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Licence Raj

Compare India (orange) with South Korea (yellow). Both started from about the same income level in 1950. 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] is the elaborate system of licences, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990.[2] The term plays off "British Raj", the period of British rule in India. It was coined by Indian freedom fighter and statesman Chakravarthi Rajagopalachari, who firmly opposed it for its potential for political corruption and economic stagnation, founding the Swatantra Party to oppose these practices.[3]

The Licence Raj was a result of the first post-Independence government'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.[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]

Reforms since the mid-1980s have significantly reduced regulation, but Indian labour laws still prevent manufacturers from reducing their workforce without prohibitive burdens.


In the beginning of independent Indian society, not everyone agreed upon the setting up of a new idea and within that the systems of government. Rajagopalachari who coined the term wrote in his newspaper:

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/Licence Raj.

The controlled economy and in itself the Licence Raj came up prior to the creation of the Indian independent state. Formation of the licence Raj was due to the aftermath of World War 2 and the departing of the British[6]. But ultimately, the underlying issues that were meant to be solved by the Licence Raj stemmed from colonial times. Due to the fact that resources for years had been extracted by the British East India Company and the British colonial government and ferried to Britain instead of benefiting India, it had left India with no basis for an economy post decolonization[7]. Due to these circumstances India had to foster its economy into being. The Licence Raj and policies of Nehru's government were meant to facilitate this. The Licence Raj was seen as a control on the Indian economy. Additionally, Late Developing Countries (LDCs) have weak economies and it is vital for those countries to build up their institutions in order to have a properly functioning market. [8] Thus making the idea of a Licence Raj in the eyes of Nehru an effective tool in the shaping of India's economy.

The architect of the system of Licence Raj was Jawaharlal Nehru, India's first Prime Minister.[4] Private players could manufacture goods only with official licences.

The key characteristic of the Licence Raj is a Planning Commission that centrally administers 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. Arguing that the Planning Commission has outlived its utility, Modi government disbanded it in 2014.[9]

Before the process of reforms 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 licences to invest and develop. This 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, even then, 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 industrialisation, the belief that countries like India needed to rely on internal markets for development, not international trade, a belief generated by a mixture of socialism and the experience during the colonial period.

Current status

The Licence Raj system was in place for four decades. The government of India initiated[when?] a liberalisation policy under P. V. Narasimha Rao.[10] Narasimha Rao also had the responsibility of industries minister; he is directly responsible for dismantling the Licence Raj.

In the 80's and early 90's the tides began to change. Liberalisation came to India and a growing belief began to rise that in fact rather than what Nehru believed, the Licence Raj was an important of Indian economic success, it was doing the opposite. This belief came from the proposition that India had to much of a heavy hand in the market and was stifling growth and preventing the Indian economy from reaching its full success. [11] 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.[12] 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.[13] 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.[13]

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.

On 6 August 2014 the Indian Parliament raised the limit on foreign direct investment in the defence sector to 49%[14] and removed the limit for certain classes of infrastructure projects: high speed railways, including construction, operation and maintenance of high-speed train projects;[15] 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


  1. ^ Oxford English Dictionary, 2nd edition, 1989: from Skr. rāj: to reign, rule; cognate with L. rēx, rēg-is, OIr. , rīg king (see RICH).
  2. ^ Street Hawking Promise Jobs in Future Archived March 29, 2008, at the Wayback Machine, The Times of India, 2001-11-25
  3. ^ The Swatantra Party and Indian Conservatism. Cambridge University Press. 2007. p. 131. ISBN 978-0-521-04980-1.
  4. ^ a b THE ECONOMIC HISTORY AND THE ECONOMY OF INDIA Nehru chose the goal of economic self-sufficiency with economic development to be achieved by central planning modeled on that of the Soviet Union.
  5. ^ "India: the economy". BBC. 1998.
  6. ^ Klöber, Rafael; Ludwig, Manju (2018-06-06). HerStory. Historical Scholarship between South Asia and Europe: Festschrift in Honour of Gita Dharampal-Frick. BoD – Books on Demand. ISBN 9783946742449.
  7. ^ Gupta, Deepak (March 2015). "Economic Growth in the Post Liberalisation Era" (PDF). International Journal of Engineering Technology Science and Research. 2: 1–10 – via Google Scholar.
  8. ^ Chaudhry, Kiren (September 1993). "The Myths of The Market and the Common History of Late Developers". Politics and Society. 21: 245–274 – via SAGE Publications.
  9. ^ Choudhury, Chandrahas (29 August 2014). "India's central planning gets its eulogy". Retrieved 11 April 2018.
  10. ^ Address by Mr. Somak Ghosh Archived 2006-05-19 at the Wayback Machine
  11. ^ Das, Gurcharan (2006). "The India Model". Foreign Affairs. 85: 2.
  12. ^ []
  13. ^ a b "India Report" (PDF). Astaire Research. Archived from the original (PDF) on 24 August 2009.
  14. ^ []
  15. ^ []