Licence Raj, Permit Raj, Permit-Licence Raj, or Quota-Permit-License Raj (rāj, meaning "rule" in Hindi)Oxford English Dictionary, 2nd edition, 1989: from Skr. rāj: to reign, rule; cognate with L. rēx, rēg-is, OIr. rī, rīg king (see RICH). is a term coined by Indian independence activist and statesman C. Rajagopalachari for the system of strict government control and regulation of the Indian economy. This system was started with Industries (Development and Regulation) Act in 1951, https://documents1.worldbank.org/curated/en/120551468189855142/pdf/ACS14223-WP-v2-P132991-Box391484B-PUBLIC.pdf continued until the early 1990s, under which businesses in India had to obtain licences from the government in order to operate, and they were often difficult to obtain.Street Hawking Promise Jobs in Future , The Times of India, 25 November 2001
Licence Raj was intended to protect Indian industry, promote economic self-reliance, and ensure regional equality. Up to 80 government agencies had to grant approval before a private company could produce something and, if granted, the government regulated the production. Economists including Jagdish Bhagwati, Padma Desai, and Anne Osborn Krueger have argued that the system misallocated resources, restricted competition, and created large rents for those who secured licences. Real economic growth during the era averaged about 3.5% a year, a record the economist Raj Krishna called the "Hindu rate of growth".
The term "Licence Raj" is a play on the "British Raj" which refers to the period of British rule in India. Chakravarti Rajagopalachari’s criticism of the Licence Raj stemmed from his opposition to strict government control and regulation of the economy. Rajagopalachari believed that the Licence Raj had the potential for political corruption and economic stagnation, and founded the Swatantra Party to oppose these practices. Reforms that began in 1991 have significantly reduced industrial licencing. Economists still debate how much of India's later growth acceleration should be attributed to dismantling the Licence Raj, and how much to changes that began in the 1980s. Origins
Socialist influence and Nehru
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 Indian independence, these socialist factions, most importantly Jawaharlal Nehru's conception of democratic socialism, influenced the policies of the Licence Raj.
Nehru studied at Trinity College, Cambridge, and was exposed to socialist ideas there. He also visited the Soviet Union in 1927, and this experience may have further influenced his views on socialism. Nehru described himself as a socialist, and in his 1936 address to the Indian National Congress at Lucknow, he identified socialism as the key to solving India's problems. In 1955, the Congress formally adopted a goal to establish a "socialist pattern of society" at its Avadi session.
However, Nehru's policies as Prime Minister were often more pragmatic than strictly socialist. He believed in a strong, centralised government and a planned economy, but also recognised the importance of private enterprise and the market in driving economic growth and development. Nehru also believed that protecting domestic industries would promote industrialisation and economic development in India, and he implemented several protectionist policies during his time in office.
He saw such government intervention as a way to modernise an economy which he regarded as impoverished by colonial rule. Unlike the Soviet Union, India retained a substantial private sector in its early decades: Nehru's government pursued a mixed economy, with strategic industries under state control and public sector corporations guiding investment.
The economic centralisation and controls required for the war effort during World War II helped create the bureaucratic and manufacturing infrastructure needed to implement Nehru's plans, and so, after independence and his election as prime minister, he could 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."
Opposition and origin of the term By the late 1950s, the Swatantra Party, the country's first classical liberal political party, had formed in opposition to Nehru's policies. This party argued economic policies were incompatible with democracy. In a memorandum to party officials, they claimed that "the best guarantee of speed in progress is a maximum of individual freedom and a minimum of governmental interference." They argued that Nehru's policies stifled individual initiative and freedom and slowed economic progress.
C. Rajagopalachari, one of the founders of the Swatantra Party, coined the term "Permit-Licence Raj" to encapsulate the party's frustrations with Nehru's policies, writing in his weekly Swarajya:
Opposition also came from within the economics profession. In 1955, the government convened a Panel of Economists to review the draft Second Five-Year Plan; of its 21 members, Bellikoth Raghunath Shenoy was the only one to dissent from the memorandum endorsing the plan. Shenoy objected to the plan's size and its reliance on deficit financing, which he warned would cause inflation, and opposed the general extension of state ownership and control over industry.Shenoy, Bellikoth Raghunath. "A Note of Dissent on the Memorandum of the Panel of Economists." Papers Relating to the Formulation of the Second Five Year Plan (1955): 15-26. Shenoy had attended Frederick Hayek's lectures in 1931, and his critique drew on the Austrian school's arguments against central planning.
