Industrial Policy and MSMEs

What to remember

• India moved from a licence-based, public-sector-led model (1948-1991) to a market-friendly model after the 1991 New Industrial Policy, which removed most licensing, opened FDI and reduced public sector reservation.
• Industrial Policy Resolution 1956 gave the public sector the "commanding heights" and divided industries into three schedules (A, B and C). It followed the heavy-industry strategy of the Second Plan.
• MSMEs are defined by investment and turnover under the MSMED Act 2006 (as later revised). Key schemes are PMEGP, CGTMSE, MUDRA, Start-up India and Stand-Up India.

Industrial policy, 1948 to 1991

Other controls during this period:

• MRTP Act, 1969 curbed concentration of economic power and monopoly.
• FERA, 1973 controlled foreign exchange and foreign firms. It was replaced by FEMA, 1999.
• Public sector reservation was wide, and heavy industries such as steel, coal, power and machinery were state-run.
• The Karve Committee (1955) on village and small industries helped small industry policy; the Khadi and Village Industries Commission was created for khadi and village work.
• Sick Industrial Companies Act (SICA), 1985 set up the BIFR for sick units; the Insolvency and Bankruptcy Code, 2016 later replaced this system.

Strength of the model: a diversified base, core industries and capital goods. Weakness: licence-permit raj, delays, inefficiency, low competition and low exports.

1991 reforms (LPG)

A balance of payments crisis led to the New Industrial Policy, 1991. It included:

• Liberalisation: industrial licensing abolished for most industries except a short list (on grounds of security, strategic or environmental concerns).
• Privatisation: the number of industries reserved for the public sector reduced sharply; selective disinvestment.
• Globalisation: automatic approval for foreign technology agreements and FDI in priority industries; the Foreign Investment Promotion Board was set up; rupee devaluation, lower import duties.
• MRTP: limits on assets removed; the Act's focus moved from size to unfair trade. It was replaced by the Competition Act, 2002 and the Competition Commission of India.
• Later, FDI limits were raised in many sectors, with a mix of automatic and government routes.

Impact of the 1991 reforms

• Gains: faster growth, more competition, new private firms in telecom, automobiles, pharmaceuticals and information technology, higher foreign investment and a rise in exports of services.
• Concerns: weak growth of jobs in manufacturing, uneven gains across states, closure of some small units unable to compete, and heavy dependence on services.
• Role of states: after licensing ended, states competed for investment through land, power, single-window clearance and incentives. Ease of doing business ranking among states became a policy tool.
• Labour and land: these remain sensitive; labour laws were later merged into four codes, and land acquisition rules affect industrial projects.
• Financial sector link: industrial finance moved from development banks to banks, bond markets and venture funds. Public sector banks and institutions like SIDBI (the apex bank for small industry, established 1990) became key lenders to MSMEs.

PSU reform and disinvestment

Concepts

• Disinvestment: the government sells a part of its stake in a public sector enterprise. If the government keeps majority control, it is partial disinvestment; if it transfers management control to a buyer, it is a strategic sale.
• Privatisation: transfer of ownership and control to private hands.
• Routes: offer for sale in the stock market, follow-on public offer, Offer for Sale (OFS) and exchange traded funds.
• Disinvestment began in 1991-92. A separate Department of Disinvestment was created in 1999 and is now called DIPAM (Department of Investment and Public Asset Management).
• A Navratna, Maharatna and Miniratna system grants public enterprises more financial autonomy based on performance (Navratna was introduced in 1997).
• A later policy for public sector enterprises names a few strategic sectors where a minimum presence stays with government, while others are open to privatisation or merger.
• The Air India sale to a private group is an example of strategic sale. Ownership of many sick units has been transferred in this way.
• Arguments for: raise resources, improve efficiency, reduce fiscal burden. Arguments against: loss of national assets, sale of valuable firms below value, employment concerns.

MSME definition and schemes

The Micro, Small and Medium Enterprises Development Act, 2006 gave a common classification of micro, small and medium enterprises for manufacturing and services. Earlier classification used investment in plant and machinery only. A later revision made the test a combination of investment and turnover, merged services and manufacturing, and introduced online Udyam Registration. Check the latest official release for the monetary limits; they change.

MSMEs are the second largest employer after agriculture, produce a large share of manufactured output and exports, and are labour-intensive. Problems: access to credit, delayed payments, technology, markets and compliance.

