Licence Raj

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The graph shows GDP per capita of South Asian economies and South Korea as a percent of the American GDP per capita. The stagnant "Hindu rate of growth" is often attributed to the Licence Raj policies.

The Licence Raj or Permit Raj (rāj, meaning "rule" in Hindi)[1] was the system of licences, regulations, and accompanying red tape, that hindered the set up and running of businesses in India between 1947 and 1990.[2][3][4] Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production.[5] The term is a 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.[6]

Reforms started in 1991 have significantly reduced regulation, but Indian labour laws still prevent manufacturers from reducing their workforce without prohibitive burdens.[7]

History[edit]

See also: Nehruism

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.[8] Following Independence these socialist factions, most importantly Jawaharlal Nehru's conception of democratic socialism, influenced the policies of the License Raj.[9] 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.[10] He saw such government intervention as a way to modernize the Indian economy which had been left impoverished by decades of colonial rule.[11] 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.[12] 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,[13] 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."[14]

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."[15] 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:[16]

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.

Characteristics[edit]

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.[17] 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 4% increase in GDP (higher than the projected 2%).[18] 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.[19] But this plan failed to reach its goal of 5% growth[20] and the heavy spending in the plan depleted the country's foreign currency reserves.[19]

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.[21] 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.[22] Industries in Schedule A included defense production, metallurgy, mining, and transportation.[23]

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. [24][25] However, many of these changes were rendered moot when Indira Gandhi decided to fully nationalize 14 major banks in 1969, with 6 additional banks coming under state control in 1980.[26]

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.[27] 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.[28] 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. Foreign investment that did not involve technology transfers was severely restricted, and foreign collaboration with local companies was conditioned on export quotas.[29] 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.[30]

The government also prevented firms from laying off workers or closing factories.[citation needed]

Fall of the License Raj[edit]

See also: Economic liberalisation in India

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.[31] 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.[32] 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.[33] 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.[34] 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.[34]

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.[35] On 6 August 2014 the Indian Parliament raised the limit on foreign direct investment in the defence sector to 49%[36] and removed the limit for certain classes of infrastructure projects: high speed railways, including construction, operation and maintenance of high-speed train projects;[37] 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.

See also[edit]

References[edit]

