Industrial policy and Make in India

In short

Industrial policy is the set of government decisions on *what* industries are produced, by *whom* (public, private, foreign, small-scale) and under what conditions (licences, tariffs, subsidies, incentives, FDI rules). India ran a licence-based, public-sector-led policy from 1948 to 1991, dismantled most of it in the New Industrial Policy of 1991, and since 2014 has pursued manufacturing growth through Make in India, production-linked incentives and infrastructure programmes. It matters because manufacturing is still only about 17% of GVA against a 25% target, while absorbing the labour force is India's central economic problem. It is examined in BA/MA Indian Economy papers, UPSC and state PSC economics and GS papers, RBI Grade B, NABARD and IES, and shows up in interviews for policy research, consulting, industry associations (CII, FICCI) and investment banking.

Explained

What industrial policy is and its instruments

• Definition: a government's declared rules, objectives and interventions governing the structure, ownership, location and growth of industry.
• Why states intervene: infant-industry learning, externalities and linkages, capital-market failure, scale economies, strategic/defence needs, balanced regional development, employment.
• Instruments, grouped:
  • *Regulatory* — industrial licensing, reservation for the public sector and for small scale, locational clearances, environmental and quality regulation.
  • *Protective (trade)* — tariffs, quotas, import substitution, phased manufacturing programmes, anti-dumping duty.
  • *Promotional (fiscal)* — subsidies, tax holidays, concessional credit, capital and interest subvention, production- or employment-linked incentives.
  • *Facilitative* — infrastructure, industrial corridors and parks, single-window clearance, skilling, standards, R&D support.
  • *Ownership* — public enterprise creation, nationalisation, disinvestment and privatisation.
• Horizontal vs vertical policy: horizontal improves conditions for all industry (power, logistics, contract enforcement); vertical ("picking winners") targets chosen sectors. PLI and the Semiconductor Mission are vertical; Gati Shakti and the Logistics Policy are horizontal.
• Nodal bodies: Department for Promotion of Industry and Internal Trade (DPIIT, Ministry of Commerce and Industry) frames industrial and FDI policy; the Ministry of Heavy Industries, MeitY, Textiles and MSME run sectoral schemes; NITI Aayog advises; the Competition Commission of India regulates market conduct.

Industrial policy before 1991 — the licence era

• Industrial Policy Resolution (IPR) 1948: mixed economy declared; four categories — state monopoly (arms, atomic energy, railways), state-led new units, 18 regulated industries, rest private.
• Industries (Development and Regulation) Act, 1951 — IDRA: the legal backbone; compulsory licensing for setting up, expanding or changing the location/product mix of a listed industry. Still on the statute book, now applying to very few industries.
• IPR 1956 (the classic, aligned to the Second Plan and the Mahalanobis model): three schedules —
  • Schedule A – 17 industries exclusively for the state (heavy machinery, iron and steel, atomic energy, rail, air transport);
  • Schedule B – 12 industries progressively state-owned, private entry allowed;
  • Schedule C – the rest, left to the private sector under IDRA licensing.
• MRTP Act, 1969: firms above an asset threshold ("MRTP companies") needed separate clearance; aimed at concentration of economic power. Repealed and replaced by the Competition Act, 2002, which targets anti-competitive conduct rather than size.
• FERA 1973: foreign equity capped at 40% in most cases; IBM and Coca-Cola exited. Replaced by FEMA, 1999.
• Small-scale reservation: from 1967 a growing list of products (over 800 at peak) could be made only by SSI units; fully de-reserved by 2015.
• IPR 1977 (Janata) stressed cottage and small industry and a District Industries Centre in every district; IPR 1980 restored the focus on efficiency, "economic federalism" and regularising excess capacity.
• The licence-permit raj — documented costs: long delays, rent-seeking, capacity under-utilisation, high-cost low-quality output, sub-optimal plant scale, sheltered monopolies, a tiny export share, and the "Hindu rate of growth" of about 3.5% a year to 1980.