Start-ups and industrial corridors

• Startup India (2016) provides recognition through DPIIT, easier compliance, tax benefits and a fund of funds. It aims to promote innovation and jobs. Make in India (2014) aims to raise manufacturing and investment.
• Industrial corridors are planned belts of infrastructure and industry around a transport spine. The idea is to give industries ready land, roads, power, water and logistics, creating "nodes" or smart industrial cities. Examples: Delhi-Mumbai Industrial Corridor, Chennai-Bengaluru, Visakhapatnam-Chennai (this one passes through AP's coast), Bengaluru-Mumbai and Amritsar-Kolkata. The National Industrial Corridor Development and Implementation Trust coordinates them.
• Special Economic Zones (SEZs) under the SEZ Act, 2005 offer duty and tax incentives for exports.

AP angle

AP's industrial strengths include steel, shipbuilding and refining around Visakhapatnam, pharmaceuticals, food processing and aquaculture-based industries, textiles and apparel, and port-led industries. Sri City is a well-known private industrial township. The Andhra Pradesh Industrial Infrastructure Corporation (APIIC) develops industrial parks. The state has Special Economic Zones and a Petroleum, Chemicals and Petrochemicals Investment Region around the Visakhapatnam-Kakinada coast. State industrial policies give incentives such as capital subsidies and time-bound clearances through a single window. The long coast and several ports suit export industries. After bifurcation, the state needs new industrial investment in many regions, especially Rayalaseema.

Exam traps

• 1. IPR 1956 (Mahalanobis, heavy industry) is different from IPR 1948 (mixed economy).
• 2. MRTP Act (1969) is about monopoly; FERA is about foreign exchange; do not mix with FEMA.
• 3. Disinvestment is not privatisation unless control passes to a private owner.
• 4. Schedule A was state monopoly in 1956; Schedule C was private.
• 5. MSME classification is no longer decided by investment alone.
• 6. MUDRA is a refinance agency, not a bank that lends directly in all cases.
• 7. PLI pays on output, not on capital invested.
• 8. Industrial corridors are infrastructure-led belts; SEZs are enclaves for export.

One-liners

• 1. First Industrial Policy Resolution came in 1948.
• 2. The IDRA Act of 1951 introduced industrial licensing.
• 3. IPR 1956 had three schedules.
• 4. Industrial Policy 1977 supported small industries and District Industries Centres.
• 5. New Industrial Policy was announced in 1991.
• 6. MRTP Act was replaced by the Competition Act 2002.
• 7. FERA was replaced by FEMA in 1999.
• 8. DIPAM handles disinvestment.
• 9. MSMED Act was passed in 2006.
• 10. Startup India and Stand-Up India were launched in 2016.
• 11. PMEGP is implemented through KVIC.
• 12. Visakhapatnam-Chennai is an industrial corridor linked to AP.

Practice questions

1. The first Industrial Policy Resolution of independent India was announced in

   1. 1956
   2. 1951
   3. 1977
   4. 1948
   Answer

   D. 1948

   IPR 1948 set out the mixed economy approach.

2. Industrial licensing was introduced by the

   1. IPR 1991
   2. IDRA Act 1951
   3. FEMA 1999
   4. MRTP Act 1969
   Answer

   B. IDRA Act 1951

   The Industries (Development and Regulation) Act 1951 empowered government to license private industry.

3. Under IPR 1956, Schedule A industries were

   1. Open to private sector
   2. Exclusively for the state
   3. Only small industries
   4. Only foreign companies
   Answer

   B. Exclusively for the state

   Schedule A listed industries reserved exclusively for the state.

4. Industrial Policy Resolution 1956 is linked to the strategy of which Plan?

   1. Eighth Plan
   2. First Plan
   3. Second Plan
   4. Fourth Plan
   Answer

   C. Second Plan

   The Second Plan stressed heavy industry and the public sector.

5. The phrase 'commanding heights of the economy' relates to

   1. Small-scale reservation
   2. Private monopoly
   3. Foreign investment
   4. Public sector role in key industries
   Answer

   D. Public sector role in key industries

   The state was to hold the commanding heights through basic industries.

6. The Industrial Policy of 1977 gave special emphasis to

   1. Heavy industry only
   2. Small and rural industries through District Industries Centres
   3. Foreign trade zones
   4. Disinvestment
   Answer

   B. Small and rural industries through District Industries Centres

   The 1977 policy was Janata government's small industry-oriented policy.

7. The MRTP Act of 1969 was meant to

   1. Promote exports
   2. Privatise banks
   3. Control foreign exchange
   4. Prevent concentration of economic power
   Answer

   D. Prevent concentration of economic power

   MRTP aimed to curb monopoly and concentration.

8. FERA was replaced in 1999 by

   1. MRTP Act
   2. Competition Act
   3. FEMA
   4. SEBI Act
   Answer

   C. FEMA

   FEMA changed control to management of foreign exchange.

9. The MRTP Act was replaced by

   1. Companies Act 1956
   2. FEMA 1999
   3. Competition Act, 2002
   4. SICA 1985
   Answer

   C. Competition Act, 2002

   The Competition Act 2002 set up the Competition Commission of India.

