Explained: What was licence raj and why is India better off without it?

Licence raj was a play on the term British raj used to describe the Indian government's strict rules and control over the economy and economic activity

With potential import restrictions on computers and laptops in India and the government asking importers to apply for licences, the term "licence raj" has been regaining popularity. Here is a look into the system that those born after the 1990s may not be familiar with and why businesses are wary of such a system.

What was the 'Licence Raj'?

"Licence Raj", also known as "Permit Raj" or the "Licence-Permit Raj," is pejorative for a system of government that adhered to strict rules, regulations and control over the Indian economy. Under this system, businesses in the country required licences to operate. These licences were difficult to get, which led to the term "licence raj '' which reportedly was a play on the term "British raj".

 

The term was coined by freedom fighter and Swatantra Party founder C Rajagopalachari.

According to an article by the BBC in 1998, due to high restrictions, businesses sometimes had to receive approval from up to 80 agencies before they were granted licences to produce.

Moreover, the state would decide what was produced, along with the quantity of production, market price as well as the course of the capital used in production. Additionally, the government also restricted firms from conducting layoffs and closing factories.

This was in place from the 1950s, after India was newly independent of the British empire and went on until 1991 when the country went through significant economic reforms.

The central belief behind the system was that India needed to rely on its own markets, become self-sustaining and self-sufficient, added the report. Import substitution was at the centre of this form of policy.

Why did it end?

Economic reforms in India in 1991 were led by Prime Minister Pamulaparthi Venkata Narasimha Rao, better known as P V Narasimha Rao, as the country suffered an economic crisis. Rao onboarded Manmohan Singh as his finance minister, who helped launch India's wide-ranging economic reforms.

According to a report by the World Bank in 1991, India's economic crisis at the time was caused by a balance of payments deficit. This came from an over-reliance on imports as well as other external factors, including the Gulf War, the fall of the Eastern Bloc and the Iraq-Kuwait conflict, all of which impacted India's trade relations.

The now declassified documents of the World Bank and IMF, reported on by The Indian Express in 2010, showed how both organisations pressed India to fundamentally transform the country's economic structure from centrally planned to market-driven. This was part of the requisites for India to receive a substantial loan from the international bodies that could take them out of its crisis and stabilise the economy. Incidentally, the government also had to pledge India's gold reserves as collateral to the Bank of England and the Union Bank of Switzerland.

End of licences, the rise of entrepreneurs

A report by The Economic Times in 2010 highlighted how the end of the licence raj may have led to the rise of entrepreneurs in the country. The report stated that many perceived 1960 as a "decade of connections" where only those with the right contact from relatively wealthier backgrounds were able to raise their businesses. Family businesses made up the market.

Saurabh Srivastava, former chairman of NASSCOM, told ET that people doing business were considered immoral and thieves. Moreover, as the government controlled production and protected workers, businesses lacked competitiveness and produced low-quality products.

However, freedom from the regulations allowed more people to seek out entrepreneurship and changed the landscape drastically as competition replaced connection.

Import restriction on computers

The Directorate General of Foreign Trade (DGFT) announced that it has decided to delay the licensing mandate for importing laptops, tablets and personal computers until November 1, 2023.

While placing import restrictions has been done on several items before, this move will likely impact major global electronic players.

It is no wonder that businesses now would be worried when the term "licence raj" is thrown around as it serves as a reminder of a more oligarchical structure, where power lay with a few powerful families and individuals. However, the import restrictions and PLI schemes are not preventing the use of foreign goods and services but rather inviting them to help India's manufacturing sector grow alongside the organisation.

Moreover, import licences have been around for a long time, and the system has become more streamlined with online portals and regulatory bodies, and the licence requirement does not extend to individuals purchasing products for personal use.