Licence Raj

Also called: Licence-Permit Raj, Licence-Permit-Quota Raj, License Raj, Licence-permit system, Permit licence raj · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Class 9, Ch 8 "Building Blocks in Economics: The Problem of Choice"; Class 11, Ch 2 "Indian Economy 1950-1990"

Meaning

Licence Raj (also called the permit-licence raj) was the system in India from the 1950s to 1991 in which a firm needed a government licence to start, expand, diversify or close an industrial unit. Around these licences sat permits, quotas, and price and distribution controls. Together they let the state, not the market, decide what was made, how much, and by whom.

It matters because it explains why Indian industry had few firms, little competition and little innovation before 1991. It is also the reason the New Industrial Policy, 1991 began by abolishing industrial licensing.

Explanation

How licensing worked

• Legal base: the Industries (Development and Regulation) Act, 1951 (IDR Act), Act No. 65 of 1951. Under Section 11, only the Central Government could set up a new industrial undertaking without a licence. Everyone else needed a licence from the Central Government [2].

• The step-by-step procedure was in the Registration and Licensing of Industrial Undertakings Rules, 1952 [2].

• Even Schedule C firms needed a licence. These were the industries left open to the private sector under the Industrial Policy Resolution 1956. They still needed a licence to:

• start a new unit;
• expand output, meaning make more of the same good;

• diversify, meaning make a new variety of goods.

• The planning logic behind it:

• Output should not go above what planners thought "the economy required".

• A licence to expand was given only if the government agreed that more output was needed.

• Licensing for regional equality:

• Licences were easier to get for units in backward areas.
• Such units also got tax benefits and cheaper electricity.

The wider web of controls

The licence was only one part of a larger control system.

Control	Year	What it did
Monopolies Inquiry Commission	1964-65	Found that economic power was held by a few business houses
Hazari report	1967	Found that big houses were pre-empting licences
Dutt Committee (Industrial Licensing Policy Inquiry Committee)	1969	Confirmed that licensing was being misused
MRTP Act (Monopolies and Restrictive Trade Practices Act)	1969	Firms above set asset limits needed extra approval to expand
FERA (Foreign Exchange Regulation Act)	1973	Strict controls on foreign exchange and on foreign firms
Price and distribution controls	1950s-80s	The government fixed prices and supply of cement, steel, sugar and other goods

• Freight equalisation policy (1952-1993): the government subsidised the transport of coal and iron ore, so a factory anywhere in India paid the same price for them.
• Worked example (illustrative numbers):
  • Coal costs ₹1,000 a tonne at the mine. Carrying it to a distant city costs ₹400 a tonne.
  • Without the policy, the factory near the mine pays ₹1,000 and the distant factory pays ₹1,400.
  • With the policy, both pay about the same price.
  • So there is no longer any reason to build near the mine.
• Result: firms chose sites near ports and markets, mostly in the west and south. The mineral-rich eastern states (Bihar/Jharkhand, Odisha, West Bengal) lost their cost advantage and industrialised slowly.

Why it failed: from control to rent-seeking

• Pre-emption of licences: a big business takes a licence it does not plan to use, only to block rivals from getting it.
• Rent-seeking means earning money by getting special favours from the government, not by making better products.
• Firms spent time and money lobbying ministries for permits.

• They spent less effort on improving their goods.

• NCERT's chain of cause and effect:

• strict permits → few firms;
• few firms → little competition;

• little competition → little innovation, poor quality and high prices.

• The first loosening came through Industrial Policy Statements:

• 1973: the joint sector, where the government and private firms own a unit together.
• 1977: District Industries Centres (DICs), which served small industry at district level.
• 1980 and 1985: broad-banding, where one licence covered a group of related products, and partial delicensing.

In India

• 1991 turning point: the New Industrial Policy, 1991 abolished industrial licensing, except for a few hazardous or strategic products.

• Licensing today: under Notification S.O. 477(E) of 25 July 1991, only four industries need a compulsory licence [4]: 1. cigars and cigarettes of tobacco and manufactured tobacco substitutes; 2. electronic aerospace and defence equipment; 3. industrial explosives; 4. hazardous chemicals.

