The private sector was regulated under the IPR 1956 because the goal was for the state to control the commanding heights of the economy and build the basis for a socialist pattern of society. At the time of independence, Indian industrialists did not have the capital to undertake industrial development on their own. The regulation was also necessary to promote regional equality and ensure that the quantity of goods produced was not more than what the economy required.

The private sector was kept under state control through a system of licenses. No new industry was allowed unless a license was obtained from the government. This license policy was used to promote industry in backward regions — it was easier to obtain a license if the industrial unit was established in an economically backward area. Such units were given concessions like tax benefits and electricity at a lower tariff. Even existing industries had to obtain a license for expanding output or diversifying production. The license to expand production was given only if the government was convinced that the economy required a larger quantity of goods.