  1. ↑ Oxford English Dictionary, 2nd edition, 1989: from Skr. rāj: to reign, rule; cognate with L. rēx, rēg-is, OIr. rī, rīg king (see RICH).
  2. ↑ Mathew, George Eby (2010). India's Innovation Blueprint: How the Largest Democracy is Becoming an innovation Super Power. Oxford: Chandos Publishing. pp. 13 ff. ISBN 978-1-78063-224-7. OCLC 867050270.
  3. ↑ Nehru, S., ed. (2019). Economic Reforms in India: Achievements and Challenges. Chennai: MJP Publisher. p. 271. ISBN 978-81-8094-251-8. OCLC 913733544.
  4. ↑ Street Hawking Promise Jobs in Future Archived March 29, 2008, at the Wayback Machine, The Times of India, 2001-11-25
  5. ↑ "India: the economy". BBC. 1998.
  6. ↑ The Swatantra Party and Indian Conservatism. Cambridge University Press. 2007. p. 131. ISBN 978-0-521-04980-1.
  7. ↑ India, Ideas For. "http://www.ideasforindia.in/topics/macroeconomics/impact-of-labour-regulations-on-indian-manufacturing-sector.html". Ideas For India. Retrieved 2022-03-20. {{cite web}}: External link in |title= (help)
  8. ↑ Saxena, Chandni (2011). "Emergence of Socialism in Early 20". Proceedings of the Indian History Congress. 72: 1515–1516. ISSN 2249-1937. JSTOR 44145782.
  9. ↑ Kaushik, P.D. (1985). "Economic Creed of the Post Independence Congress: The Nehru-Indira Phase". The Indian Journal of Political Science. 46 (4): 474–486. ISSN 0019-5510. JSTOR 41855200.
  10. ↑ Sharma, Brij Kishore (2012). "Jawaharlal Nehru's Model of Development". Proceedings of the Indian History Congress. 73: 1292–1302. ISSN 2249-1937. JSTOR 44156330.
  11. ↑ AHANGER, JAVID AHMAD (2018). "Revisiting Nehru: THE POLITICS OF NONALIGNMENT AND SECULARISM". World Affairs: The Journal of International Issues. 22 (2): 24–33. ISSN 0971-8052. JSTOR 48520062.
  12. ↑ Thakur, Ramesh (1993). "Restoring India's Economic Health". Third World Quarterly. 14 (1): 137–157. doi:10.1080/01436599308420317. ISSN 0143-6597. JSTOR 3992587.
  13. ↑ Kamtekar, Indivar (2016). "THE WARTIME PATERNITY OF INDIA'S 'LICENCE-PERMIT RAJ'". Proceedings of the Indian History Congress. 77: 403–409. ISSN 2249-1937. JSTOR 26552665.
  14. ↑ "Jawaharlal Nehru - Freedom at Midnight (Tryst with Destiny) Speech to the Assembly of India". www.americanrhetoric.com. Retrieved 2020-11-01.
  15. ↑ Aditya Balasubramanian, Contesting ‘Permit-and-Licence Raj’: Economic Conservatism and the Idea of Democracy in 1950s India, Past & Present, Volume 251, Issue 1, May 2021, Pages 189–227, https://doi.org/10.1093/pastj/gtaa013
  16. ↑ Katiyar, Prerna. "ET@50: Entrepreneurship no longer an aberration". The Economic Times. Retrieved 2020-11-01.
  17. ↑ Bhawan, Yojana (October 19, 2019). "Government of India Planning Commission: History". Retrieved November 1, 2020.
  18. ↑ Krishnan, Revathi (2020-07-09). "All about the First Five-Year Plan that was presented by Nehru nearly 70 years ago today". ThePrint. Retrieved 2020-11-02.
  19. ↑ 19.0 19.1 TYSON, GEOFFREY (1958). "The Second Indian Five Year Plan". Journal of the Royal Society of Arts. 106 (5024): 609–621. ISSN 0035-9114. JSTOR 41368676.
  20. ↑ L. N. Dash (2000). World bank and economic development of India. APH Publishing. p. 375. ISBN 81-7648-121-1.
  21. ↑ THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 [PDF]. (1951, October 31). New Delhi: Parliament of India. http://legislative.gov.in/sites/default/files/A1951-65.pdf
  22. ↑ Sivadasan, Jagadeesh (2006). "Regulatory Regime in India: 1947 to 1998" (PDF). The B.E. Journal of Economic Analysis & Policy. 9 – via University of Michigan.
  23. ↑ "Archived copy" (PDF). Archived from the original (PDF) on 28 May 2015. Retrieved 29 March 2013.{{cite web}}: CS1 maint: archived copy as title (link)
  24. ↑ Torri, M. (1975). Factional Politics and Economic Policy: The Case of India’s Bank Nationalization. Asian Survey, 15(12), 1077–1096. https://doi.org/10.2307/2643585
  25. ↑ Central Office, Reserve Bank of India. (2005). Chapter 2: Banking Expands. In The Reserve Bank of India, 1967-1981 (pp. 54–59).
  26. ↑ Ketkar, K. W., & Ketkar, S. L. (1992). Bank Nationalization, Financial Savings, and Economic Development: A Case Study of India. The Journal of Developing Areas, 27(1), 69–84. http://www.jstor.org/stable/4192167
  27. ↑ PATNAIK, ILA, and AJAY SHAH. “POLICY CORNER: Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?” IMF Economic Review, vol. 60, no. 3, 2012, pp. 442. JSTOR, www.jstor.org/stable/23279077. Accessed 15 Aug. 2021.
  28. ↑ Panagariya, A. (2004). India's Trade Reform. pp. 2. Columbia University.
  29. ↑ Mukherji, R. (2000). India's Aborted Liberalization-1966. Pacific Affairs, 73(3), 377-379. doi:10.2307/2672025
  30. ↑ Callen, Timothy, and Paul Cashin. 2002. “Capital Controls, Capital Flows and External Crises: Evidence from India.” Journal of International Trade and Economic Development 11 (1): 77–98. https://search-ebscohost-com.proxy.uchicago.edu/login.aspx?direct=true&db=bas&AN=BAS120452&site=eds-live&scope=site.
  31. ↑ Address by Mr. Somak Ghosh Archived 2006-05-19 at the Wayback Machine
  32. ↑ Das, Gurcharan (2006). "The India Model". Foreign Affairs. 85 (4): 2–16. doi:10.2307/20032037. JSTOR 20032037.
  33. ↑ "25 years of liberalisation: A glimpse of India's growth in 14 charts-Business News , Firstpost". 7 July 2016.
  34. ↑ 34.0 34.1 "India Report" (PDF). Astaire Research. Archived from the original (PDF) on 24 August 2009.
  35. ↑ Choudhury, Chandrahas (29 August 2014). "India's central planning gets its eulogy". livemint.com/. Retrieved 11 April 2018.
  36. ↑ "Business News Today: Read Latest Business news, India Business News Live, Share Market & Economy News".
  37. ↑ "Govt notifies FDI cap relaxation in Railways". 28 August 2014.
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