10. Which law replaced the system of BIFR and SICA for resolving insolvency?

    1. FEMA
    2. MSMED Act
    3. Companies Act, 2013
    4. Insolvency and Bankruptcy Code, 2016
    Answer

    D. Insolvency and Bankruptcy Code, 2016

    The IBC 2016 provided time-bound insolvency resolution.

11. The New Industrial Policy was announced in

    1. 1980
    2. 2001
    3. 1985
    4. 1991
    Answer

    D. 1991

    It was part of the 1991 reforms after the balance of payments crisis.

12. Which of the following was NOT a feature of the 1991 industrial policy?

    1. Reduction of MRTP restrictions
    2. Automatic approval for foreign technology agreements
    3. Increase in the number of industries reserved for the public sector
    4. Abolition of licensing for most industries
    Answer

    C. Increase in the number of industries reserved for the public sector

    Public sector reservation was reduced, not increased.

13. LPG reforms stand for

    1. Liberalisation, Privatisation, Globalisation
    2. Loans, Prices, Government
    3. Licensing, Planning, Growth
    4. Labour, Production, Goods
    Answer

    A. Liberalisation, Privatisation, Globalisation

    These are the three pillars of the 1991 reforms.

14. Disinvestment means

    1. Cancelling licences
    2. Government sells part of its stake in a public enterprise
    3. Nationalising private firms
    4. Opening new public enterprises
    Answer

    B. Government sells part of its stake in a public enterprise

    Disinvestment is a sale of government equity in public sector units.

15. A strategic sale involves

    1. Transferring management control to a buyer
    2. Selling shares to retail investors only
    3. Closing a PSU
    4. Merging two ministries
    Answer

    A. Transferring management control to a buyer

    In a strategic sale, control passes to the buyer.

16. The department that handles disinvestment is now called

    1. DPIIT
    2. DIPAM
    3. NITI Aayog
    4. CCI
    Answer

    B. DIPAM

    The Department of Investment and Public Asset Management handles it.

17. Which of the following is a category of public sector enterprise given extra autonomy?

    1. Mahalanobis
    2. Mahavir
    3. Mahanadi
    4. Maharatna
    Answer

    D. Maharatna

    Maharatna, Navratna and Miniratna provide graded financial autonomy.

18. The Navratna scheme began in

    1. 1977
    2. 2014
    3. 1997
    4. 1956
    Answer

    C. 1997

    Navratna status was introduced in 1997.

19. The MSMED Act was enacted in

    1. 2006
    2. 2016
    3. 1991
    4. 2000
    Answer

    A. 2006

    The Micro, Small and Medium Enterprises Development Act dates from 2006.

20. Under the revised approach, MSMEs are classified by

    1. Investment in plant alone
    2. Investment and turnover
    3. Employees only
    4. Location
    Answer

    B. Investment and turnover

    The later revision uses both investment and turnover.

21. Registration of MSMEs now takes place through

    1. Udaan scheme
    2. Udyog Bank
    3. Udyam portal
    4. Utkarsh
    Answer

    C. Udyam portal

    Udyam Registration is online and paperless.

22. PMEGP is implemented mainly through

    1. NABARD only
    2. RBI
    3. SEBI
    4. KVIC
    Answer

    D. KVIC

    The Khadi and Village Industries Commission is the nodal agency.

23. CGTMSE gives

    1. Subsidy for fertiliser
    2. Disaster relief
    3. Collateral-free credit guarantee to MSMEs
    4. Export incentives
    Answer

    C. Collateral-free credit guarantee to MSMEs

    The Credit Guarantee Fund Trust guarantees loans to small units.

24. MUDRA loans are classified as

    1. Micro, Macro and Giga
    2. A, B and C
    3. Alpha, Beta and Gamma
    4. Shishu, Kishor and Tarun
    Answer

    D. Shishu, Kishor and Tarun

    These three categories mark increasing loan sizes.

25. Stand-Up India supports

    1. Agricultural subsidy
    2. Foreign investors only
    3. Women and SC/ST entrepreneurs in setting up new enterprises
    4. Urban housing
    Answer

    C. Women and SC/ST entrepreneurs in setting up new enterprises

    The scheme was launched in 2016 for these groups.

26. The Production Linked Incentive scheme gives incentives based on

    1. Incremental output or sales
    2. Capital invested
    3. Land area
    4. Number of employees
    Answer

    A. Incremental output or sales

    PLI rewards extra sales in chosen sectors.

27. The Karve Committee (1955) dealt with

    1. Banking reforms
    2. Village and small industries
    3. Tax reforms
    4. Land reforms
    Answer

    B. Village and small industries

    It examined village and small industry development.

