Licence Raj or the Permit Raj, refers to the elaborate licenses, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990.[1]
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.[2]
Reforms since the mid-1980s have significantly reduced regulation, but Indian labour laws still prevent manufacturers from reducing their workforce without prohibitive burdens.
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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.[3]
In his newspaper, Swarajya, C. 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/License Raj."
The architect of the system of Licence Raj was Jawaharlal Nehru, India's first Prime Minister.[4] Inspired by the economy in the Soviet Union, he implemented a mixed economy in India. A mixed economy is one in which capitalism is combined with government intervention. Private players could manufacture goods only with official licenses. The quantity of goods they were allowed to produce was determined by the license 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 has 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 licenses to invest and develop. The labyrinthine 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 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, the belief that 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: [5]
However, by the 1980s, the country was left with: [6]
The License Raj-system was in place for four decades. The government of India initiated a liberalization policy under the Prime Ministership of Rajiv Gandhi, though much of the actual progress was made under P.V.Narasimha Rao[7]. Liberalization resulted in substantial growth in the Indian economy, which continues today[8] 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."[9] 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.[9] The reform policies introduced in after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all product categories but alcohol, tobacco, hazardous chemicals, industrials explosives, electronics, aerospace and pharmacueticals. The only industries which are now reserved for public sector are defence equipment, atomic energy generation and railway transport. In many industries, the market has been allowed to determine the prices.
Recently, this liberalisation may be altered under a draft bill seeking to regulate broadcasting media.[10]