Which one of the following committees recommended the abolition of reservation of items for the small scale sector in industry?

1. Significance of MSMEs in the Indian Economy (basic)

To understand the Indian economy, one must look beyond the gleaming skyscrapers of large corporations and into the heart of its Micro, Small, and Medium Enterprises (MSMEs). Often called the "backbone" of the economy, MSMEs are industrial units that operate on a smaller scale than giants like Reliance or Tata, but collectively, they drive the nation's pulse. Their significance stems from a unique set of characteristics: they are labor-intensive (employing more people per rupee invested), require low capital, and have a short gestation period, meaning they start producing results much faster than massive infrastructure projects Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy after 2014, p.234.

Economically, the footprint of MSMEs is staggering. They act as a silent engine driving three critical pillars: Output, Exports, and Manufacturing. While we often focus on heavy industries, MSMEs contribute approximately 30% to India's total GDP and nearly 45% of the overall manufacturing output. When it comes to global trade, their contribution is even more pronounced, accounting for about 40% to 50% of India's total exports Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Industry, p.394. This signifies that MSMEs are not just local players; they are vital for India's foreign exchange earnings and global competitiveness.

Beyond numbers, MSMEs serve a profound socio-economic purpose. India faces a massive challenge in transitioning labor from low-productivity agriculture to more productive sectors. With over 11 crore workers employed across roughly 6.34 crore units, MSMEs provide the primary alternative to farm distress Indian Economy, Vivek Singh (7th ed. 2023-24), Inclusive growth and issues, p.254. They are crucial for inclusive growth because they can be set up in rural and backward areas, helping to reduce regional imbalances and providing livelihoods to the unorganized sector. By creating forward and backward linkages—where small units supply parts to large industries (backward) or process raw materials from them (forward)—they integrate the entire industrial ecosystem.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy after 2014, p.234; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Industry, p.394; Indian Economy, Vivek Singh (7th ed. 2023-24), Inclusive growth and issues, p.254

2. Pre-1991 Protectionism and IPR 1956 (basic)

To understand India's industrial journey, we must start with the Industrial Policy Resolution (IPR) of 1956. Often called the 'Economic Constitution of India' or the 'Bible of State Capitalism', this policy was based on the Mahalanobis Model, which prioritized heavy industries to build a self-reliant foundation for the nation Nitin Singhania, Indian Industry, p.403. Under this resolution, the government established a strict protectionist framework to shield domestic industries from foreign competition and ensure the state held the 'commanding heights' of the economy.

The IPR 1956 divided industries into three distinct categories, known as Schedules, to define the roles of the public and private sectors clearly:

Category	Ownership/Control	Examples
Schedule A	Absolute State Monopoly	Arms & ammunition, Atomic energy, Railways
Schedule B	State-led, but Private sector could supplement	Fertilizers, Mining, Basic chemicals
Schedule C	Remaining industries open to Private sector	Consumer goods, light manufacturing

Beyond state control, protectionism also took the form of Product Reservation for the Small-Scale Sector (SSI). Starting in 1967, the government began reserving certain items (like toys, shoes, or specific chemicals) that only small units could manufacture. The logic was to generate massive employment and prevent large corporations from crushing small entrepreneurs Vivek Singh, Indian Economy [1947 – 2014], p.213. By the late 1980s, over 800 items were locked behind this reservation wall. While well-intentioned, this meant many Indian products stayed small and technologically outdated because they didn't have to compete with larger, more efficient firms.

As India moved toward the 1991 reforms, the flaws in this protectionist logic became apparent. In 1995, the Abid Hussain Committee was formed to review the SSI sector. Its 1997 report was a landmark moment, explicitly recommending the abolition of product reservations. The committee argued that for India to be globally competitive, even small firms needed to face competition and upgrade their technology rather than hiding behind government-mandated protections.

