Reforms in Licensing Policy in India

A series of reforms in Licensing System was initiated after the second five year plan in the form of studies by some committees and commissions in the 1960s.  The key question were:

• Are the five year plans really increasing the income level of the people?
• What was the extent and effect of concentration of power in private hands?
• What was the extent and effect of monopolistic tendencies in Indian industries?
• To what extent and how the licensing regime should be liberalized?

First such committee was Mahalanobis committee on ” Distribution of Income and Levels of Living” to find who was benefitted in first and second five year plans because there was no substantial increase in per capita income of the people under these two plans. This committee found that big financial and development institutions helped only big industrial houses and helped in ‘monopolistic growth’ in the country and aided in concentration of economic power in few hands.

Monopolies Inquiry Commission

On the basis of recommendation of this committee, a Monopolies Inquiry Commission was established headed by Justice KC Dasgupta. This committee also iterated the dangers of monopolistic tendencies by reporting that the Industrial licensing system enabled big business houses to obtain disproportionately large share of licenses.

Hazari Committee

The process for review of the licensing system began with Hazari committee in 1967 headed by Dr. R K Hazari. This committee threw light on the failure of the Industrial licensing in almost every stated objectives. It termed license as ‘passport’ to do business in India.

Dutt Committee

The 1967 “Industrial Licensing Policy Inquiry Committee” was set up under the chairmanship of Mr. Subimal Dutt. This committee reported that due to the license raj, a very strong nexus had developed between the Industrial houses, politicians and bureaucrats. Corruption prevailed in the system and the licensing authorities were bought over by the large industrial houses. Its key recommendations were:

• The industries should be reclassified into core sector, non-core sector, reserved sector etc. Licensing should continue with necessary reorientation and larger houses should be given license to set up industry in only core and heavy investment sectors.
• A monopolies commission should be established with necessary teeth to deal with the problems of concentration of economic power or product monopolies.

MRTP Act 1970

On the basis of recommendation of Dutt Committee, MRTP Act was enacted in 1969 to ensure that concentration of economic power is not in hands of few rich. The act was there to prohibit monopolistic and restrictive trade practices. This act is not in force now as it was repealed in 2009 and was replaced by Competition Act 2002 with effect from September 1, 2009. It established a MRTP commission; which is now replaced by Competition Commission of India. The key points from this act are as follows:

• This act was not applicable to the Public Sector Companies, Trade Unions, Cooperatives and Financial Institutions.
• Any other company with assets more than Rs. 25 Crore was tagged as MRTP company. This limit was raised several times later and finally removed in 1991. Under the current provisions, no MRTP companies exist in India. Under the current provisions, any company which has more than 25% of the market share is called Monopoly company.

MRTP Commission

This MRTP act established MRTP Commission (MRTPC) as an organ of Department of Company Affairs as a quasi-judicial body. Its major function was to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. It is now replaced with Competition Commission of India (CCI).  We shall be studying the Competition Act later in these modules, here we note the two main differences between the two:

• The object of the MRTP Act was to prevent the economic concentration in few hands, the competition act aims to promote and sustaining Competition in the market and to ensure the freedom of trade and to protect the interest of the consumer in whole.
• The MRTP commission had an advisory role while the CCI has been provided teeth to initiate suo moto [on its own motion] actions and impose punishments to the entities having some adverse effect in the market.

Industrial License Policy in 1970 and emergence of core and non-core sectors

In the backdrop of Dutt committee and MRTP Act; the government launched its new Industrial License Policy in 1970 whereby the industries were re-classified into four groups viz. Core Sector, Middle Sector, Non-core Heavy Investment Sector and Delicensed sector. Core sector comprised basic, critical and strategic industries such as atomic energy, cement, Iron, Steel etc. requiring investment of Rs. 5 Crore or more. This sector would be exclusively developed under public sector. Non-core heavy investment sector or joint sector comprised of those core industries which required investment below 5 Crore. Middle Sector comprised the investment of Rs. 1 Crore to 5 Crore.  Delicensed Sector, in which investment was less than ` 1 Crore and was exempted from licensing requirements.

Thus, the role of the large business houses was confined to the core, heavy and export oriented sectors. The small industries were deregulated and this was first major step towards freedom from license Raj. The government released further licensing policies in 1975, 1978, 1980, 1985, 1991, 1999 and 2006 gradually liberalising the licensing system and making it much simpler.