff
reduction. The trade policy reforms have also made progress, though the pace has been slower
than in industrial liberalization. The economic reforms in trade policy aimed to phase out import
licensing and to reduce import duties.
1. Import licensing - The import licensing system has been dismantled. Import licensing
was abolished relatively early for capital goods and intermediaries. It became freely
importable in 1993, when the switch to a flexible exchange rate system was also made.
Import licensing had been traditionally thought to be necessary in order to manage the
balance of payments, but the shift to a flexible exchange rate enabled the government to
argue that any balance of payments impact would be effectively dealt with through
exchange rate flexibility.
1. Import duties-

38
 Removing quantitative restrictions on imports of capital goods and intermediates was

relatively easy, as the number of domestic producers was small. The Indian industry
welcomed the move as it would become more competitive.
 Removing import duties in the case of final consumer goods was much more difficult
because the number of domestic producers affected was very large. This was partly
because much of the consumer goods industry had been reserved for small-scale
production. Quantitative restrictions on imports of manufactured consumer goods and
agricultural products were finally removed on April 1, 2001. This was almost exactly ten
years after the reforms began, and that in part because of a ruling by a World Trade
Organization (WTO) dispute panel on a complaint brought by the United States.
Foreign Direct Investment
Liberalizing foreign direct investment was another important part of India‘s economic reforms. It
was felt that this would increase the total volume of investment in the economy, improve
production technology and increase access to world markets. The reforms include
 The procedures for obtaining permission were greatly simplified by listing industries that
are eligible for automatic approval up to specified levels of foreign equity (100 percent,
74 percent and 51 percent). The potential foreign investors investing within these limits
only need to register with the Reserve Bank of India.
 A Foreign Investment Promotion Board (FIPB) was established that considered
applications for investments in other industries, or for a higher share of equity than is
automatically permitted in the listed industries. FIPB was authorized to negotiate with
foreign investors in person to fast track the process of clearances. FIPB could approve up
to 100 percent foreign ownership in projects that involve transfer of high technology,
produce predominantly for exports, energy and infrastructural projects, consultancy or
trading companies.
 In 1993, Foreign Institutional Investors (FIIs) were allowed to purchase shares of listed
Indian companies in the stock market. This opened a window for portfolio investment in
existing companies by FIIs.
 A more favourable treatment was given to Non Resident Indians who were allowed up to
100 percent ownership in priority industries.
The policy now allows 100 percent foreign ownership in a large number of industries. These
reforms have brought about a lot of changes in the Indian industry with the result it is more
competitive than it was in 1991. Indian companies have upgraded their technology and have
started working at more efficient scales of production. They have also restructured through
mergers and acquisitions and refocused their activities to concentrate on areas of competence.
New dynamic firms have replaced older and less dynamic ones. The presence of foreign owned
firms and their products in the domestic market is visible and has added greatly to the pressure to
improve quality.

39
The Eleventh Five Year Plan Document (2008) noted that the industrial licensing had already
been substantially dismantled and during the Tenth Five Year Plan period further measures were
taken to trim it down. Drugs and pharmaceuticals including biotechnology were delicensed in
2005. At the end of the Tenth Five Year Plan period only the following manufacturing activities
needed industrial license:
 Distillation and brewing of alcoholic drinks