Sources: Indian Economy, Nitin Singhania, Indian Industry, p.403; Indian Economy, Nitin Singhania, Indian Industry, p.378; Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6: Indian Economy [1947 – 2014], p.213

3. 1991 Industrial Policy and Liberalization (intermediate)

To understand the 1991 Industrial Policy, we must first look at what it replaced. Since independence, India followed the Industries (Development and Regulation) Act of 1951, which birthed the infamous 'License Raj'. Under this system, the government didn't just suggest what to build; it controlled every detail—from the location of a factory to the specific quantity of goods produced Nitin Singhania, Indian Industry, p.377. By 1991, this rigid control had led to inefficiency and a lack of global competitiveness. The New Industrial Policy (NIP) of 1991 was a paradigm shift that moved the state's role from a 'regulator' to a 'facilitator' or 'developer' Nitin Singhania, Indian Industry, p.379.

One of the most revolutionary pillars of this policy was Industrial De-licensing. In one stroke, the government abolished compulsory licensing for almost all industries, except for a small list of 18 sectors (which has since been pruned down to just 5 today, covering items like alcohol, tobacco, and hazardous chemicals). This allowed private entrepreneurs to start or expand businesses based on market demand rather than bureaucratic permission Vivek Singh, Indian Economy [1947 – 2014], p.215. Furthermore, the MRTP Act (Monopolies and Restrictive Trade Practices), which previously capped the growth of large industrial houses, was substantially diluted to allow Indian companies to achieve economies of scale.

Another critical, though slightly later, refinement of this liberalization spirit concerned the Small-Scale Industries (SSI). For decades, hundreds of items were 'reserved' exclusively for small firms to protect them from big corporations. However, this often prevented these firms from growing or upgrading technology. Following the Abid Hussain Committee recommendations (submitted in 1997), the government began the process of de-reservation, arguing that for India to be globally competitive, even small units needed to face market competition rather than rely on protective walls Vivek Singh, Indian Economy [1947 – 2014], p.213.

Feature	Pre-1991 (License Raj)	Post-1991 (Liberalization)
Primary Goal	Regulation and Control	Development and Growth
Licensing	Required for almost everything	Abolished for most (except 5-18 sectors)
Public Sector	"Commanding Heights" of economy	Disinvestment and more private role
Large Houses	Restricted by MRTP Act	Free to expand and diversify

Sources: Indian Economy, Nitin Singhania, Indian Industry, p.377, 379; Indian Economy, Vivek Singh, Indian Economy [1947 – 2014], p.213, 215; History, class XII (Tamilnadu state board), Envisioning a New Socio-Economic Order, p.124

4. Defining MSMEs: MSMED Act 2006 vs 2020 Revision (intermediate)

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was a landmark piece of legislation that provided the first-ever legal recognition of the concept of an 'enterprise', which integrated both manufacturing and service entities under one umbrella Indian Economy, Vivek Singh (7th ed.), Chapter 6, p.236. Prior to this, the focus was primarily on 'Small Scale Industries' (SSIs). The 2006 framework sought to enhance competitiveness by setting specific investment ceilings, but it maintained a rigid distinction: Manufacturing units were defined by their investment in plant and machinery, while Service units were defined by their investment in equipment.

Over time, this 2006 definition faced criticism for encouraging 'dwarfism'—a phenomenon where small firms deliberately stayed small to avoid losing government benefits once they crossed the low investment thresholds. To address this and bolster the 'Atmanirbhar Bharat' initiative, the government introduced a major revision in 2020. This reform fundamentally changed the game by eliminating the distinction between the manufacturing and service sectors and introducing a 'composite criteria' that combines both investment and annual turnover Indian Economy, Nitin Singhania (2nd ed.), Sustainable Development and Climate Change, p.619.

Criteria	Micro	Small	Medium
New 2020 Classification	Investment < ₹1 cr AND Turnover < ₹5 cr	Investment < ₹10 cr AND Turnover < ₹50 cr	Investment < ₹50 cr AND Turnover < ₹250 cr

A crucial addition to the 2020 revision is the Export Exclusion: turnover resulting from exports is not counted toward the turnover limits for any MSME category Indian Economy, Vivek Singh (7th ed.), Chapter 6, p.236. This allows firms to grow their international presence aggressively without the fear of outgrowing their MSME status and losing associated benefits like priority sector lending or government procurement preferences.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6: Indian Economy after 2014, p.236; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Sustainable Development and Climate Change, p.619

5. Institutional Support: SIDBI, MUDRA, and ECLGS (exam-level)

To understand India's industrial growth, we must look at how the government supports the 'backbone' of our economy: the **Micro, Small, and Medium Enterprises (MSMEs)**. While large industries have easy access to capital markets, small entrepreneurs often face 'credit rationing'—where banks are hesitant to lend due to perceived risks. To bridge this gap, the government moved from a policy of mere protection (like reserving items for small scales) to a policy of **institutional empowerment** through specialized financial bodies.