Features
Central planning
A key characteristic of the Licence Raj was a Planning Commission, a non-constitutional body, that centrally administered the country's economy. Like a command economy, India followed the Soviet Union model of five-year plans. However, unlike the Soviet Union, the private sector also played a role. The Planning Commission was set up in 1950 to survey the country's resources and formulate plans to raise the standard of living.
The Planning Commission enacted the First Five-Year Plan in 1951 to develop the agricultural sector amid severe food shortages and an influx of refugees from the Partition, and that plan led to a 4% increase in GDP, higher than the projected 2%. Nehru's government hoped to build on the success of the First Five Year Plan with an ambitious Second Five-Year Plan aimed at continuing agricultural and infrastructure investment while developing heavy industry and increasing employment. The second plan, drafted under statistician Prasanta Chandra Mahalanobis, and prioritised state-led heavy industry. But the plan failed to reach its goal of 5% growth, and its investment programme, which exceeded available domestic resources and depended on imported capital goods and technology, depleted the country's foreign exchange reserves. The foreign exchange crisis and rising prices were among the outcomes Shenoy had warned of.
Industrial licencing Another main characteristic of the Licence Raj was substantial regulation of the industry. Legislation to regulate industry began with the Industries (Development & Regulation) Act of 1951, which imposed licensing restrictions on industries it designated as Schedule I, including industrial machinery, telecommunications, and chemical manufacturing. Next, the Industrial Policy Resolution of 1956 extended these restrictions by designating certain industries as Schedule A, exclusively under state control, and certain other industries under Schedule B, majority state-owned. Schedule A industries included defence production, metallurgy, mining, and transportation.
Licences governed not only entry into an industry but also a plant's location, product mix, and maximum capacity, and firms needed government permission to expand output beyond licenced limits. The Monopolies and Restrictive Trade Practices Act of 1969 added a further layer, requiring large firms and business houses to obtain approval before expanding or establishing new undertakings.
Banking During the 1960s, the Indian banking sector came under criticism for being controlled by a few big industrialists in large cities, and thus failing to meet the needs of rural Indians and small-scale industry. In response, the government of Indira Gandhi began pursuing "social control" of banking institutions, with Deputy Prime Minister Morarji Desai spearheading the Banking Laws (Amendment) Bill in 1968 to regulate the commercial banks' leadership. The bill stipulated that at least 51% of the directors should not be directly connected monopolies and big business, that industrialist chairmen had to be replaced by professional bankers, and that banks could not form relationships with companies tied to their own directors. Additionally, Desai forged the National Credit Council (NCC) to regulate credit allocations in order to bring more credit to rural areas and small industry.Central Office, Reserve Bank of India. (2005). Chapter 2: Banking Expands. In The Reserve Bank of India, 1967-1981 (pp. 54–59). However, many of these changes were rendered moot when Indira Gandhi decided to fully nationalise 14 major banks in 1969, with 6 additional banks coming under state control in 1980.
Capital controls, foreign investment and trade 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 to 1957, the government became more concerned with carefully allocating foreign exchange between different sectors of the economy. After a failed attempt at liberalisation in 1966, the Foreign Investments Board was established in 1968 to scrutinise companies investing in India with more than 40% foreign equity participation. Foreign investment that did not involve technology transfers was severely restricted, and foreign collaboration with local companies was conditioned on export quotas. 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.
Fall of the Licence Raj and Rise of Compliance Raj
The Licence Raj system was in place for four decades. Many members of the Congress, including Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh, were strong supporters of liberalisation and played key roles in implementing these changes. In 1991, Prime Minister Narasimha Rao, who was also the Minister of Industries, initiated a policy of liberalisation in India. This policy aimed to reduce government intervention in the economy and promote market-based solutions to economic problems.Address by Mr. Somak Ghosh
The Licence Raj was believed by some to be hindering economic growth and preventing the Indian economy from reaching its full potential. This belief was based on the idea that the government's heavy intervention in the market was stifling economic activity and hampering the ability of the economy to grow and develop.