Industrialisation and the Law

What the design produced

Its achievements. A capital goods base, a public sector in steel, coal, power and heavy engineering, technical institutions and a scale of industry that did not exist in 1947.

Its costs, and these are the standard criticisms. The licence became a scarce asset, so obtaining one became a business in itself and the system acquired the name it is remembered by. Capacity was allocated rather than competed for, so quality and cost had no discipline. Section 25N of the Industrial Disputes Act, requiring previous permission of the appropriate Government for retrenchment or closure in an establishment above a threshold, meant that an employer who could not exit was reluctant to enter. And the small-scale RESERVATION, under which hundreds of items could be manufactured only by small units, capped the size of the firms making them.

And the balance of payments crisis of 1991, which is the immediate cause of what followed.

1991

The New Industrial Policy, 24 July 1991. Industrial LICENSING abolished for all industries except a short list; the number of industries reserved for the public sector cut from seventeen to a handful; automatic approval for foreign equity up to a stated proportion in specified industries; the MRTP Act's requirement of prior approval for the expansion of large undertakings removed; and the disinvestment of shareholdings in public sector undertakings begun.

What followed in the statutes. The Foreign Exchange Regulation Act 1973 was replaced by the Foreign Exchange Management Act 1999, which changed the offence of dealing in foreign exchange into a regulated activity; the MRTP Act was replaced by the COMPETITION ACT 2002, which moved the question from the SIZE of an undertaking to its CONDUCT and its effect on competition; the Companies Act 1956 was replaced by the Companies Act 2013; and the Insolvency and Bankruptcy Code 2016 created a time-bound exit that the old winding-up law had not.

What did NOT change in 1991. Labour law. The Industrial Disputes Act's chapter on permission for retrenchment and closure survived, and the reform of labour law waited until the four LABOUR CODES of 2019 and 2020, on wages, industrial relations, social security, and occupational safety, health and working conditions, which consolidate the earlier statutes.

And the constitutional question that 1991 raised. Whether a policy of liberalisation is consistent with article 39(b) and (c), which direct distribution for the common good and against concentration. The answer given in the cases is that Part IV states objectives and not methods, and that the choice of economic policy is for the elected government, subject to review for arbitrariness. Say that and note the dissent from it.

What industrialisation asked of the law

Of LABOUR LAW. Security of employment against the ability to reorganise; the Industrial Disputes Act 1947's machinery of conciliation, adjudication and the definition of an industry; the standing orders; and the Codes of 2019 and 2020, whose central change is to raise the threshold above which an establishment needs permission to retrench or close and to widen the definition of a worker.

Of LAND. The Land Acquisition Act 1894, under which land was taken for a public purpose with compensation to the recorded owner and no rehabilitation, and its replacement in 2013 by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, with a social impact assessment, a consent requirement for private and public-private projects, a wider definition of an affected family and rehabilitation as an entitlement. That is the point at which this chapter meets [The Causes: Land, Dispossession and the Failure of Law].

Of the COMPANY. Limited liability, the separation of ownership from management, and the machinery of corporate governance; the Companies Act 2013's provisions on independent directors, on related party transactions and on CORPORATE SOCIAL RESPONSIBILITY, which requires companies above stated thresholds to spend a proportion of average net profit on specified activities.

Of the ENVIRONMENT. The Water Act 1974, the Air Act 1981 and the Environment (Protection) Act 1986, and the doctrines the courts built. That is the next two chapters.

And of the CONSUMER. The Consumer Protection Act 1986, replaced in 2019, which gave a purchaser a forum against a manufacturer, and which is the demand-side counterpart of all the rest.

Industrialisation as social transformation

What it changed in the society, which is why MU sets it in this paper.

Occupation ceased to be inherited. A factory hires by skill and not by caste, and that is the sharpest attack on the caste order that any Indian institution has made. It is incomplete, because recruitment networks reproduce community, but it is real.

It produced the city, and with it the migrant, the tenement and the pavement dweller. [Urbanisation and the Pavement Dweller].

It produced the wage, and with it a woman's possibility of an independent income, which is the economic half of [Empowerment of Women].

It produced the trade union, an association of interest rather than of birth, protected by article 19(1)(c) and regulated by the Trade Unions Act 1926.

And it produced its own displacement. Dams, mines and plants took the land of the people least able to litigate about it, which is the Expert Group's finding in Module II.

Say that in an answer. MU's question is set in a paper on social transformation, so the answer must reach the social consequences and not stop at the policy.

A worked example

A company wishes to set up a steel plant in 1985 and the same company wishes to do so in 2026. Trace what the law requires in each year.

In 1985. A LICENCE under the Industries (Development and Regulation) Act 1951 to establish the undertaking and for the capacity; approval under the MRTP Act if it was a large undertaking; approval under the Foreign Exchange Regulation Act 1973 for any foreign equity; land acquired under the Land Acquisition Act 1894, with compensation to recorded owners and no rehabilitation; environmental clearance under the Water Act 1974 and the Air Act 1981; and, once employing above the threshold, the previous permission of the Government to retrench or close.

