Changes in Industrial and Labour Policy in India for RBI Grade B ESI

Last updated: 2026-11-11 · MockMentor

"Changes in Industrial and Labour Policy" is listed by name in the Indian Economy unit of the RBI Grade B Phase 2 Economic and Social Issues (ESI) syllabus. It traces how India moved from a licence-driven, public-sector-led industrial strategy to an open market with targeted incentives, and how labour law has been rewritten alongside. Questions often ask students to compare policies across decades, judge the 1991 policy, or assess schemes such as Make in India and PLI.

In one line: industrial policy in India moved from state control and licensing (1948 to 1990) to deregulation and competition (1991 onwards), and since 2014 to active support for chosen industries, while labour law has been consolidated into four codes.

Basic concepts

• Industrial policy: the government's plans and rules for the development of industry: who may own it, where it is located, how it is regulated and which sectors get support.
• Industrial licensing: the requirement to get government permission to set up a factory, expand capacity, change location or make a new product.
• Public sector: enterprises owned and run by the government, such as Central Public Sector Enterprises (CPSEs).
• Disinvestment: the sale of part or all of the government's shareholding in a public enterprise.
• Strategic disinvestment: the sale of a controlling stake, usually 50% or more, along with management control, to a private buyer.
• Micro, Small and Medium Enterprises (MSMEs): small businesses classified by their investment in plant and machinery and their turnover.
• Special Economic Zone (SEZ): a duty-free area treated as foreign territory for trade, with tax and regulatory benefits, meant to boost exports.
• Industrial policy of the new kind: support for chosen sectors through incentives linked to output, as in the Production Linked Incentive (PLI) schemes, rather than through ownership and licences.

Why in News?

1. By 31 March 2026, the PLI schemes in 14 sectors had attracted actual investment of over ₹2.40 lakh crore and created over 14.15 lakh direct and indirect jobs; 99.2% of mobile phones used in India are now made in India.
2. The Index of Industrial Production (IIP) grew 6.7% in September 2026, with manufacturing up 7.6%, electricity up 11.2% and mining down 6.2%.
3. MSMEs contributed about 31.1% of GDP and 48.58% of exports, and over 8.7 crore enterprises had registered on the Udyam portal by June 2026.
4. The four labour codes came into force on 21 November 2025.

Industrial development before Independence

India's modern industry began in the mid-19th century: cotton mills in Bombay (the first in 1854), jute mills near Calcutta (1855), coal mining and railways. The Tata Iron and Steel Company was set up at Jamshedpur in 1907. But colonial policy favoured British manufactures. Industry remained small, mostly in consumer goods, concentrated in a few port cities, and owned largely by British firms or a few Indian business houses. There was almost no capital goods industry. The two World Wars gave Indian industry a push because imports were cut off, and the Bombay Plan of 1944 showed that Indian industrialists themselves wanted the state to build infrastructure and heavy industry.

Industrial policy from 1948 to 1990

Industrial Policy Resolution, 1948

The first statement of policy after Independence established a mixed economy. It divided industries into four groups:

1. State monopoly: arms and ammunition, atomic energy and railways.
2. New units only by the state: coal, iron and steel, aircraft, shipbuilding, telephones and mineral oils. Existing private units could continue for ten years.
3. Industries under state regulation: 18 important industries such as automobiles, heavy chemicals and machine tools.
4. All other industries, open to the private sector.

It also gave a role to cottage and small industries and accepted foreign capital under regulation.

Industries (Development and Regulation) Act, 1951

The IDRA gave the government power to license and regulate industries in a schedule. A licence was needed to set up a new unit, expand capacity substantially or manufacture a new product. This law was the legal base of the licence system for four decades.

Industrial Policy Resolution, 1956

Often called the "economic constitution of India", it came with the Second Five Year Plan and the goal of a "socialistic pattern of society". It divided industries into three schedules:

The 1956 resolution also stressed the reduction of regional disparities, the growth of small and cottage industries and fair treatment of labour.

Controlling monopolies and foreign firms

The Mahalanobis Committee (1960) on income distribution and the Monopolies Inquiry Commission (1964) found that licensing had favoured large business houses, concentrating economic power. The Hazari Committee (1967) and the Dutt Committee (1969) reached similar conclusions. In response:

• The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 required large firms with assets above a set limit to get approval to expand, and banned unfair trade practices.
• The Foreign Exchange Regulation Act (FERA), 1973 limited foreign shareholding in most Indian companies to 40%. Several multinationals, including Coca-Cola and IBM, left India.

Industrial Policy Statement, 1973

It introduced the concept of "core industries" of basic and strategic importance, defined large industrial houses as those with assets above ₹20 crore, and allowed them into core industries only. It encouraged the joint sector, where the government, private firms and the public shared ownership.

Industrial Policy Statement, 1977

The Janata government's policy focused on small and cottage industries. It expanded the list of items reserved for the small sector (from about 180 to over 500), set up District Industries Centres (DICs) to support small firms in each district, and limited the growth of large business houses.

