EconomicsCBSE Class 12 · Indian Economy 1950-1990

Industrial Policy Resolution 1956 and Small-Scale Industry (Class 12)

Updated 15 October 2026 · Fact-checked

The Industrial Policy Resolution 1956, the basis of the Second Five Year Plan, put industries in three categories: exclusively state-owned; public sector leading with private supplementing; and the rest for the private sector under licensing. Small-scale industries, labour-intensive and employment-generating, were protected through product reservation, lower excise duty and cheaper bank loans.

Notice how IPR 1956 split industry into three categories, and how small-scale industry got reserved products, lower excise duty and cheaper loans.

Illustration drawn for QuestionBuddy.

Understand Industrial Policy 1956 and Small-Scale Industry

Background. The state was to control the commanding heights of the economy. The IPR 1956 was adopted accordingly and formed the basis of the Second Five Year Plan, which tried to build a socialist pattern of society.

Three categories of industries.
1. Industries exclusively owned by the government.
2. Industries where the private sector could supplement the public sector, with the government solely responsible for starting new units.
3. Remaining industries in the private sector.

Licensing. Even the private sector was kept under state control through licences: no new industry without a licence.

Used to promote industry in backward regions: licences were easier to get there, with concessions such as tax benefits and cheaper electricity, to promote regional equality.
An existing industry needed a licence to expand output or diversify production, to ensure output did not exceed what the economy required.

Small-scale industry (SSI).

In 1955, the Village and Small-Scale Industries Committee (Karve Committee) saw SSI as a means of promoting rural development.
SSI is defined by the maximum investment on a unit's assets: ₹5 lakh in 1950; NCERT states the present limit as ₹1 crore.
Role and importance: more labour-intensive, so they generate more employment; give opportunities to people without capital for large firms; support rural development.
Protection: since they cannot compete with big firms, the production of a number of products was reserved for SSI (criterion: ability to manufacture the goods), and they got lower excise duty and bank loans at lower interest.

Results (1950-1990, NCERT). Industry's share of GDP rose from 13% (1950-51) to 24.6% (1990-91); industrial growth of about 6% a year; industry became well diversified beyond cotton textiles and jute, largely due to the public sector. Protection helped indigenous electronics and automobiles.

Criticism. Many public enterprises continued producing goods and services (often as monopolies) when no longer needed, e.g. telecommunications (long waits for telephone connections till the late 1990s) and Modern Bread; licensing and protection also reduced efficiency and competition.

Industrial Policy 1956 and Small-Scale Industry: key facts

IPR 1956: three categories: State-only; public-led with private supplement; private (under licensing); Basis of the Second Plan.
Licensing aims: Regional equality (backward areas: tax benefits, cheaper power); control expansion and diversification; Even existing units needed licences to expand.
SSI definition: Defined by maximum investment on assets: ₹5 lakh (1950) → ₹1 crore (as stated in NCERT); 20 times higher.
SSI support: Product reservation; lower excise duty; cheaper bank loans; Protection from large firms.
Industry share of GDP: 13% (1950-51) → 24.6% (1990-91); +11.6 percentage points.

How to answer Industrial Policy 1956 and Small-Scale Industry questions

IPR 1956 and SSI were the most-tagged 1950-1990 items (about 4 items, 24 marks): 3-4 mark explanations of IPR categories, licensing, and SSI's role and protection.

1For IPR, state its link to the Second Plan and list the three categories.
2Explain licensing and how it promoted regional equality.
3For SSI, define by investment limit, then give role (employment, labour-intensive) and protection measures.
4For evaluation, add achievements (industry share 13% → 24.6%) and criticisms (inefficient public monopolies).

Industrial Policy 1956 and Small-Scale Industry in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Licensing for regional equality

Suppose, during the licence era of the 1960s, two businessmen want to start textile mills, one near Bombay and one in a backward district of Madhya Pradesh. The second gets a licence faster, a tax break and cheaper electricity.

What was the government trying to achieve?

Try it first, then show the solutionSolution

Licensing was used to steer industry to backward regions.
Concessions made backward locations attractive.
Aim: regional equality.

Answer: Under IPR 1956 licensing, licences were easier to get in backward areas, and such units received tax benefits and cheaper power, to spread industry and promote regional equality.

Memory hook: Licence as a compass pointing industry to backward areas.

Tricks to remember Industrial Policy 1956 and Small-Scale Industry

Short memory aids. Say each one aloud once, then use it on a question the same day.