The New Industrial Policy, 24 July 1991, and what remains regulated

• Announced with the balance-of-payments crisis and the reform budget; the four pillars were de-licensing, de-reservation, FDI liberalisation and public-sector restructuring.
• De-licensing: industrial licensing abolished except for a short list; licensing for MRTP firms scrapped. Compulsory licensing today covers only four groups — electronic aerospace and defence equipment; industrial explosives; specified hazardous chemicals; cigars, cigarettes and manufactured tobacco substitutes. (Alcohol is regulated by the states.)
• De-reservation of the public sector: Schedule A's 17 industries were cut to 8 in 1991 and progressively to 2 — atomic energy and atomic minerals; railway operations have since been opened to private participation.
• FDI: automatic approval of 51% foreign equity in 34 industries in 1991; today 100% FDI under the automatic route in most sectors, with sectoral caps and government-route conditions remaining (for example defence up to 74% automatic and beyond that by approval; multi-brand retail restricted; insurance raised to 74% with a move to 100% announced in Budget 2025–26 — check the notified position before quoting). Press Note 3 of 2020 requires government approval for investment from entities of land-bordering countries.
• Public-sector reform: MoU-based performance contracts, Navratna/Maharatna/Miniratna autonomy, BIFR reference for sick units, disinvestment from 1991-92. The New PSE Policy, 2021 keeps a "bare minimum presence" in four strategic sectors — (i) atomic energy, space and defence; (ii) transport and telecommunication; (iii) power, petroleum, coal and other minerals; (iv) banking, insurance and financial services — and privatises or closes the rest. Air India's sale (2022) is the landmark case.
• Compliance easing since: the Jan Vishwas (Amendment of Provisions) Act, 2023 decriminalised 183 provisions across 42 Acts; the four Labour Codes (Code on Wages 2019; Industrial Relations; OSH&WC; Social Security) came into force on 21 November 2025, replacing the Factories Act, Minimum Wages Act, Industrial Disputes Act and BOCW Act — the Industrial Relations Code raises the threshold for prior government permission for lay-off, retrenchment and closure to 300 workers and legalises fixed-term employment.

Make in India — design, pillars, targets and record

• Launched 25 September 2014, coordinated by DPIIT. Objective: make India a global manufacturing and design hub, raise manufacturing to 25% of GDP and create 100 million additional manufacturing jobs by 2022 (the 25% target was inherited from the National Manufacturing Policy, 2011, and later re-dated).
• Four pillars: new processes (ease of doing business), new infrastructure (corridors, parks, faster IP processing), new sectors (FDI opening in defence, insurance, railways, construction, medical devices), new mindset (government as facilitator, not regulator).
• Coverage: 25 focus sectors at launch; Make in India 2.0 works on 27 sectors — 15 manufacturing and 12 services.
• Related programmes: Startup India (2016), Skill India, Digital India, Atmanirbhar Bharat (May 2020, a ₹20 lakh crore package, about 10% of GDP, including liquidity, guarantees and the PLI idea), Gati Shakti National Master Plan (2021), National Logistics Policy (2022), PM Vishwakarma, PM MITRA textile parks, National Green Hydrogen Mission (2023, ₹19,744 crore).
• National Single Window System (2021): one portal for central and state approvals; the Doing Business reform drive lifted India from 142 (2015) to 63 of 190 (2020) in the World Bank ranking — note the Doing Business report was discontinued in 2021 and replaced by B-READY, so later "rank" claims are not comparable.
• Record — honest reading:
  • Manufacturing GVA share has stayed roughly flat at 16–18%; the 25% target has not been met and jobs created are far short of 100 million.
  • Real gains are concentrated: mobile phone production rose from a handful of units to India being among the largest handset makers, with mobile phones now a top-five export item; defence production and exports, pharmaceuticals, automobiles and electronics assembly grew strongly.
  • FDI equity inflows rose substantially over the decade, but services and computer software take a large share.
  • Criticisms: assembly rather than deep value addition (high imported component content), rising tariffs after 2017 reversing earlier openness, exit from RCEP, scheme complexity, and the fact that total manufacturing employment has grown slowly relative to output.