28. Startup India was launched in

    1. 2005
    2. 2016
    3. 2010
    4. 2021
    Answer

    B. 2016

    The initiative was launched in 2016.

29. Industrial corridors are best described as

    1. Planned industrial belts around a transport spine
    2. Free trade zones for services
    3. State-run farms
    4. Tax havens
    Answer

    A. Planned industrial belts around a transport spine

    They provide infrastructure and nodes around freight routes.

30. Which industrial corridor is associated with the AP coast?

    1. Delhi-Mumbai Corridor
    2. Nagpur-Surat Corridor
    3. Amritsar-Kolkata Corridor
    4. Visakhapatnam-Chennai Industrial Corridor
    Answer

    D. Visakhapatnam-Chennai Industrial Corridor

    VCIC runs along the east coast through AP.

31. SEZs in India were provided a legal framework by

    1. MSMED Act, 2006
    2. FEMA, 1999
    3. SICA, 1985
    4. SEZ Act, 2005
    Answer

    D. SEZ Act, 2005

    The Special Economic Zones Act was passed in 2005.

32. Which is a well-known private industrial township in AP?

    1. Sri City
    2. Noida
    3. Navi Mumbai
    4. Gift City
    Answer

    A. Sri City

    Sri City is a multi-sector industrial township near the AP-Tamil Nadu border.

33. The agency that develops industrial parks in AP is

    1. APSRTC
    2. NABARD
    3. APIIC
    4. SIDBI
    Answer

    C. APIIC

    The Andhra Pradesh Industrial Infrastructure Corporation develops parks.

34. Consider the statements: 1. IPR 1948 accepted a mixed economy. 2. IPR 1956 abolished the public sector. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    IPR 1956 enlarged the public sector.

35. Consider the statements: 1. The 1991 policy abolished licensing for most industries. 2. It removed the need for any government approval in all sectors. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    A short list remained subject to licensing and some sectors required approval.

36. Consider the statements: 1. Disinvestment always leads to privatisation. 2. In partial disinvestment the government can retain majority ownership. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    Only strategic sale or full sale gives private control.

37. Consider the statements: 1. MSMEs are labour intensive. 2. MSMEs are a negligible part of India's manufacturing and employment. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    MSMEs employ many people and contribute a large share of output.

38. Consider the statements: 1. SEZs mainly encourage exports. 2. Industrial corridors are only about agriculture. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Corridors link industry, infrastructure and logistics.

39. Consider the statements: 1. SIDBI is an apex bank for small industries. 2. SIDBI was created to give crop loans to farmers. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    SIDBI works for small industry finance, not crop loans.

40. Match the item with its feature: 1. MRTP Act - (i) Monopoly control 2. FERA - (ii) Foreign exchange control 3. IDRA - (iii) Industrial licensing Which match is correct?

    1. 1-i, 2-iii, 3-ii
    2. 1-iii, 2-ii, 3-i
    3. 1-i, 2-ii, 3-iii
    4. 1-ii, 2-i, 3-iii
    Answer

    C. 1-i, 2-ii, 3-iii

    MRTP controlled monopolies, FERA foreign exchange and IDRA licensing.

41. Match the item with its feature: 1. PMEGP - (i) Subsidy-linked self employment loans 2. CGTMSE - (ii) Credit guarantee 3. SFURTI - (iii) Cluster development of traditional industries Which match is correct?

    1. 1-iii, 2-ii, 3-i
    2. 1-i, 2-ii, 3-iii
    3. 1-ii, 2-i, 3-iii
    4. 1-ii, 2-iii, 3-i
    Answer

    B. 1-i, 2-ii, 3-iii

    These are the standard roles of the three schemes.

42. A state with weak private investment wants to attract manufacturing quickly. Which tool is most closely linked to the corridor idea?

    1. Cutting the repo rate
    2. Printing currency
    3. Raising MSP
    4. Ready industrial land and logistics at planned nodes
    Answer

    D. Ready industrial land and logistics at planned nodes

    Corridors offer ready infrastructure at nodes.

43. An entrepreneur without collateral wants a small business loan. Which scheme helps most directly with a guarantee?

    1. UDAN
    2. PM-KISAN
    3. e-NAM
    4. CGTMSE
    Answer

    D. CGTMSE

    CGTMSE guarantees collateral-free credit.

44. The sale of control of a loss-making public airline to a private firm is best described as

    1. Nationalisation
    2. Devaluation
    3. Strategic disinvestment
    4. Land reform
    Answer

    C. Strategic disinvestment

    Management control moved with the sale, so it is strategic disinvestment.

45. Which body is the apex bank for financing small industries?

    1. EXIM Bank
    2. SIDBI
    3. NABARD
    4. NHB
    Answer

    B. SIDBI

    SIDBI was set up in 1990 for small industry finance.