• Defence:

• The list of defence items that need a licence under the IDR Act and the Arms Act, 1959 has been cut down.
• DPIIT Press Note 1 (2019 Series), dated 01.01.2019, replaced Press Note 3 (2014 Series), dated 26.06.2014 [3].
• Parts and accessories used in defence do not need a licence unless they are named in the list [3][7].

• Applications can be filed on an online portal run by DPIIT (Department for Promotion of Industry and Internal Trade) [7].

• Locational rules remain: the 1991 policy kept some rules on where units may be located. These apply alongside the licences still needed under the IDR Act [6].

• From MRTP to competition law:
• Policy moved from curbing monopolies, meaning limiting how big a firm can grow, to promoting competition, meaning punishing unfair conduct. So the MRTP Act was repealed [6].

• The Competition Act, 2002 was passed in the Winter Session ending 20 December 2002 and notified as Act No. 12 of 2003 [6].

• The same problem in a new form: later, discretionary allocation of resources, where officials chose who got them without an open auction, repeated the licence-raj problem.

• The courts cancelled 2G spectrum licences in 2012 and coal blocks in 2014. Both judgments pushed allocation towards auctions.

• Economic Survey 2019-20, Chapter 3: it says India's goal of a $5 trillion economy needs "pro-business" policy that uses competitive markets, not "pro-crony" policy that favours powerful incumbents (firms already established in the market) [5].

Don't confuse with

• Industrial licensing today: the Licence Raj was a control system covering almost all industry before 1991. Today's licensing covers only four industries, and only for safety or security reasons [4].
• MRTP Act vs Competition Act, 2002: MRTP (1969) limited firm size through asset limits and was built for the pre-reform economy. The Competition Act regulates firm conduct and is built for the post-reform economy [6].
• Crony capitalism: the Licence Raj was one early form of it. Crony capitalism is the wider idea that business success depends on ties with officials, through permits, contracts and subsidies. It continued after 1991, as the 2G and coal cases showed.
• "Pro-business" (Rajan-Zingales) vs "pro-business" (Economic Survey 2019-20): in Rajan-Zingales, pro-market is the good option and pro-business (favours to incumbent firms) is the bad one. The Economic Survey 2019-20 uses pro-business in the good sense and pro-crony in the bad sense [5].

Prelims Hooks

• The law behind industrial licensing is the IDR Act, 1951 (Act No. 65 of 1951). Section 11 requires a Central Government licence for any new industrial undertaking [2].
• Trap: before 1991, even Schedule C firms needed a licence to expand or diversify, not only to start a unit.
• Committee matching: Monopolies Inquiry Commission (1964-65) → concentration of economic power; Hazari report (1967) → pre-emption of licences; Dutt Committee (1969) → confirmed misuse.
• Freight equalisation policy (1952-1993) hurt the mineral-rich eastern states. It did not help them.
• Compulsory licence today: tobacco cigars and cigarettes, electronic aerospace and defence equipment, industrial explosives, hazardous chemicals, under Notification S.O. 477(E), 25 July 1991 [4].
• Loosening timeline: joint sector = 1973; District Industries Centres = 1977; broad-banding = 1980 and 1985.

Mains Points

• Licensing is a case study of government failure:
• It was meant to direct scarce resources and spread industry evenly across regions.
• Instead, it led to pre-emption of licences, rent-seeking, few firms and little innovation.

• Freight equalisation made the regional imbalance worse. This is useful for GS-III answers on why liberalisation came in 1991.

• From a licence-permit state to a regulatory state:

• India moved from controlling firm size (MRTP) to controlling firm conduct (Competition Act, 2002, with the CCI as regulator) [6].

• Licensing now survives only where there is a clear safety or security reason: explosives, hazardous chemicals and defence [4][3].

• Cronyism outlived the Licence Raj:

• Discretionary allocation in the 2G and coal cases repeated the old problem.
• The fixes are auctions, transparent rules and a strong competition regulator, which support creative destruction (new, better firms replacing old, weaker ones) [5].
• Easier defence licensing and online filing [3][7] support Make in India and Atmanirbhar Bharat. This shows that deregulation and strategic self-reliance can go together.

Related concepts

• Industrial licensing
• Licensing for regional equality
• Freight equalisation policy
• Crony capitalism
• Pro-market versus pro-business policy

Read more

• Industrial licensing and the permit-licence raj