India through a predominantly agrarian economy, had its own type of village or cottage industries capable of producing good quality goods. Some historians also opine that India was on the verge of the industrial revolution when British conquest happened because the authority of Mughals was disintegrating and the society was ripe for a revolution. They argue that British conquest distorted the potential developments by laying down the foundations of a new type of empire. Whatever may be the ground realities about the possibility of capitalist conversion when British reached India, by the time they left India the industrial sector was in complete ruins.
We needed rapid development of the Industrial sector and we focused on capital goods industries for the same in the second five-year plan. The first question which was to be decided when we decided to promote rapid industrialisation was whether we should depend on the Public sector or private sector to initiate growth. But the private sector was not sufficiently developed in India at the time of Independence to take up a huge task. The Private sector will be willing to participate actively only if we can assure policy stability and at the time of independence, there was a lot of apprehensions and Indian democracy was regarded as an experiment. So, the willingness was also less in private players.
Our policy of promotion of small-scale industries and socialistic ideals of preventing concentration of economic power also were not supportive of the private sector. Due to these aim, we had reserved vital industries for the public sector. We wanted autonomous investment by the government should help in the development of infrastructure and atmosphere conductive of private sector investment.
We had our first Industrial Policy in 1948 and the next one in 1956 in this direction. In 1956 reclassification of Industries was done to strengthen the Public Sector. Apart from the reservation of some industries for Public sector, licensing was required to start private industries also in the unreserved sectors. These slowed down the development of Private Sector.
1973 Industrial Policy was a turning point in the direction that it allowed joint sector for the first time. It enabled joint ventures between a public sector partner and a private sector partner. 1980 policy was the major change in direction which started liberalisation in reality. The government has started to focus on social sector spending and was not in a position to invest more in wealth economy and the Private sector was developed enough to play a better role. Increased demand for manufactured products and incidences of smuggling, hoarding and black marketing warranted a change from the era of restriction to an era of promotion. Norms of licensing were relaxed and plants were allowed to increase the capacity of production to actual installed capacity to promote the private sector.
But the real change in the direction of policy happened in 1991 Industrial policy where we actually opened up the economy for the private sector and also moved in a direction to allow foreign companies to compete with India.