The newer instruments — PLI, ISM, corridors, procurement, standards

• Production Linked Incentive (PLI): cash incentive of typically 4–6% of incremental sales of specified goods made in India over a base year, for a fixed period, against committed investment. Announced for 14 sectors with an outlay of about ₹1.97 lakh crore (Budget 2021-22) — mobiles and electronic components, pharmaceuticals, medical devices, automobiles and auto components, ACC batteries, telecom, textiles, food processing, white goods, solar PV modules, speciality steel, drones and others. Reported outcomes to 2024-25 include investment of the order of ₹1.5–1.7 lakh crore and incremental production of over ₹13–14 lakh crore; these figures are updated frequently by DPIIT, so quote the latest release rather than a remembered number. Criticisms: sectoral concentration (electronics and pharma dominate), slow disbursal, and the "incremental sales" design favouring large incumbents.
• India Semiconductor Mission (2021): ₹76,000 crore for fabs, display fabs, ATMP/OSAT and design (DLI). Approved projects include Micron's ATMP at Sanand, the Tata–PSMC fab at Dholera, Tata's OSAT in Assam, CG Power–Renesas at Sanand and Kaynes at Sanand; a successor ("ISM 2.0") has been discussed — verify its approved status and outlay.
• Employment Linked Incentive (ELI) Scheme, 2025: incentives tied to first-time formal hiring and to employer-level additional employment, with an outlay of about ₹99,400 crore — the most direct answer yet to the "growth without jobs" criticism; check current notified terms.
• Phased Manufacturing Programme (PMP): a calibrated tariff ladder (first on assembled goods, later on sub-assemblies and components) to deepen local value addition — used for mobile phones and electric vehicles.
• Public Procurement (Preference to Make in India) Order, 2017: government buyers prefer suppliers by local content — Class-I local supplier: ≥50% local content; Class-II: 20% to under 50%; non-local: below 20%. Class-I gets first preference; in some tenders only Class-I and Class-II may bid. Separately, the Public Procurement Policy for MSEs reserves 25% of CPSE/ministry purchases for micro and small enterprises (within it 4% for SC/ST-owned and 3% for women-owned units).
• Standards and Quality Control Orders (QCOs): BIS-certification made mandatory for a growing list of products, both for quality and as a non-tariff barrier against low-cost imports; industry complains of input-side QCOs raising costs.
• Land and infrastructure: National Industrial Corridor Development Programme — Delhi–Mumbai, Chennai–Bengaluru, Amritsar–Kolkata and other corridors; 12 new industrial smart cities approved in August 2024 (about ₹28,600 crore). SEZs (SEZ Act, 2005) are being re-thought after the WTO ruling against export-linked tax benefits; NIMZs under the 2011 policy largely did not take off.
• MSME classification (composite investment-and-turnover criteria, revised limits effective 1 April 2025): Micro — investment up to ₹2.5 crore and turnover up to ₹10 crore; Small — ₹25 crore and ₹100 crore; Medium — ₹125 crore and ₹500 crore. Registration is on Udyam; credit support through CGTMSE guarantees, TReDS for receivables and priority-sector lending norms.

Measuring industrial performance

• Index of Industrial Production (IIP): monthly volume index from MoSPI (CSO), base 2011-12 (a revision to a 2022-23 base has been announced — confirm before quoting). Sectoral weights: manufacturing 77.63%, mining 14.37%, electricity 7.99%. Also published by use-based classification — primary goods, capital goods, intermediate goods, infrastructure/construction goods, consumer durables, consumer non-durables.
• Index of Eight Core Industries (ICI), about 40.27% of the IIP: refinery products 28.04, electricity 19.85, steel 17.92, coal 10.33, crude oil 8.98, natural gas 6.88, cement 5.37, fertilisers 2.63 (weights within the ICI, base 2011-12).
• Annual Survey of Industries (ASI): the structural source for registered factories — output, GVA, employment, fixed capital. NSS unincorporated enterprise surveys (ASUSE) cover the unregistered segment, where most industrial employment sits.
• Other measures: manufacturing GVA share, capacity utilisation (RBI OBICUS survey), PMI (private, diffusion index around 50), employment elasticity, ICOR, total factor productivity.

Key points

• Industrial policy – government rules and incentives shaping what industry is produced, by whom and how.
• IDRA 1951 – the licensing statute; compulsory licences now survive for only four industry groups.
• IPR 1956 – Schedules A/B/C; the high point of the state-led, import-substituting model.
• MRTP Act 1969 – size-based clearance for large firms; repealed and replaced by the Competition Act, 2002.
• New Industrial Policy 1991 – de-licensing, de-reservation, FDI liberalisation, PSU restructuring.
• Reserved for the public sector today – atomic energy and atomic minerals only.
• De-reservation of SSI – the reserved-product list ended completely in 2015.
• Make in India (25.09.2014) – four pillars, 27 sectors in version 2.0; targets 25% manufacturing share and 100 million jobs.
• The gap – manufacturing is about 17% of GVA and roughly flat since 2014; the 25% goal is unmet.
• PLI – 4–6% of incremental sales, 14 sectors, about ₹1.97 lakh crore outlay; a vertical, output-linked subsidy.
• ISM – ₹76,000 crore for fabs, OSAT/ATMP and chip design; Micron Sanand and Tata Dholera are the flagships.
• Local content – Class-I supplier ≥50%, Class-II 20–50% under the 2017 Make in India procurement order.
• MSME limits (from 1 April 2025) – micro ₹2.5 cr/₹10 cr, small ₹25 cr/₹100 cr, medium ₹125 cr/₹500 cr.
• IIP – base 2011-12; manufacturing 77.63%, mining 14.37%, electricity 7.99%; ICI is 40.27% of IIP.
• Labour Codes – in force 21 November 2025; retrenchment/closure approval threshold 300 workers.
• PSE Policy 2021 – minimum presence in four strategic sectors, privatisation elsewhere.
• Horizontal vs vertical – logistics and power reform help all firms; PLI picks sectors and carries capture risk.
• Core criticism – assembly-led deepening, rising tariffs, jobs lagging output; hence the 2025 employment-linked incentive.

