Industrial Licensing and Economic Growth in India

Summary

Dr. F. A. Mehta’s 1969 Forum of Free Enterprise booklet is a frontal indictment of the Industries (Development and Regulation) Act, 1951 and the industrial-licensing regime it spawned. Writing as Economic Adviser to Tata Industries Ltd., Mehta traces the Act from its 1949 introduction through the 1951 passage, the Avadi Session’s 1955 ‘socialistic pattern of society’ resolution, and the 1956 Industrial Policy Resolution that recast private industry as a tolerated junior partner under three Schedules ringfencing state and joint-sector activity. Licensing, he argues, was conceived to serve a ‘mixed economy’ but was almost immediately conscripted into a second role — as an instrument of central planning — and it is the simultaneous discharge of these two functions, against an over-ambitious Second Plan, that rendered the system both ideologically suspect and operationally incoherent.

The core of the booklet catalogues four administrative pathologies: over-licensing irrespective of plan targets (the gap between 998 First-Plan licences and 4,794 Second-Plan licences); under-utilised licensed capacity from chronic shortages of foreign exchange, raw materials and infrastructure (units running at 40 per cent of capacity); no proper concept of economic costs in scrutinising applications; and the burdening of licensing with too many policy objectives at once — small-scale promotion, regional dispersal, conservation of foreign exchange, anti-concentration — none of which it can deliver. Mehta walks through the Swaminathan Committee (1964), the Administrative Reforms Commission, and the May 1966 liberalisation that de-licensed 45 industries, conceding genuine procedural gains while insisting the underlying disease persists.

The second half attacks the ‘concentration of economic power’ bogey raised by Dr. R. K. Hazari’s reports, the Mahalanobis Committee and the Monopolies Inquiry Commission. Mehta accepts Hazari’s own central finding — that licensing itself, by restricting entry, helped produce the concentration it was meant to prevent — and quotes J. R. D. Tata at length on the Catch-22 in which a ‘Big Business’ house is condemned whether it stays inactive, diversifies into small ventures, or undertakes major capital-intensive projects. The conclusion calls for industrial licensing to be liberated from its ‘ideological bouts’, supplemented by a dual exchange rate, and stripped of price controls so that the private sector can exceed planned investment targets. The closing tables (1951-1967 licence counts; unit-growth across 30 industries) supply the data backbone.

Key points

• Industrial licensing was conceived to operationalise a ‘mixed economy’ under the Industries (Development and Regulation) Act, 1951 but was quickly recast as an instrument of central planning after the 1956 Industrial Policy Resolution — Mehta treats this dual mandate as the original sin.

• Mehta identifies four administrative defects: over-licensing irrespective of plan targets, no concept of economic costs, no priority discipline, and overloading licensing with multiple incompatible policy objectives.

• Quantitative spine: 998 licences in the First Plan, 4,794 in the Second Plan, 4,560 in the Third Plan, with licensed capacity routinely splintered into uneconomic units operating at 40 per cent of plate capacity.

• He concedes real procedural liberalisation — the Swaminathan Committee’s Letter of Intent procedure (1964), the May 1966 de-licensing of 45 industries — while arguing the underlying ideological captivity persists.

• On ‘concentration of economic power’, Mehta endorses Dr. R. K. Hazari’s own finding that licensing itself, by restricting entry, produced the concentration it was meant to prevent.

• He invokes J. R. D. Tata’s framing that a ‘Big Business’ house is condemned whether it stays inactive, diversifies into small ventures, or undertakes a major capital-intensive project — illustrated by the Tata Fertiliser Project delays.

• Mehta names the political-economy lineage on both sides: M. R. Masani’s 1947 booklet’s influence on Nehru, G. D. Birla’s 1949 assent to a ‘primary part’ for government, P. C. Mahalanobis’s Second Plan formulation, and the contrary cautions of Eugene Black and J. R. D. Tata.

• Prescription: dismantle licensing as a regulatory weapon, introduce a dual-priority foreign-exchange rate, remove price controls, and restrict licensing to a narrow positive role of signalling investment opportunities.