The Small Industries Development Bank of India (SIDBI) is the apex institution in this ecosystem. Established in 1990, it was originally a subsidiary of IDBI but now operates as an independent body under the Ministry of Finance Nitin Singhania, Money and Banking, p.182. SIDBI's brilliance lies in its 'Credit+' approach: it doesn't just provide loans; it offers 'refinancing' (lending money to banks so they can lend to you), technology modernization, and venture capital through the India Aspiration Fund Nitin Singhania, Indian Industry, p.399. During the push for 'Make in India,' SIDBI launched the SMILE scheme (SIDBI Make in India Soft Loan Fund) to provide flexible, quasi-equity loans to MSMEs in 25 thrust sectors.

While SIDBI targets the broader MSME sector, the Pradhan Mantri MUDRA Yojana (PMMY), through the MUDRA Bank (a subsidiary of SIDBI), focuses on the 'last mile' entrepreneurs—the small shopkeepers, fruit vendors, and artisans who are often outside the formal banking net Nitin Singhania, Money and Banking, p.183. To handle various stages of business growth, MUDRA loans are categorized into three distinct buckets:

Category	Loan Limit	Target Stage
Shishu	Up to ₹50,000	Seed stage/Startup
Kishore	₹50,001 to ₹5 Lakh	Mid-stage/Expansion
Tarun	₹5,00,001 to ₹10 Lakh	Growth/Established stage

Finally, the Emergency Credit Line Guarantee Scheme (ECLGS) represents a modern shift in support. Launched as part of the Atmanirbhar Bharat package during the COVID-19 pandemic, it provides a 100% credit guarantee to lenders. Essentially, the government tells the banks: 'Lend to these MSMEs to help them survive the crisis; if they cannot pay back, the government-backed guarantee fund will cover the loss.' This gave banks the confidence to keep credit flowing during the toughest economic lockdowns.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.84; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Money and Banking, p.182-183; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Industry, p.399

6. History of the Reservation Policy for SSIs (intermediate)

To understand the history of the Reservation Policy for Small-Scale Industries (SSIs), we must look at India's post-independence obsession with employment generation. Because small units are more labor-intensive and require less capital than giant factories, the government decided to protect them from the 'big players.' This protection took the form of Product Reservation, where the government created a list of items that only small-scale units were legally allowed to manufacture. This policy officially began in 1967 with just 47 items but grew aggressively over the decades Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6, p.213. By the late 1980s, the list included everything from pickles and chutneys to steel almirahs and padlocks Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6, p.216. However, a major problem emerged after the 1991 reforms. As India lowered import duties, foreign companies could export these same goods to India. These foreign goods were often better and cheaper because they were produced using massive scales and superior technology. Paradoxically, Indian large-scale industries were still banned from making these items, leaving the domestic market open to foreign competition while keeping Indian firms small and technologically stagnant. The turning point came with the Abid Hussain Committee (1995-1997). The committee argued that the reservation policy was actually hurting the sector by preventing firms from growing (as growing would mean losing their 'small-scale' status and the right to produce those items). They recommended a complete abolition of reservation to encourage technological up-gradation and competitiveness. Following this 'forward-looking' approach, the government began progressively de-licensing and de-reserving items, finally bringing the number down to zero by April 2015 Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6, p.216.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6: Indian Economy [1947 – 2014], p.213; Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6: Indian Economy [1947 – 2014], p.216