Formulas and examples

Example 1 — PLI incentive. A handset maker had base-year (FY 2019-20) sales of eligible goods of ₹500 crore; FY 2023-24 sales are ₹1,500 crore; the notified rate for that year is 5%.

• Incremental sales = 1,500 − 500 = ₹1,000 crore
• Incentive = 0.05 × 1,000 = ₹50 crore, payable only if cumulative investment meets the committed threshold.
• Note the design effect: a firm starting from zero base gets incentive on its entire turnover, so the scheme favours new large capacity over an existing small producer.

Example 2 — local content and bid eligibility. Ex-factory value of a pump is ₹100 lakh per unit; imported castings and controls cost ₹58 lakh (landed).

• Local content = (100 − 58)/100 × 100 = 42% → Class-II local supplier (20–50%).
• To qualify as Class-I (≥50%) imported content must fall to ₹50 lakh or below, i.e. a reduction of ₹8 lakh, or 13.8% of the current import bill.

Example 3 — what the 25% target arithmetically requires. Total GVA is ₹170 lakh crore with manufacturing at ₹28.9 lakh crore.

• Current share = 28.9/170 × 100 = 17.0%
• If total GVA grows at 10% nominal for 5 years: 170 × 1.10⁵ = 170 × 1.61051 = ₹273.8 lakh crore; 25% of that = ₹68.4 lakh crore
• Required manufacturing CAGR = (68.4/28.9)^1/5 − 1 = (2.3668)^0.2 − 1 ≈ 18.8% a year nominal, i.e. manufacturing must grow nearly twice as fast as the rest of the economy for five straight years — which is why the target has repeatedly been re-dated.

Example 4 — weighted IIP growth. Mining +3.0%, manufacturing +5.0%, electricity +7.0% over the year.

• Weighted growth = (0.1437 × 3.0) + (0.7763 × 5.0) + (0.0799 × 7.0) = 0.4311 + 3.8815 + 0.5593 = 4.87%
• Manufacturing contributes 3.88 of the 4.87 points (about 80%) — the index is effectively a manufacturing index.

Example 5 — effective protection and the inverted-duty trap. A appliance sells at ₹100 at world prices, using imported inputs worth ₹60; so world value added = ₹40.

• Tariff of 20% on the finished good and 10% on inputs → domestic output price ₹120, input cost ₹66, domestic value added = ₹54
• ERP = (54 − 40)/40 = +35% — protection to the *activity* far exceeds the 20% nominal tariff.
• Reverse the duties (10% on output, 20% on inputs): VA = 110 − 72 = ₹38 → ERP = (38 − 40)/40 = −5%, i.e. the tariff structure penalises domestic manufacturing. This is the inverted duty structure that the PMP is designed to avoid.

Example 6 — ICOR and jobs. Investment is 30% of GDP and real growth is 7%.

• ICOR = 30/7 = 4.29 (₹4.29 of investment per ₹1 of extra annual output). At ICOR 4.0 the same 7% growth would need only 28% investment.
• If manufacturing output grows 7% and manufacturing employment 1.4%, employment elasticity = 1.4/7 = 0.2 — five percentage points of output growth for one point of employment growth.

Where it is used

• Policy and research roles: DPIIT, NITI Aayog, state industries departments, RBI and finance-ministry economists use IIP, ICI, ASI and GVA data for industrial monitoring and scheme design.
• Industry bodies and consulting: CII, FICCI, ASSOCHAM, EY/Deloitte/KPMG government-advisory teams prepare PLI applications, state incentive claims and sector competitiveness reports.
• Corporate strategy and tendering: calculating local content for Class-I/Class-II certification in government tenders (railways, defence, power utilities, GeM procurement) and claiming state capital subsidies.
• Real Indian instances: Micron's Sanand ATMP and the Tata–PSMC Dholera fab under ISM; Apple's contract manufacturers (Foxconn, Tata Electronics) under the mobile PLI; Ola/Tata/Exide under ACC battery and EV schemes; PM MITRA textile parks; defence offsets and corporatised ordnance factories.
• State-level industrial policy: Tamil Nadu, Gujarat, Maharashtra, Karnataka and Uttar Pradesh industrial policies offering land at MIDC/SIPCOT/GIDC estates, capital subsidy, stamp-duty waiver and power tariff concessions — the layer where most incentives are actually negotiated.
• Banking and credit appraisal: MSME classification and Udyam status decide priority-sector eligibility, CGTMSE cover and interest subvention.

