The lead section of this article may need to be rewritten. (August 2021)
the set up and running of 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 is play on the "British Raj", which refers to the period of British rule in India. It was coined by Indian independence activist and statesman Chakravarti Rajagopalachari, who firmly opposed it for its potential for political corruption and economic stagnation, founding the Swatantra Party to oppose these practices.
Following the Russian Revolution, socialist thinkers in India began drawing parallels between the pre-revolution Russian proletariat and the Indian masses under colonial rule, seeing socialism as a way to empower poor Indian farmers. Following Independence these socialist factions, most importantly Jawaharlal Nehru's conception of democratic socialism, influenced the policies of the License Raj. Following his college studies and 1927 visit to the USSR, Nehru had become an avowed socialist and proposed economic plans in the Indian National Congress that stressed the importance of centrally planning in the economy. He saw such government intervention as a way to modernize the Indian economy which had been left impoverished by decades of colonial rule. However, Nehru did not seek to destroy the private sector as in the USSR but rather create a mixed economy with strategic industries under state control and public sector corporations guiding investment. The economic centralization and controls required for the war effort during World War II helped create the bureaucratic and manufacturing infrastructure necessary to institute Nehru's plans, and so following independence and his election as Prime Minister, he had the opportunity to put his ideas into action. In his speech to the Constituent Assembly of India, he declared "The service of India means the service of the millions who suffer. It means the ending of poverty and ignorance and disease and inequality of opportunity."
By the late 1950s, opposition to Nehru's ideas from ex-landlords, businessmen, and rich peasants coalesced into the country's first market-friendly political party, the Swatantra Party. They argued that democracy was incompatible with the kind of centralized economy Nehru was trying to establish, claiming in a memorandum to party officials that "the best guarantee of speed in progress is a maximum of individual freedom and a minimum of governmental interference." Chakravarti Rajagopalachari, a founder of the Swatantra Party, coined the term “Permit-License Raj” to encapsulate the party's frustrations with Nehru's policies, writing in his magazine Swarajya:
I want the corruptions of the Permit/Licence Raj to go... I want real, equal opportunities for all and no private monopolies created by the Permit/Licence Raj.
A key characteristic of the Licence Raj was a Planning Commission that centrally administered 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. The Planning Commission was set up in 1950 to survey the available resources in the country and formulate plans to raise the standard of living. That Planning Commission enacted the First Five Year Plan in 1951, aimed at developing the agricultural sector amid severe food shortages and an influx of refugees from the Partition, and that plan led to a 3.6% increase in GDP (higher than the projected 2.1%). Nehru's government hoped to build on the success of the First Five Year Plan with their more ambitious Second Five Year Plan aimed at continuing agricultural and infrastructure investment while developing heavy industry and increasing employment. But this plan failed to reach its goal of 4.5% growth and the heavy spending in the plan depleted the country's foreign currency reserves.
Another main characteristic of the License Raj was heavy regulation on industry. 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 a failed 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.
Indian capital controls started as wartime restrictions imposed by the British on cross-border transactions during World War II, eventually growing into a complex framework of restrictions on the current account and capital account. After independence the Indian government introduced restrictions on the flow of foreign exchange reserves, and following a balance of payments crisis from 1956-1957, the government became more concerned with carefully allocating foreign exchange between different sectors of the economy.
This tight control over foreign investment became a core part of a broader policy of import substitution industrialisation, the belief that countries like India needed to rely on internal markets for development, not international trade. To achieve this goal, the Indian government erected strict import restrictions and a complex system of tariffs that featured high rates which varied by industry. The government also prevented firms from laying off workers or closing factories.
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 had 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.
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