 Cigars and cigarettes of tobacco and manufactured tobacco substitutes
 Electronic aerospace and defence equipment
 Industrial explosives
 Specified hazardous chemicals.
Also the entrepreneurs were free to select the location for setting up industry. Approval is
required from the government for locating an industrial unit within 25 km of the periphery of
cities having a population of more than one million according to the 1991 census, provided that
is not within an industrial area designated before 24 July 1991. However, these locational
restrictions are not applicable for electronics, computer software, printing industries, and other
non-polluting industries that may be designated from time to time.
Apart from the licensing restrictions, there are some restrictions arising from certain industries
reserved for the public sector and for the small-scale sector. The reservation for the public sector
is now very limited, covering only manufacturing involving certain substances relevant for
atomic energy (as well as production of atomic energy and provision of railway transport). The
list of items reserved for SSIs has been reduced to 114. The larger units are allowed to
manufacture items reserved for the small-scale sector only if they undertake an export obligation
of 50 percent of their industrial production.
The Foreign Direct Investment (FDI) policy was also successively liberalized during the Tenth
Five Year Plan. It was further liberalized in 2006 after a comprehensive review, The policy now
allowed FDI under the automatic route for manufacture of industrial explosives and hazardous
chemicals and made it easier for new investments by foreign investors who had entered into joint
ventures with Indian partners earlier. FDI up to 100 percent was permitted in all manufacturing
activities by the end of the Plan period, except where the foreign investor had an existing joint
venture or technical collaboration or trademark agreement in the same field of activity.
Did you know

Limits on Foreign Equity in Services
Source: Planning Commission, Eleventh Five Year Plan 2007-12, Volume III, Chapter 7
There are caps on the foreign equity in certain service sectors-
 20 percent on FM radio broadcasting

40
 26 percent on insurance, defence production, print and electronic media covering news
and current affairs
 49 percent on air transport services, asset reconstruction companies, cable network, direct
to home (DTH), hardware for uplinking, etc.
 51 percent on single brand retailing of products
 74 percent on atomic minerals, private sector banking, telecom services, and the
establishment and operation of satellites.
FDI is even prohibited in a few other services, viz., retail trading (except single brand product
retailing), gambling and betting, lottery, and atomic energy.
But, there is no foreign equity cap on any manufacturing activity other than in public sector
undertakings for petroleum refining.
Interesting Fact
Bureaucratic Costs and Delays
Source: Government of India, Economic Survey 2009-10, Chapter2
India has one advantage over most emerging economies and even some industrialized ones– its
vibrant democratic institutions and independent judiciary. This has greatly helped India gradually

41
take its place among the leading global economies of the world. While this has helped the nation,
there is another feature that has been a hindrance– India's high bureaucratic delays. Thanks to
recent data collection from around the world on bureaucratic transactions costs, there are now
hard statistics on where India stands.
If one were to look at this from a brighter angle, India‘s unpardonably large bureaucratic costs
are like a valuable resource buried under the ground, waiting to be excavated and used. If we can
cut down these costs, it would be like unearthing a free, valuable resource that was lying idle. It
can release large energies in the country and boost productivity and growth. More importantly,
this can be India‘s gold rush.
Value Additions
Doing Business- India and other Countries
Source: Government of India, Economic Survey 2009-10, Chapter2
Doing business: Cross-country experience
SI No. Country Ease of How many days Days to Time to Days to
doing to start a enforce a close a Export
business business (days) contract business
(rank) (days) (years)
1. Brazil 129 120 616 4.0 12
2. Chile 49 27 480 4.5 21

