I’m typing this using a tool produced by one American MNC on a laptop manufactured by another American MNC. I’m using Internet for reference and the connection is through an Indian private company. I’m surrounded by products of top quality that are available at a reasonable price and are from across the world. The India of 2017 is slowly moving from a country of job seekers to a country of job providers. NASSCOM expects that by 2020, India will be home to 10,500 startups and as of now, India is the third largest startup base in the world, behind only the UK and the USA. An average Indian can become an entrepreneur and sufficient opportunities are there for him. The Government of India itself has launched schemes like Digital India and Make in India to encourage investment from across the world and also help Indian entrepreneurs flourish. The backbone of the Indian economy is the hard working middle class which comprises of about 30% of the population. India is emerging and the Indian economy is booming with entrepreneurs coming up every single day.
But there was a time in India where being an entrepreneur meant a big headache. The middle class back then comprised of not more than 30 million people. Decades of Nehruvian and Indira socialism had ruined the Indian economy and the growth had become stagnant. This was the case of India prior to 1991. Had India not changed its ways, the entire economy would have collapsed. Luckily, we had a savior. Luckily, the Prime Minister in 1991 was Pamulaparti Venkata Narasimha Rao or PV Narasimha Rao. The way Rao and his government turned things around despite being a minority government and despite the opposition within and outside the party is nothing short of extraordinary and full credit must be given to Rao for his outstanding and path breaking tenure as the Prime Minister of India.
What was so bad about the Nehru-Indira style of socialism and why was it hampering the growth of the country? Why were we still a poor country in 1991? Why had our growth become stagnant? The British Raj had ruined the country completely there’s no doubt about that. But even after India became independent, there was a Raj which was hampering our growth. There was a Raj which didn’t allow us to grow faster.
There was a Raj which today’s generation doesn’t even remember. This was the absolutely dreadful and pathetic License Raj / Permit Raj. Even though the British had left, the situation of India hadn’t changed much. Just that the British Raj had been replaced by the License Raj.
What exactly was this License Raj? License Raj referred to a system wherein there was an elaborate setup of licenses, regulations, and always accompanied by red tape and a corrupt bureaucracy which made it extremely difficult for entrepreneurs to setup and run businesses in India. Everything was controlled by the state and only a few individuals were given licenses. The entrepreneurial spirit within Indians had been killed by this corrupt system. Jawaharlal Nehru was the architect of this system and his daughter Indira Gandhi had carried it forward and had enhanced it completely. With Congress being the most powerful force in the country, there were very few opponents against this system. The only prominent opponent was the legendary statesman and the founder of the Swatantra Party, Chakravarathi Rajagopalachari or as he was known affectionately, Rajaji. It was Rajaji who coined the term “License Raj” to illustrate that this flawed system was no different from the British Raj and to show that this was also damaging to the economy as Britsh Raj had been.
There were three aspects of the License Raj or three steps to ensure that the system was in place. These three steps had been incorporated by Indira Gandhi. The first step of the License Raj was that large parts of the economy were reserved for public sector companies and private companies and entrepreneurs could only operate in a few select areas. Importing goods was ruled out and there were severe restrictions placed on our own private entrepreneurs. As a result of this, Indian market was flooded with incompetent, second grade products. The consumer had no option but to buy these second grade products and although there were people who aspired to build better products, they could not because everything was regulated. Those who had the resources to buy better stuff from abroad also could not because products could not be imported. One example of this was the wristwatch industry. The Indian consumer had to buy the second grade HMT watches which were neither user friendly nor of world class quality. Titan and Sonata were not there back then because the Tata’s could not have come up with these brands because there was so much of red tape. Buying a Rolex or any other imported watch was ruled out. Mediocrity ruled the Indian market back then.
The second step of the License Raj was to limit the number of private entrepreneurs and organisations so that a powerful pressure group could not be created which could threaten the superiority of the Congress Party. This was done cleverly and in a very subtle way. Licenses were a must and were provided to few people and organisations, labour laws and the powerful trade unions meant that the business owner was always under severe pressure. Anti-monopoly laws were introduced to ensure that the state kept tabs on the businesses of private organisations and the biggest blow that shattered the dreams of so many entrepreneurs was when banks across India were nationalized. My home state of Karnataka had been the cradle of banking and as many as 7 banks had taken birth here. With just one shot, all these 7 banks became the property of the Central Government.
Labour laws didn’t help the workers either. The industries hired lesser number of workers in response to these laws and the worst part of this system was that even though an entrepreneur with great difficulty set up his business in a place like Mumbai, his livelihood was still at the mercy of a bureaucrat sitting about 1300 km away in Delhi. How could small scale industries flourish in such a situation? The situation wasn’t any better for the big business groups either. Big business groups like the Tatas, Birlas, and the Wadias had to apply for hundreds of licenses since their business was diversified and it was such a mess and such a headache for even these big business groups to apply for so many licenses. Even they had to deal with corrupt bureaucrats.
The third step of the License Raj was to ensure that the system was in place was to isolate the Indian economy from the rest of the world. Foreign investment was viewed with suspicion and hence was severely restricted. Not just investment even the raw materials and resources that the Indian companies needed from foreign sources could not be obtained. As I stated earlier, Indians did not have any access to obtain world class products from different parts of the world. They had to settle for mediocre products manufactured by inefficient public sector organisations. The public sector and the bureaucracy at this point of time were both severely corrupt and like I said earlier, mediocrity ruled the market in India.
Source: Half Lion by Vinay Sitapati. Images of pages are as follows. 
The effect of the License Raj was so disastrous that when third world countries could grow at a decent pace, India, one of the world’s largest countries and the world’s largest democracy registered a growth rate of just 1.4% in the period between 1960 and 1980.
Interestingly, the likes of Singapore, Malaysia, and others which had been dismissed as Coca Cola countries by Nehru had all obtained a better growth.
Apart from this License Raj, the various welfare schemes put forward by the successive governments, especially the Indira government ensured that all the revenue generated by the country was spent on funding these numerous welfare schemes, a lot of which were irrelevant in 1991. Narasimha Rao had inherited an economy which was totally broken and the India of 1991 was in a desperate condition thanks to the License Raj. Rao who himself had been a socialist previously quickly turned things around. By 1996, Indian economy was back on the path of recovery and growing at an impressive 7.6%.
Today’s generation is growing up in a India where you can afford to buy the best of the best. Apple, IBM, Dell, Samsung, Adidas, Nike, Microsoft, Honda, BMW, and the best of the best have opened shop in India. Indian entrepreneurs like Narayana Murthy, Azim Premji, Ratan Tata, and others have put Indian companies on the global map. Infosys, Wipro, Tata Group, Godrej, Reliance, Bajaj, and so many business organisations have flourished and are flourishing. In today’s startup world, everyone wants to and in fact can become an entrepreneur. Indian economy is one the rise.
But there was a time when we were desperate and we were in a hopeless situation. There was a time when mediocrity ruled our markets and this was because our economy was governed by the License Raj.