The Licence Raj was a result of India's decision to have a planned economy where all aspects of the economy are controlled by the state and licences are given to a select few. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production.
Reforms since the mid-1980s have significantly reduced regulation, but Indian labour laws still prevent manufacturers from reducing their workforce without prohibitive burdens.
The term plays off "British Raj", the period of British rule in India. It was coined by Indian statesman Chakravarthi Rajagopalachari, who firmly opposed it for its potential for political corruption and economic stagnation and founded the Swatantra Party to oppose these practices.
In his newspaper, Rajagopalachari wrote:
"I want the corruptions of the Permit/Licence Raj to go. [...] I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party, and gradually restored back to the standards of fearless honesty which they once maintained. [...] I want real equal opportunities for all and no private monopolies created by the Permit/Licence Raj."
The architect of the system of Licence Raj was Jawaharlal Nehru, India's first prime minister. Private players could manufacture goods only with official licences. The quantity of goods they were allowed to produce was determined by the licence regime, not by free-market demand.
The key characteristic of the Licence Raj is a Planning Commission that centrally administers the economy of the country. Like a command economy, India had five-year plans on the lines of the Five Year Plans in the former Soviet Union.
Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licences to invest and develop. This bureaucracy often led to absurd restrictions: up to 80 agencies had to be satisfied before a firm could be granted a licence to produce, and, even then, the state would decide what was produced, how much, at what price and what sources of capital were used.
The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution industrialization, the belief that countries like India needed to rely on internal markets for development, not international trade, a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.
India had started out in the 1950s with:
- high growth rates
- openness to trade and investment
- a promotional state
- social expenditure awareness
- macro stability
However, by the 1980s, the country was left with:
- low growth rates
- closure to trade and investment
- a licence-obsessed, restrictive state
- inability to sustain social expenditures
- macro instability, indeed crisis
The Licence Raj system was in place for four decades. The government of India initiated a liberalisation policy under P.V.Narasimha Rao. Narasimha Rao also had the responsibility of industries minister; he is directly responsible for dismantling the Licence Raj.
Liberalisation resulted in substantial growth in the Indian economy, which continues today. The Licence Raj is considered to have been significantly reduced in 1991 when India had only two weeks of dollars left: "In return for an IMF bailout, Gold bullion was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India." The federal government, with Dr Manmohan Singh as finance minister, reduced licensing regulations; lowered tariffs, duties and taxes; and opened up to international trade and investment.
The reform policies introduced after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all product categories but alcohol, tobacco, hazardous chemicals, industrial explosives, electronics, aerospace and pharmaceuticals.
On 6 August 2014 the Indian Parliament raised the limit on foreign direct investment in the defense sector to 49% and removed the limit for certain classes of infrastructure projects: high speed railways, including construction, operation and maintenance of high-speed train projects; suburban corridor projects through PPP; dedicated freight lines; rolling stock including train sets; locomotives manufacturing and maintenance facilities; railway electrification and signalling systems; freight terminals and passenger terminals; infrastructure in industrial park pertaining to railway line, and mass rapid transport systems.
- Economic liberalisation in India
- Corruption in India
- Mafia Raj
- Economic history of India
- Hindu rate of growth
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- THE ECONOMIC HISTORY AND THE ECONOMY OF INDIA Nehru chose the goal of economic self-sufficiency with economic development to be achieved by central planning modeled on that of the Soviet Union.
- What Went Wrong: Derailing after the 1950s
- Address by Mr. Somak Ghosh
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