The stringent industrial licensing regime in India (pre-1991) often led to which unintended consequence for established firms, despite aiming to prevent monopolies?
Show answer & explanation
Correct answer: C
Explanation
Solution: The correct answer is Reduced incentive for technological upgradation and efficiency.
Explanation:
☛ Before the 1991 economic reforms, India followed a stringent licensing system commonly referred to as the 'License Raj' under the Industries (Development and Regulation) Act, 1951.
☛ This system required businesses to obtain government approvals to establish new units, expand capacity, or diversify product lines.
☛ While intended to curb monopolies and ensure balanced regional growth, it created severe barriers to entry for new entrepreneurs and sheltered existing firms from both domestic and foreign competition.
☛ Due to a guaranteed market and the absence of competitive threats, established firms had little to no economic incentive to invest in research and development, upgrade technology, or improve operational efficiency, resulting in a persistent 'sellers’ market' with low-quality goods.
Extra Exam-Relevant Facts:
☛ Industries (Development and Regulation) Act, 1951: Provided the statutory backbone for industrial licensing and government control over private sector production.
☛ MRTP Act, 1969: The Monopolies and Restrictive Trade Practices Act imposed strict asset-based thresholds on large firms, curbing legitimate scale economies.
☛ New Industrial Policy, 1991: Ended the licensing system for almost all sectors, retaining compulsory licensing for only a select few strategic and hazardous sectors.
☛ Competition Act, 2002: Replaced the MRTP Act to shift the focus from curbing enterprise size to preventing anti-competitive market practices.
Important One-Liners for Upcoming Exams:
☛ Who coined the popular term 'License Raj' to criticise India’s permit system? → Chakravarti Rajagopalachari (Rajaji)
☛ In which year was the landmark New Industrial Policy announced in India? → 1991
☛ Which Act established the statutory foundation for industrial licensing in India? → Industries (Development and Regulation) Act, 1951
☛ The MRTP Act of 1969 was repealed and replaced by which legislation? → Competition Act, 2002
☛ Who was the Prime Minister of India when the 1991 economic reforms were initiated? → P. V. Narasimha Rao