History
The architect of the system of Licence Raj was Jawaharlal Nehru, 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.
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