7. Key Industrial and Banking Reform Committees (exam-level)

To understand India's journey from a protected, state-led economy to a competitive global player, we must look at the expert committees that provided the intellectual blueprint for change. In the industrial sector, a major turning point was the treatment of Small Scale Industries (SSIs). Since 1967, the government 'reserved' hundreds of products—ranging from bread to shoes—to be manufactured only by small units to protect employment. However, by the 1990s, this protection became a cage, preventing these units from growing or importing better technology. The Abid Hussain Committee (1995-1997) was the landmark panel that recommended abolishing this reservation policy, arguing that small firms should grow through strength and credit support rather than artificial protection Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6, p.213. Parallel to industrial shifts, the banking sector required a total overhaul to support a liberalized economy. The Narasimham Committee I (1991) and II (1998) are considered the 'Magna Carta' of banking reforms. They moved Indian banking away from being a mere tool for government financing toward a market-driven system. Key recommendations included reducing the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to leave more money with banks for lending, and introducing prudential norms to identify Non-Performing Assets (NPAs) Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.127. They also suggested legal changes to help banks recover defaults without endless court delays, eventually leading to powerful laws for seizing collateral Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.136. In recent years, the focus has shifted from mere 'protection' to 'handholding and scaling.' Modern committees like the U.K. Sinha Committee and K.V. Kamath Committee have focused on MSME sustainability, leading to the 2020 change in MSME definitions (merging investment and turnover criteria) and the creation of digital support systems like CHAMPIONS and RAMP Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy after 2014, p.236.

Committee	Primary Focus	Key Recommendation/Impact
Abid Hussain	Small Scale Industry (SSI)	Ending product reservation; shift to technology/credit support.
Narasimham I & II	Banking & Finance	Lowering SLR/CRR; NPA classification; asset recovery powers.
U.K. Sinha	MSME Ecosystem	Long-term solutions for MSME credit and economic sustainability.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Chapter 6: Indian Economy [1947 – 2014], p.213; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.127; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking - Part II, p.136; Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy after 2014, p.236

8. Abid Hussain Committee and De-reservation (exam-level)

To understand the Abid Hussain Committee, we must first understand why India reserved items for small industries. After independence, India faced two major challenges: a massive need for employment and a severe shortage of capital. Policymakers believed that Small-Scale Industries (SSIs) were the answer because they are labor-intensive and require less investment. Starting in 1967, the government reserved 47 items that only small units could manufacture. By the late 1980s, this list exploded to over 800 items, ranging from pencils to electronics Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.213.

While the intention was protection, the result was technological stagnation. Because large companies were barred from these sectors, there was no competition to drive innovation or economies of scale. After the 1991 reforms, India lowered import duties, allowing foreign goods—produced efficiently on a large scale—to flood the market. Indian small-scale units, restricted by law from growing larger or using expensive high-tech machinery, found themselves unable to compete Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.213.

Recognizing this crisis, the government appointed the Abid Hussain Committee in December 1995. In its 1997 report, the committee made a landmark recommendation: the complete abolition of the reservation policy. It argued that protection was actually hurting the small sector by preventing it from upgrading technology and expanding. This process of removing items from the protected list is known as De-reservation. It was a pivotal shift from "protection through reservation" to "support through credit and infrastructure," allowing small firms to eventually grow into medium and large enterprises.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Indian Economy [1947 – 2014], p.213

9. Solving the Original PYQ (exam-level)

Now that you have mastered the evolution of India's industrial policy from the License-Quota-Permit Raj to the 1991 LPG reforms, this question tests your ability to identify the specific policy shift regarding Small Scale Industries (SSIs). You've learned that while the 1967 reservation policy was designed to protect small players and boost employment, it eventually led to "dwarfism," where firms stayed small just to retain benefits. This question asks you to identify the committee that recognized this stagnation and recommended a move toward market-driven competitiveness.

To arrive at the correct answer, (A) Abid Hussain Committee, you must link the committee's timeline (1995–1997) to the post-liberalization need for scale. The committee argued that the reservation of over 800 items was actually hurting the sector by preventing technological upgrades and economies of scale. As detailed in Indian Economy, Vivek Singh, the committee’s recommendation to end product reservation was a pivotal moment in transitioning the sector from a protected enclave to a competitive MSME framework.

UPSC often uses "domain-specific" traps to confuse students. For instance, the Narasimham Committee is a common distractor; however, you should remember it strictly for Banking Sector Reforms. The Nayak Committee also dealt with the small-scale sector, but its mandate was focused on the adequacy of credit and institutional finance, not the abolition of item reservations. Finally, the Rakesh Mohan Committee is primarily associated with Infrastructure Development. Distinguishing committees by their specific "problem statements" is a crucial skill for the Prelims.