Industrial Policy Statement, 1980

It shifted the focus to growth and efficiency: fuller use of capacity, higher productivity, the promotion of export-oriented and import-substituting industries, and the development of industrially backward areas. It also allowed some automatic expansion of capacity.

Policies of 1985 and 1986

Under Rajiv Gandhi, the government delicensed 25 industries, raised the asset limit for MRTP companies to ₹100 crore, allowed "broad-banding" (permission to make a range of related products under one licence), and opened telecom and electronics to more private firms. This partial liberalisation helped growth rise in the 1980s.

The New Industrial Policy, 1991

Announced on 24 July 1991, along with the Union Budget, this policy ended four decades of the licence system.

Objectives

1. Remove the controls that held back growth, competition and efficiency.
2. Make Indian industry competitive internationally.
3. Attract foreign investment and technology.
4. Reduce the role of the public sector to strategic areas and improve its performance.
5. Make the small sector more efficient and modern.

Main features

Assessment

The 1991 policy opened Indian industry to competition, technology and capital. Industries such as automobiles, telecom, steel and pharmaceuticals grew rapidly and became globally competitive. But manufacturing's share in GDP did not rise much, and it did not become a large employer. Infrastructure bottlenecks, rigid labour laws, costly land, high power tariffs for industry and the difficulty of doing business at the state level continued to hold back factories.

Disinvestment and the public sector

Types of disinvestment

Why disinvest

• To raise money for the budget and reduce the fiscal deficit.
• To improve efficiency through private management and market discipline.
• To let the government focus on governance, regulation and welfare instead of running businesses.
• To deepen the stock market and widen share ownership.

Arguments against

• Selling profit-making units for one-time revenue loses future dividends.
• Prices may be too low when markets are weak, leading to loss of public wealth.
• Job losses and weaker social goals, such as service in remote areas.
• Risk of concentrating economic power in a few private groups.

The present policy

The Public Sector Enterprise Policy announced in the Budget 2021-22 keeps a bare minimum presence of public enterprises in four strategic sectors (atomic energy, space and defence; transport and telecom; power, petroleum, coal and minerals; and banking, insurance and financial services), with the rest to be privatised, merged or closed. The Department of Investment and Public Asset Management (DIPAM) manages disinvestment. In practice, progress has been slow, and in recent years dividends from public enterprises have often brought in more money than share sales.

Micro, Small and Medium Enterprises

Definition

Under the MSME Development Act, 2006, the classification was revised from 1 April 2025:

The earlier limits, set in 2020, were ₹1 crore, ₹10 crore and ₹50 crore for investment and ₹5 crore, ₹50 crore and ₹250 crore for turnover. Since 2020, the same limits apply to manufacturing and services.

Contribution

MSMEs are the second-largest source of employment after agriculture, with over 38.9 crore people working in them. They produce about 31% of GDP and nearly half of India's exports, and they are spread across rural and semi-urban areas, which helps balanced regional growth.

Problems

• Access to credit: a large share of small firms depend on informal lenders. Formal lenders demand collateral and find it hard to judge small firms' risk.
• Delayed payments from large buyers, including government departments.
• Old technology and low productivity; most firms stay very small and do not grow.
• Heavy compliance burden and inspections.
• Weak access to markets, marketing and quality certification.

Support measures

• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for collateral-free loans.
• The Udyam registration portal for simple, paperless registration.
• The Trade Receivables Discounting System (TReDS) to get paid faster on invoices.
• A rule that buyers must pay MSMEs within 45 days, or lose the tax deduction on that expense (Section 43B(h) of the Income Tax Act).
• Public procurement policy: 25% of central government purchases from MSMEs.
• The Raising and Accelerating MSME Performance (RAMP) programme with the World Bank, and Pradhan Mantri Vishwakarma for traditional artisans.

Special Economic Zones

The SEZ Act, 2005

India set up Asia's first Export Processing Zone at Kandla in 1965. The SEZ policy of 2000 and the SEZ Act, 2005 replaced these with larger zones that are treated as foreign territory for trade and taxes.

Objectives

• Generate additional economic activity and exports.
• Promote investment from domestic and foreign sources.
• Create employment.
• Develop infrastructure.

Main features

• Duty-free import and domestic purchase of goods for developing, running and maintaining SEZ units.
• Income tax exemption for units for a period, which was phased out for new units after 2020 under a sunset clause.
• Single-window approval through a Board of Approval and Development Commissioners.
• SEZs can be set up by the Central or a State Government, private developers, or jointly.
• Sales from an SEZ to the rest of India (the Domestic Tariff Area) are treated as imports.

