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The Licence Raj or Permit Raj (rāj, meaning "rule" in Hindi) was the system of licences, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production. The term plays off "British Raj", the period of British rule in India. It was coined by Indian independence activist and statesman Chakravarthi Rajagopalachari, who firmly opposed it for its potential for political corruption and economic stagnation, founding the Swatantra Party to oppose these practices.
The term License Raj was coined by Rajagopalachari who wrote in his newspaper:
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 License Raj was formed in the aftermath of World War 2 and the departing of the British, but the underlying issues that were meant to be solved by the Licence Raj stemmed from colonial times. Due to the fact that resources had been extracted for years by the British East India Company and the British colonial government and ferried to Britain instead of benefiting India, it had left India with no basis for an economy post decolonization.[better source needed] Due to these circumstances India had to foster its economy into being, and so the Licence Raj and policies of the government of Jawaharlal Nehru, India's first Prime Minister, were meant to facilitate this.
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 Soviet Union.
Legislation to regulate industry started with the Industrial Development Regulation Act of 1951, which laid out licensing restrictions on industries it designated as Schedule I which included industrial machinery, telecommunications, and chemical manufacturing. Next the Industrial Policy Resolution of 1956 extended these restrictions by designating certain industries known as Schedule A to be exclusively under state control, and certain other industries under Schedule B to be majority state-owned. Industries in Schedule A included defense production, metallurgy, mining, and transportation. After an attempt at liberalization in 1966, the Foreign Investments Board was established in 1968 to scrutinize companies investing in India with more than 40% foreign equity participation.
The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market.
The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution industrialisation, 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 during the colonial period.
Fall of the License Raj
The Licence Raj system was in place for four decades. In 1991, the government of India initiated a liberalisation policy under P. V. Narasimha Rao. Narasimha Rao also had the responsibility of industries minister.
In the 1980s and early 1990s the tides began to change. Liberalisation came to India and a growing belief contrary to what Nehru believed, began to rise. The Licence Raj, which was thought to be important for India's economic success, was doing just the opposite. This belief came from the proposition that India had too much of a heavy hand in the market and was stifling growth and preventing the Indian economy from reaching its full success.  While it may have been important at the time to ensure a successful economic transition, the Licence Raj became outdated.
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 foreign reserves left. In return for an IMF bailout, India transferred gold bullion to London as collateral, devalued the Rupee, and accepted economic reforms. The federal government, with 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 economic restrictions. Industrial licensing was abolished for almost all product categories, except for alcohol, tobacco, hazardous chemicals, industrial explosives, electronics, aerospace and pharmaceuticals.
Arguing that the Planning Commission has outlived its utility, Modi government disbanded it in 2014. On 6 August 2014 the Indian Parliament raised the limit on foreign direct investment in the defence 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.
- Oxford English Dictionary, 2nd edition, 1989: from Skr. rāj: to reign, rule; cognate with L. rēx, rēg-is, OIr. rī, rīg king (see RICH).
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