Licence Raj
Encyclopedia
Licence Raj, 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.
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 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, Swarajya, C. Rajagopalachari wrote:
, India's first Prime Minister
. 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.
However, by the 1980s, the country was left with:
, though much of the actual progress was made under P.V.Narasimha Rao. Liberalization 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 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.
Red tape
Red tape is excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic and hinders or prevents action or decision-making...
that were required to set up and run businesses in India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
between 1947 and 1990.
The Licence Raj was a result of India's decision to have a planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
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.
Term
The term plays off "British RajBritish Raj
British Raj was the British rule in the Indian subcontinent between 1858 and 1947; The term can also refer to the period of dominion...
", the period of British rule in India. It was coined by Indian statesman
Statesman
A statesman is usually a politician or other notable public figure who has had a long and respected career in politics or government at the national and international level. As a term of respect, it is usually left to supporters or commentators to use the term...
Chakravarthi Rajagopalachari
C. Rajagopalachari
Chakravarti Rajagopalachari , informally called Rajaji or C.R., was an Indian lawyer, independence activist, politician, writer and statesman. Rajagopalachari was the last Governor-General of India...
, who firmly opposed it for its potential for political corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
and economic stagnation and founded the Swatantra Party
Swatantra Party
The Swatantra Party was a classical liberal political party in India founded by Chakravarti Rajagopalachari and N. G. Ranga in August 1959. The party opposed the Nehruvian socialist outlook of the Congress Party by advocating free enterprise and free trade, and opposing the licence-permit Raj...
to oppose these practices.
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."
History
The architect of the system of Licence Raj was Jawaharlal NehruJawaharlal Nehru
Jawaharlal Nehru , often referred to with the epithet of Panditji, was an Indian statesman who became the first Prime Minister of independent India and became noted for his “neutralist” policies in foreign affairs. He was also one of the principal leaders of India’s independence movement in the...
, India's first Prime Minister
Prime Minister of India
The Prime Minister of India , as addressed to in the Constitution of India — Prime Minister for the Union, is the chief of government, head of the Council of Ministers and the leader of the majority party in parliament...
. Inspired by the economy in the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
, 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
Five-Year Plans of India
The economy of India is based in part on planning through its five-year plans, which are developed, executed and monitored by the Planning Commission. The tenth plan completed its term in March 2007 and the eleventh plan is currently underway...
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.
Consequences
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 license-obsessed, restrictive state
- inability to sustain social expenditures
- macro instability, indeed crisis1991 India economic crisisBy 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three...
Current status
The License Raj-system was in place for four decades. The government of India initiated a liberalization policy under the Prime Ministership of Rajiv GandhiRajiv Gandhi
Rajiv Ratna Gandhi was the sixth Prime Minister of India . He took office after his mother's assassination on 31 October 1984; he himself was assassinated on 21 May 1991. He became the youngest Prime Minister of India when he took office at the age of 40.Rajiv Gandhi was the elder son of Indira...
, though much of the actual progress was made under P.V.Narasimha Rao. Liberalization 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
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
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
Manmohan Singh
Manmohan Singh is the 13th and current Prime Minister of India. He is the only Prime Minister since Jawaharlal Nehru to return to power after completing a full five-year term. A Sikh, he is the first non-Hindu to occupy the office. Singh is also the 7th Prime Minister belonging to the Indian...
as finance minister, reduced licensing regulations; lowered tariffs, duties and taxes; and opened up to international trade and investment.
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.
See also
- Economic liberalisation in India
- Corruption in IndiaCorruption in IndiaPolitical, bureaucratic, corporate and individual corruption in India are major concerns. A 2005 study conducted by Transparency International in India found that more than 55% of Indians had first-hand experience of paying bribes or influence peddling to get jobs done in public offices...
- RajRajRaj and Rajya mean "royalty" or "kingdom" in many Sanskrit and Hindu languages, and may refer to:- Indian history :*British Raj, the British Empire in India...
- Mafia RajMafia RajMafia Raj refers to an economic and political situation in India where public goods, property and funds are controlled and systematically embezzled by a criminalized nexus of government officials, elected politicians, business interests and other entities Mafia Raj (Hindi-Urdu: माफ़िया राज, مافیا...
- Economic history of IndiaEconomic history of IndiaThe known Economic history of India begins with the Indus Valley civilization. The Indus civilization's economy appears to have depended significantly on trade, which was facilitated by advances in transport. Around 600 BC, the Mahajanapadas minted punch-marked silver coins. The period was marked...
- Hindu rate of growthHindu rate of growthThe Hindu rate of growth is a controversial and derogatory expression used to refer to the low annual growth rate of the socialist economy of India before 1991, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%....