42
3. China 89 37 406 1.7 21

4. India 133 30 1420 7.0 17
5. Indonesia 122 60 570 5.5 21
6. Japan 15 23 360 0.6 10
7. Malaysia 23 11 585 2.3 18
8. Mexico 51 13 415 1.8 14
9. Pakistan 85 20 976 2.8 22
10. Russian Fed. 120 30 281 3.8 36
11. Singapore 1 3 150 0.8 5
12. Sri Lanka 105 38 1318 1.7 21
13. Thailand 12 32 479 2.7 14
14. USA 4 6 300 1.5 6
Source : World Bank, Doing Business 2010
In terms of the ease of doing business, India ranks 133rd in the world. Singapore ranks 1st, Malaysia 23rd, and China 89th.
The number of days it takes in India to enforce a contract is 1,420. It can no longer be argued that this is inevitable given the
complexity of contracts because it takes 150 days for the same in Singapore, 300 days in the US and 406 days in China.
Likewise, for the time taken to close a business that has gone bankrupt. This takes 9 months in Singapore, 18 months in the
US, 20 months in China and 7 years in India. This clearly shows that despite dismantling the industrial licensing system,
liberalizing the economy and other various measures to increase the efficiency of domestic industries, we still have a long
way to go.
Comparative Study
Doing business in India
Source: Government of India, Economic Survey 2009-10, Chapter 2
The World Bank periodically does comparative study regarding the time taken to start a business
venture within different cities in a country. It has in a study done for India, ranked the major
cities according to the ‗ease of doing business‘. Ludhiana has been given the highest rating while
Kolkata has been given the last rank among the 17 cities which have been compared. In Mumbai
and Noida, it takes the least amount of days, that is, 30 days to start a business while in
Bengaluru it takes the maximum time, 40 days. The data on the number of days taken to enforce
a contract shows some interesting findings. In Guwahati it takes 600 days to enforce a contract,
the minimum time taken among the 17 cities. In the financial capital of India, Mumbai, it takes
1420 days to enforce a contract, which is the maximum time taken in any city. It takes the least
time to close the business in Ahmedabad while it takes the longest time in Kolkatta to do the
same. It takes 17 days to export goods from Bhubaneshwar, Ahmedabad and Mumbai which is
also the average time taken for the country as a whole. The city of Kochi, despite being a major
port town, takes the maximum number of days, that is 28 days, to export. The different state
governments can improve their performance by cutting down on the delays, making state
officials more accountable and making policies which are more business friendly.

43
Doing business in India - Comparison among major cities/capitals

SI. No Places in India Ease of How many days Days to Time to Days to
doing to start a enforce a close a Export
business business (days) contract business
(rank) (days) (years)
1. Ludhiana 1 33 862 7.3 21
2. Hyderabad 2 33 770 7 26
3. Bhubaneshwar 3 37 735 7.5 17
4. Gurgaon 4 33 1163 7 25
5. Ahmedabad 5 35 1295 6.8 17
6. New Delhi 6 32 900 7 25
7. Jaipur 7 31 1033 9.1 22
8. Guwahati 8 38 600 8.3 22
9. Ranchi 9 38 985 8.5 21
10. Mumbai 10 30 1420 7 17
11. Indore 11 32 990 8 21
12. Noida 12 30 970 8.7 25
13. Bengaluru 13 40 1058 7.3 25
14. Patna 14 37 792 9.3 19
15. Chennai 15 34 877 7.5 25
16. Kochi 16 41 705 7.5 28
17. Kolkata 17 36 1183 10.8 20
Source : World Bank, Doing Business in India 2009
Summary
The process of industrialization in India in the first four decades was governed by
two major considerations—import substitution and industrial licensing. Import
substitution was a major plank of foreign trade policy and, hence, of
industrialization. A key element in the process of industrialization was a system of
industrial licensing under which a license was required before setting up any large
unit. This practice was started because it was felt that resources could be best
allocated only by a planning authority and that licensing was the best way to
manage limited resources. This industrial regulatory environment in the past led to
certain unintended results which in turn have contributed to the weaknesses in our
industry. The domestic competition has often been restricted, leading to lack of
quality and cost consciousness in segments of industry. The level of protection
offered to Indian industry, by way of quantitative import restrictions and tariffs, has

44
been too high leading to high costs of production and inadequate technological
vitality. It also became increasingly clear that production for export could not be
isolated from production for the domestic market. These weaknesses had to be
removed in the context of the scarcity of resources, which put a premium on
efficiency, and also in the context of global economic trends which require a high
degree of competitiveness.
While the Industrial Policy of 1991 sought to bring about a greater competitive
environment domestically, the counterpart Trade Policy, sought to improve
international competitiveness subject to the degree of protection offered by the
tariffs. The centerpiece of the new policies was the reform of the License-Raj - the
name by which the licensing system was being called. The Industrial licensing
system was dismantled and the requirement of obtaining an industrial license from
the government was abolished in all but five product categories. These needed to be
regulated because they were considered to be hazardous and environmentally
sensitive industries. The private sector was to be given a larger role to play and
were to operate in areas reserved exclusively for the public sector earlier. In these
areas, the public sector would have to compete with the private sector, even though
the public sector might continue to play the dominant role in the near future. What
was sought to be achieved was the improvement in the functioning of the various
entities, whether they were in the private or in the public sector.
Exercises
2.1. Discuss the reasons for slow progress of land reforms.
2.2. Do you think there is a need to reformulate the land policy of India against the background
of last six decades of experience. Discuss.
2.3. What do you mean by tenancy reforms. Discuss the measures of tenancy reforms introduced
by the government.
2.4. Critically examine the reform measures that were introduced for the reorganization of Indian
agricultural sector.
2.5. Briefly evaluate the performance of the industrial licensing system in India.
2.6. What was the thinking behind the introduction of the industrial licensing system in India. Do
you agree with it.
Glossary
Capital goods- The items that are designed to produce other goods, a factor of production.
45
Competitiveness- The factors that influence economic performance in a nation‘s macro-