Performance

As on 31 March 2026, there were 418 formally approved, 368 notified and 277 operational SEZs, with 7,013 units employing about 32.6 lakh people. Exports from SEZs were about ₹16.4 lakh crore in 2025-26. Critics point to the loss of tax revenue, under-used land, the concentration of SEZs in a few states and in IT services, and the weakening of benefits since the Minimum Alternate Tax was applied to them in 2011. The government has proposed replacing the SEZ Act with a new law on Development of Enterprise and Service Hubs (DESH).

National Investment and Manufacturing Zones

The National Manufacturing Policy, 2011 aimed to raise manufacturing's share of GDP to 25% and create 10 crore jobs by 2022. It proposed National Investment and Manufacturing Zones (NIMZs): large integrated industrial townships of at least 5,000 hectares, with world-class infrastructure, owned by the state government or a special purpose vehicle. Few NIMZs actually took off, and the 25% target was not met.

Industrial policy since 2014

Make in India (2014)

Launched on 25 September 2014, Make in India aimed to make India a global manufacturing hub. It focused on 25 sectors, easier business rules, investor facilitation through Invest India, and the opening of FDI in sectors such as defence, railways and insurance.

Production Linked Incentive (PLI) schemes (2020-21)

The PLI schemes pay companies a percentage of their additional sales of goods made in India, over a base year, for five years. They cover 14 sectors, including mobile phones and electronics, pharmaceuticals, medical devices, automobiles and auto parts, advanced chemistry cell batteries, specialty steel, textiles, food processing, white goods, solar modules, telecom equipment and drones. The total outlay was nearly ₹2 lakh crore.

Supporters say the PLI has built new industries, especially electronics, and attracted global firms shifting supply chains out of China. Critics say much of the value added is still imported (phones are assembled in India from imported parts), that incentives favour large firms, and that spending has been well below the allocation in several sectors.

Other recent initiatives

• National Manufacturing Mission, announced in the Union Budget 2025-26, covering small, medium and large industries, with focus on clean-technology manufacturing (solar cells, batteries, electrolysers, wind turbines), labour-intensive sectors such as footwear and toys, and five areas: ease of doing business, a future-ready workforce, MSMEs, technology and product quality.
• Industrial corridors and the approval in 2024 of 12 new industrial smart cities under the National Industrial Corridor Development Programme.
• PM Gati Shakti National Master Plan (2021) to plan infrastructure across ministries using a single digital platform.
• National Logistics Policy (2022) to cut logistics costs.
• India Semiconductor Mission (2021) for chip fabrication, assembly and design.
• Jan Vishwas Acts (2023 and 2026) to decriminalise minor offences in business laws.

Labour policy

Constitutional status

Labour is a subject in the Concurrent List of the Seventh Schedule, so both Parliament and state legislatures can make laws on it. Entries on trade unions, industrial and labour disputes, social security, employment and welfare of labour are in the Concurrent List, while subjects such as labour in mines, oilfields and central government undertakings fall in the Union List. Directive Principles such as Articles 39, 41, 42 and 43 ask the state to secure adequate livelihood, the right to work, just and humane conditions of work, maternity relief and a living wage.

Main institutions

From many laws to four codes

The Second National Commission on Labour (2002) recommended merging the many overlapping labour laws into a few codes. Parliament passed the Code on Wages in 2019, and the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code in 2020. They replaced 29 central labour laws and came into force on 21 November 2025. Key changes include a national floor wage, social security for gig and platform workers, gratuity after one year for fixed-term employees, lay-offs without prior approval in firms with up to 300 workers, and night work for women with safeguards. The details and the debate are covered in our chapter on employment generation.

Challenges for industry

• Manufacturing's share in GDP has stayed around 16% to 17% for decades.
• High costs of land, power and logistics, and slow approvals at the state level.
• Low spending on research and development, and dependence on imported components and technology.
• Most firms remain very small; India has a "missing middle" of medium-sized firms.
• Competition from China and other low-cost producers, and rising protectionism in rich countries.

Way forward

• Cut input tariffs and join global value chains, instead of protecting final goods.
• Move from incentives to a low-cost business environment: land, power, logistics and quick approvals.
• Help small firms grow by removing size-based thresholds that discourage expansion.
• Link skills training with industrial clusters.
• Implement the labour codes uniformly across states, with strong social security.
• Invest in research and development and in clean-technology manufacturing.

Possible exam and interview questions

1. Trace the evolution of India's industrial policy from 1948 to 1991. Why did the licence system fail? (420 words)
2. Critically evaluate the Production Linked Incentive schemes. Are they the right tool to raise manufacturing's share of GDP? (620 words)
3. What are the main problems faced by MSMEs in India, and what steps has the government taken to address them?
4. Explain the different types of disinvestment. Should the government privatise profitable public sector enterprises?
5. Interview: Why has India not become a manufacturing powerhouse like China?

Related reading: economic reforms since 1991, employment generation, and our RBI Grade B Phase 2 Finance guide.

More in ESI

• National Income
• Human Development
• Poverty
• Employment
• Sustainable Development

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