State, Shared, Private
IPR 1956 categories: State-only, Shared (public leads, private supplements), Private (with licence).
Use it when: Three categories.
Karve '55, Five lakh '50
Karve Committee 1955; SSI limit ₹5 lakh in 1950.
Use it when: SSI facts.
R-E-L
SSI protection: Reservation, Excise duty lower, Loans cheaper.
Use it when: SSI support measures.

Industrial Policy 1956 and Small-Scale Industry: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Basis of the Second Plan · 1 mark · MCQBoard level

Which policy formed the basis of the Second Five Year Plan?
(a) Industrial Policy Resolution 1948
(b) Industrial Policy Resolution 1956
(c) New Economic Policy 1991
(d) Karve Committee report 1955

Try it first, then show the solutionSolution

NCERT: IPR 1956 formed the basis of the Second Plan.

Answer: (b) Industrial Policy Resolution 1956

Example 2: Three categories · 3 marks · Short answerBoard level

Explain the classification of industries under the Industrial Policy Resolution 1956. (3 marks)

Try it first, then show the solutionSolution

One mark per category.

Answer: (1) Industries exclusively owned by the government. (2) Industries in which the private sector could supplement the public sector, with the government solely responsible for starting new units. (3) The remaining industries, left to the private sector but controlled through licensing.

Example 3: Role of SSI · 4 marks · Short answerHarder board level

Explain the role and importance of small-scale industries in India's development during 1950-1990. (4 marks)

Try it first, then show the solutionSolution

Labour-intensive, employment (1 mark).
Opportunity for those without large capital (1 mark).
Rural development (Karve Committee) (1 mark).
Protection measures (1 mark).

Answer: SSIs are more labour-intensive than large industries, so they generate more employment. They allowed people without the capital for large firms to enter business. The Karve Committee (1955) saw them as a tool for rural development. To help them survive competition from big firms, products were reserved for SSI and they received lower excise duty and cheaper bank loans.

Example 4: Industry's share of GDP · 2 marks · Short answerHarder board level

Industry's share of GDP rose from 13% in 1950-51 to 24.6% in 1990-91 (NCERT). Find the rise in percentage points and the percentage increase in the share. (2 marks)

Try it first, then show the solutionSolution

24.6 − 13 = 11.6 percentage points.
11.6 ÷ 13 × 100 ≈ 89.2%.

Answer: A rise of 11.6 percentage points, i.e. the share increased by about 89%.

Example 5: Licensing: help or hurdle? · 4 marks · Short answerHOTS / competency

Evaluate the licensing system under IPR 1956. (4 marks)

Try it first, then show the solutionSolution

Aims and merits: regional equality, concessions in backward areas, controlled output.
Demerits: limited competition and expansion; protected inefficiency.

Answer: Merits: licensing let the state steer industry to backward regions (with tax benefits and cheaper power) for regional equality, and ensured output matched what the economy required. Demerits: firms needed permission even to expand or diversify, which restricted growth and competition; protected firms had little pressure to be efficient. This later led to the 1991 reforms that abolished most licensing.

Example 6: Assertion on SSI · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): The production of certain goods was reserved for small-scale industries.
Reason (R): Small-scale industries cannot compete with large firms and need protection.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.

Try it first, then show the solutionSolution

Reservation was the shield against large firms.

Answer: (a) Both A and R are true and R is the correct explanation of A.

Where students lose marks in Industrial Policy 1956 and Small-Scale Industry

The slips examiners see most often, and what to write instead.

Mistake: Confusing IPR 1948 and IPR 1956
Two resolutions.
Wrong working
IPR 1948 formed the basis of the Second Plan.
Right working
IPR 1956 formed the basis of the Second Plan.
Do this: 56 for the Second Plan (begun 1956).
Usually costs: 1 mark.
Mistake: Defining SSI by number of workers
Common assumption.
Wrong working
SSI: units with fewer than 50 workers.
Right working
SSI is defined by the maximum investment on assets.
Do this: Investment limit.
Usually costs: 1 mark.
Mistake: Saying the private sector was free in category 3
Ignoring licensing.
Wrong working
Category 3 industries were free from state control.
Right working
They were in the private sector but controlled through licences.
Do this: Private, but licensed.
Usually costs: ½ to 1 mark.

Exam tips

IPR 1956 and the public sector carried about 24 marks across four tagged items in the PYQ bank.
Always link IPR 1956 to the Second Plan and to 'commanding heights'.
Use NCERT's SSI figures as stated (₹5 lakh in 1950; ₹1 crore 'at present' per NCERT).