economy and micro- economy.
Cooperative- A voluntary association of people who jointly own and control a productive
enterprise to satisfy the economic, social or cultural needs of members; also called a co-op.
Mixed economy- An economy that combines features of the market economy and command
economy models; in common usage, it refers to economic systems that lean toward the market
model.
Private sector- The part of an economy whose activities are under the control and direction of
non-governmental economic units such as households or firms. Each economic unit owns its own
resources and uses them mainly to maximize its own well-being.
Public Sector- The portion of an economy whose activities (economic and noneconomic) are
under the control and direction of the State.
Redistribution policies- Policies geared to reducing income inequality and expanding economic
opportunities in order to promote development. Examples are- progressive income tax policies;
rural development policies to improve the level of living of rural poor through land reforms and
other measures of asset and wealth redistribution.
Tenant farmer- A person who farms on land held by landlord and therefore lacks secure
ownership rights and has to pay for the use of that land, for example, by giving part of his output
to the owner.
References
 Rao V. M. (1992), ―Land Reform Experiences: Perspective for Strategy and Programmes‖,
Economic and Political Weekly, June 27
 Ray S. K. (2006), ―Land System and its Reforms in India‖ in N. A. Majumdar and Uma Kapila
(eds.), Indian Agriculture in the New Millennium, Volume 2, Academic Foundation, New Delhi.
 Reddy Narasimha D. (2006), ―Changes in Agrarian Structure and Agricultural Technology: Is
Peasant Farming Sustainable under Institutional Retrogression‖ in R. Radhakrishna, S. K. Rao,
S. Mahendra Dev and K. Subbarao (eds) India in a Globalising World: Some Aspects of
Macroeconomy, Agriculture and Poverty, Essays in Honour of C. H. Hanumantha Rao,
Academic Foundation, New Delhi
 Srivastava Ravi, Saxena N. C., and Thorat Sukhadeo K. (2008). ―Land Institutions, Policy,
and Reforms in India‖ in Ashok Gulati and Shenggen Fan (eds), The Dragon & The Elephant-
Agricultural and Rural Reforms in China and India, Oxford University Press, New Delhi.
Web Links
 http://www.labour.nic.in/lcomm2/2nlc-pdfs/Chap3.pdf
 http://eaindustry.nic.in/handbk/chap001.pdf
 http://www.education.nic.in/cd50years/home.htm
 http://www.scribd.com/doc/22980096/Industrial-and-Licensing-Policy
 http://econ.lse.ac.uk/staff/mghatak/landref.pdf

46
 http://books.google.co.in/books?id=cVb0k-
asSaEC&pg=PA4&lpg=PP1&ots=ZI2xHOky0N&dq=inauthor:%22Academic+Foundati
on+(New+Delhi,+India)%22#v=onepage&q&f=false

47

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Chapter : The Institutional Framework

Paper XVIII Indian Economy: Performance and Policies

Fellow:Dr.Kawal Gill, Associate Professor

Author: Dr. Poonam Bewta

Reviewer: Dr. Uma Kapila (Retd.)

Institute of lifelong learning, University of Delhi

o The Institutional Framework

Institute of lifelong learning, University of Delhi