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India should not go back to the 'licence raj' regime and the country should have a deliberate policy for fostering industries, Nobel prize-winning economist Paul Krugman said on Monday.

Addressing a virtual event organised by Ashoka University, Krugman further said the income inequality issue is a severe one in India.

"Don't go back (to) Licence Raj regime... country Like India might want to have a deliberate policy for fostering industries," he said.

The licence raj, which involved an elaborate system of licences and regulations that were required to set up and run businesses in the country, was dismantled with the liberalisation policy introduced in 1991.

Replying to a question on why India is not well in labour-intensive industries, Krugman said India is not as well suited as some other players are to produce labour-intensive manufacturing products.

"Internal geography (of India) may be one of the reason...Indian does have a kind of non-industrial ecology," the eminent economist noted.

He further said India does not have a great transport infrastructure and that is going to pose some problems.

Krugman pointed out that India has not really done well in the labour-intensive aspects, but the country was very successful in the services sector and high skill manufacturing.

"Services sector generates a lot of GDP, but they do not generate a lot of jobs," he opined.

The Nobel laureate said he is an optimist about export-oriented growth for developing countries even as the process of globalisation is slowing down.

"Income inequality issue is a severe one in India. If the USA has an extremely hard time to tackle extreme inequality, then I got to worry about India," he observed.

Krugman won the Nobel Prize in economics in 2008 for his work on international trade theory.

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