The End of India's Licensing Regime: A Historical Overview
Discover the historical overview of India's licensing regime, known as the Licence Raj, and how it stifled entrepreneurship and innovation. Learn how it ended in 1991 and how India's economy has evolved since then to become the world's fifth-largest economy.
India's licensing regime, known as the Licence Raj, was a strict government permit system that controlled almost all economic activity in the country. It was established in 1951 with the first Five-Year Plan, which prioritized strategic sectors such as railroads, heavy industry, and power plants. This regime was meant to establish a socialist economic system of state enterprises and create a general welfare society.
The Industrial Policy Declaration of 1977 and 1980 supplemented this regime, leading to more state-owned enterprises being incorporated into the public sector. However, this strict control stifled entrepreneurship and innovation, causing a decline in the quality of products and an increase in illegal imports of goods.
In the seventies, economic activity recovered, and companies that were well-related increased their production. The eighties saw a GDP growth of 5.4%, but the overprotection of the industry by high tariff barriers led to a decline in product quality. Additionally, a financial crisis and a domestic political crisis in the 1990s aggravated the situation. The official stimulus to the economy caused the country's foreign debt to skyrocket from 16 to 65 billion dollars between 1981 and 1991. The need to free up the economy to stabilize it was thus imposed.
On May 24, 1991, the Declaration of Industrial Policy proclaimed by Manmohan Singh, then Finance Minister under Prime Minister Narashima Rao, unanchored the country from the permit system inherited from Jawaharlal Nehru, his daughter Indira, and grandson Rajiv Gandhi. This led to renewed general confidence, which allowed for a restructuring of public finances. Monetary reserves rose from $3 billion to $25 billion between 1991 and 1995.
However, the recovery of economic activity was being applied to outdated infrastructure. In 2003, the third stage of the process saw the strengthening of the information technology industry and the automotive industry with its various components. Import substitution was also promoted to support domestic production.
Economic growth in the following years was uneven, with the widening gap between rich and poor intensifying social tensions. Both the Congress Party and the Indian People's Party (BJP) had tolerated the concentration of wealth in large corporations, leaving vital sectors such as health and education neglected. The fiscal deficit had risen to almost 6% of GDP in 2010, while the trade deficit increased in 2014 to $137 billion.
Despite these challenges, India has emerged as the world's fifth-largest economy, with activities that combine traditional agriculture with mechanized processes, handicrafts, and large industrial conglomerates. The licensing regime, which once stifled entrepreneurship and innovation, has been replaced by a more liberalized and open economy that has encouraged economic growth and development.
In conclusion, the end of India's licensing regime marked a significant turning point in the country's economic history. The License Raj, established in 1951, was a strict government permit system that controlled almost all economic activity in the country. It stifled entrepreneurship and innovation, causing a decline in the quality of products and an increase in illegal imports of goods.
The licensing regime ended on May 24, 1991, with the Declaration of Industrial Policy proclaimed by Manmohan Singh, then Finance Minister under Prime Minister Narasimha Rao. This led to renewed general confidence, allowing for a restructuring of public finances. Despite challenges, India has emerged as the world's fifth-largest economy, with a more liberalized and open economy that has encouraged economic growth and development.