Interview questions

• Q: What did the Industrial Policy Resolution of 1956 do? A: It classified industries into Schedules A (17, exclusively state), B (12, progressively state-owned) and C (the rest, private under IDRA licensing), making the public sector the commanding height of the economy.
• Q: Which industries still require a compulsory industrial licence? A: Electronic aerospace and defence equipment, industrial explosives, specified hazardous chemicals, and cigars/cigarettes and manufactured tobacco substitutes; alcohol is regulated by the states.
• Q: Why was the MRTP Act replaced? A: It policed firm *size* and discouraged scale in an open economy; the Competition Act, 2002 instead targets anti-competitive agreements, abuse of dominance and harmful combinations.
• Q: Has Make in India met its targets? A: No. Manufacturing is still about 17% of GVA against the 25% goal and job creation is far below 100 million, though mobile phones, defence, pharma and autos show real gains.
• Q: How exactly is a PLI incentive computed? A: A notified rate, typically 4–6%, is applied to sales of eligible goods *above a base-year level*, conditional on the firm meeting its committed investment, within a scheme-wide cap.
• Q: What is the main criticism of PLI as an industrial-policy tool? A: It is fiscally costly, picks sectors and favours large incumbents and new entrants with low base sales; critics argue the same money spent on power, logistics and trade facilitation would help all firms.
• Q: What makes a supplier a Class-I local supplier? A: Local content of at least 50% of ex-factory value under the Public Procurement (Preference to Make in India) Order, 2017; 20% to under 50% is Class-II.
• Q: What is an inverted duty structure and why does it hurt manufacturing? A: Duties on inputs higher than on the finished good; it compresses or turns negative the effective rate of protection, so importing the finished product beats making it here.
• Q: Why is India's manufacturing share stuck while GDP grows? A: Services grew faster, manufacturing is capital-intensive and concentrated in assembly, infrastructure and logistics costs are high, firm size is small and informality is widespread — and labour-intensive export sectors lost ground to Vietnam and Bangladesh.
• Q: Difference between IIP and the index of eight core industries? A: IIP is the full industrial volume index (mining, manufacturing, electricity; base 2011-12); the core index covers eight infrastructure industries that make up about 40.27% of the IIP and is released a little earlier.
• Q: What changed for industry when the Labour Codes came into force? A: From 21 November 2025 the four Codes replaced 29 laws including the Factories, Minimum Wages, Industrial Disputes and BOCW Acts; the Industrial Relations Code sets the prior-permission threshold for retrenchment and closure at 300 workers and recognises fixed-term employment.
• Q: Is Atmanirbhar Bharat protectionism? A: In design it mixes both — PLI, QCOs and tariff increases are inward-looking, while FDI opening, PMP's export orientation and logistics reform aim at global value chains; the government frames it as self-reliance through competitiveness, not import substitution.

Common mistakes

• Confusing IPR 1948/1956/1977/1980 with one another, or dating the New Industrial Policy to the 1991 budget rather than 24 July 1991.
• Saying licensing was "abolished" in 1991 — IDRA stands and four industry groups still need a licence.
• Writing that MRTP was "repealed in 1991"; licensing for MRTP firms went in 1991, the Act itself was replaced by the Competition Act, 2002 (CCI operational from 2009).
• Computing PLI on *total* sales instead of incremental sales over the base year.
• Using total value instead of ex-factory value, or adding freight/GST, when computing local content — and confusing the ≥50% Class-I rule with the 25% MSE procurement reservation.
• Quoting the "World Bank ease of doing business rank 63" as current; the report was discontinued in 2021.
• Quoting old MSME limits or old nominal GVA shares — state the year of the figure, and say so when the number is updated frequently.
• Treating IIP growth as manufacturing growth, or forgetting that the weights must be used for aggregation.

Related topics

Economic reforms since 1991 · Sectors of the Indian economy · Infrastructure and urbanisation · Planning in India and NITI Aayog · Poverty, inequality and employment in India · Federal finance and GST