Practice questions on Industrial Policy 1956 and Small-Scale Industry

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
The Karve Committee (1955) is associated with:
(a) land reforms
(b) small-scale industries
(c) green revolution
(d) import substitution
Hint
Village and small-scale industries.
Answer
(b) small-scale industries
Q2 · 1 mark · Short answerBoard level
How is a small-scale industry defined? (1 mark)
Hint
Investment.
Answer
With reference to the maximum investment allowed on the assets of a unit (₹5 lakh in 1950; ₹1 crore at present, as stated in NCERT).
Q3 · 3 marks · Short answerBoard level
How did the licensing policy promote regional equality? (3 marks)
Hint
Easier licences, concessions.
Answer
Licences were easier to obtain for units set up in economically backward areas, and such units received concessions such as tax benefits and electricity at lower tariffs. This encouraged industry to locate in backward regions, promoting regional equality.
Q4 · 3 marks · Short answerHarder board level
State three measures taken to protect small-scale industries. (3 marks)
Hint
R-E-L.
Answer
(1) Reservation of production of certain products for SSI. (2) Lower excise duty. (3) Bank loans at lower interest rates.
Q5 · 2 marks · Short answerHarder board level
Why did even existing industries need a licence to expand output under IPR 1956? (2 marks)
Hint
Match output to needs.
Answer
To ensure that the quantity of goods produced was not more than what the economy required; a licence to expand was given only if the government was convinced that a larger quantity was needed.
Q6 · 3 marks · Short answerHarder board level
Give two criticisms of public sector enterprises during 1950-1990, with NCERT's examples. (3 marks)
Hint
Telecom, Modern Bread.
Answer
(1) State enterprises continued to produce goods and services, often as monopolies, even when no longer required; e.g. telecommunications remained reserved for the public sector, and people waited a long time for telephone connections till the late 1990s. (2) The government entered areas the private sector could handle, e.g. Modern Bread. Absence of competition reduced efficiency.
Q7 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Small-scale industries generate more employment than large industries for the same investment.
Reason (R): Small-scale industries are more labour-intensive.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
Hint
More labour per unit of capital.
Answer
(a) Both A and R are true and R is the correct explanation of A.
Q8 · 1 mark · Short answerHarder board level
By how many times did the SSI investment limit rise from 1950 (₹5 lakh) to the present limit stated in NCERT (₹1 crore)? (1 mark)
Hint
1 crore ÷ 5 lakh.
Answer
20 times.
Q9 · 3 marks · Short answerHOTS / competency
Suppose a student argues that IPR 1956 'killed private enterprise'. Evaluate using NCERT's account. (3 marks)
Hint
Category 3; SSI; growth record.
Answer
Overstated. IPR 1956 left a whole category of industries to the private sector (under licensing), protected and promoted small-scale private units, and industry's share of GDP rose from 13% to 24.6% with about 6% annual growth. But licensing restricted entry and expansion and public monopolies reduced competition, so private enterprise was constrained rather than killed.
Q10 · 3 marks · Short answerHOTS / competency
Why might reservation of products for SSI become a problem over time? Reason it out. (3 marks)
Hint
Protection vs efficiency.
Answer
Reservation shielded small units from large firms, which helped employment early on. But permanent protection removes the pressure to improve technology and quality, can keep products costlier or lower in quality for consumers, and stops firms from growing (since growing beyond the limit loses benefits). The aim should be to help SSIs become competitive, not to protect them indefinitely.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Which plan was based on IPR 1956?Show answer
The Second Five Year Plan.
2.How many categories of industries in IPR 1956?Show answer
Three.
3.SSI investment limit in 1950?Show answer
₹5 lakh.
4.Industry's share of GDP in 1990-91?Show answer
24.6%.
5.Name two concessions to SSI.Show answer
Lower excise duty and cheaper bank loans (also product reservation).

Industrial Policy 1956 and Small-Scale Industry: frequently asked questions

What was the Industrial Policy Resolution 1956?

The policy that classified industries into three categories (state-only, public-led with private supplement, and private under licensing) and formed the basis of the Second Five Year Plan.

Why were small-scale industries promoted?

Because they are labour-intensive and generate more employment, help rural development and let people without large capital enter business.

How was regional equality promoted?

Through licensing: units in backward areas got licences more easily, plus tax benefits and cheaper electricity.

What were the criticisms of the public sector?

Many enterprises continued as monopolies when no longer needed, leading to inefficiency, e.g. long waits for telephone connections.