In 2026. No industrial licence for most industries; no prior approval for size, but scrutiny of any combination under the COMPETITION ACT 2002 on its effect on competition; foreign investment under the Foreign Exchange Management Act 1999 and the sectoral policy; land under the Act of 2013 with a social impact assessment, a consent requirement, rehabilitation as an entitlement and, in a Scheduled Area, the gram sabha's prior consent; environmental clearance under the Environment (Protection) Act 1986 and its notifications; the labour Codes on wages, industrial relations, social security and safety; and, on failure, the Insolvency and Bankruptcy Code 2016 for exit.

What has moved. The question the State asks has changed from MAY YOU PRODUCE THIS to ON WHAT TERMS, and the terms now include the environment, the displaced and the worker rather than the allocation of capacity.

And what has not. The person whose land is taken is still the person least able to litigate, and the Act of 2013 answers that with procedure rather than with a veto except in the Scheduled Areas.

What this does NOT mean

It does not mean the pre-1991 framework failed. It built a capital goods base and a public sector that did not exist, and the criticism is of the allocation mechanism rather than of the objective.

It does not mean 1991 was a repeal of Part IV. Articles 39(b) and (c) stand, and the courts have held that Part IV states objectives while the choice of method is the elected government's.

It does not mean labour law was liberalised in 1991. It was not; the Codes came in 2019 and 2020.

And it does not mean industrialisation is only an economic subject. Its social consequences, the breaking of the caste-occupation link, the city, the wage, the union and the displaced, are why it is in this paper.

Quick revision

Constitutional equipment: article 39(b), distribution of material resources for the COMMON GOOD; 39(c), no CONCENTRATION of wealth and means of production; 41, right to work and education within economic capacity; 42 and 43, humane conditions, maternity relief, a LIVING WAGE and cottage industries; 43A, WORKERS' PARTICIPATION in management, 1976.

The framework: Industrial Policy Resolutions 1948 and 1956; the Industries (Development and Regulation) Act 1951, requiring a LICENCE to establish, expand, relocate or make a new article; the MRTP Act 1969 on the size of undertakings; the Foreign Exchange Regulation Act 1973; and the labour statutes of 1947 to 1952. Criticisms: the licence as a scarce asset; capacity allocated rather than competed for; section 25N's permission to retrench or close deterring entry; and small-scale reservation capping firm size.

1991, New Industrial Policy of 24 July: licensing abolished except for a short list; public sector reservation cut; automatic foreign equity approval; MRTP prior approval removed; disinvestment begun. Then FERA replaced by FEMA 1999; MRTP by the COMPETITION ACT 2002, moving from SIZE to CONDUCT; the Companies Act 2013; and the Insolvency and Bankruptcy Code 2016. Labour law untouched until the four Codes of 2019 and 2020.

What industrialisation asked of the law: labour law, security against reorganisation; land, the Act of 1894 replaced in 2013; the company, limited liability, governance and corporate social responsibility; the environment, the Acts of 1974, 1981 and 1986; and the consumer, the Acts of 1986 and 2019. Social consequences: occupation ceases to be inherited; the city and the migrant; the wage and a woman's independent income; the trade union as an association of interest; and displacement of those least able to litigate.

Test yourself

1. Which Directive Principles equip industrial policy, and what does each direct? Article 39(b), that the ownership and control of the material resources of the community be so distributed as best to subserve the common good; article 39(c), that the operation of the economic system not result in the concentration of wealth and means of production to the common detriment; article 41, the right to work, education and public assistance within the limits of economic capacity; articles 42 and 43, just and humane conditions of work, maternity relief, a living wage and the promotion of cottage industries; and article 43A, the participation of workers in the management of undertakings.

2. What did the Industries (Development and Regulation) Act 1951 require? A licence to establish a new industrial undertaking, to expand capacity, to change location or to manufacture a new article, in the scheduled industries, with power in the Central Government to investigate and to take over the management of an undertaking. Capacity was allocated by the State rather than competed for.

3. What did the New Industrial Policy of 1991 change, and what followed in the statutes? It abolished industrial licensing except for a short list, cut the industries reserved for the public sector, permitted automatic approval of foreign equity in specified industries, removed the MRTP Act's requirement of prior approval for the expansion of large undertakings, and began disinvestment. FERA was replaced by FEMA 1999, the MRTP Act by the Competition Act 2002, which asks about conduct and effect rather than size, the Companies Act 1956 by that of 2013, and winding up by the Insolvency and Bankruptcy Code 2016.

4. What did NOT change in 1991? Labour law. The Industrial Disputes Act's requirement of previous permission for retrenchment and closure survived, and consolidation waited for the four labour Codes of 2019 and 2020 on wages, industrial relations, social security, and occupational safety, health and working conditions.

5. Why does a paper on social transformation set industrialisation? Because of what it changed in the society: it broke the inherited link between caste and occupation by hiring for skill; it produced the city, the migrant and the pavement dweller; it produced the wage and with it the possibility of an independent income for a woman; it produced the trade union, an association of interest rather than of birth; and it displaced the people least able to litigate about it.