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The Indian Economy and The Licence Raj

Licence Raj, refers to the involved various licenses, regulations and accompanying red-tape that were required to set up and run businesses in India between 1947 and 1990. The Licence Raj was the result of Indian Planned Economy where each and every aspect is controlled by States and Central Government. To start an any new business, one has to take approximately 80 licences, that are resultant into disinterested new initiatives and not only that after getting licences businesses are controlled and governed by the government bodies that resultant into losses of new business.

Government objective is not to control the growth but plan the each every thing and allocate the proper resources but somehow increased corruption rate and frauds has lead to decrease in growth rate.

The License Raj-system was in place for around four decades. The government of India initiated a liberalization policy under the Prime Minister-ship of Rajiv Gandhi, though much of the actual progress was made under P.V.Narasimha Rao. Liberalization resulted in substantial growth in the Indian economy, which continues today.

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Indian economy had experienced major policy changes in early 1990s. The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

The new neo-liberal policies (economic and social policy) included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.

The main objective of the government was to reform the economic system from socialism to capitalism so as to achieve high economic growth and industrialize the nation for the well-being of Indian citizens. Today India is mainly characterized as a market economy.

With the result of that change today about 300 million people-equivalent to the entire population of the United States-have escaped extreme poverty. The consequences of liberalisation reached their pinnacle in 2007, when India recorded its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China.

The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalisation has done away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.

Narsimha Rao government’s goals were reducing the fiscal deficit, privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans.

Accountable changes made

In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.

Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.

Starting in 1994 of the National Stock Exchange as a computer-based trading system

Reducing tariffs from an average of 85 percent to 25 percent

Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures

Opening up in 1992 of India’s equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts


Under the privatization plan, many of the public sector activities have been or are still being sold to the private sector. Thus the concept of PPP (public private partnership) came up. It describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies.

Privatization, in its wider sense, stands for policies to reduce the role of the state or government, assign larger role for the private sector pursuing the logic of the market in all economic decisions. The entry of new private sector enterprises could introduce competition where public sector enjoyed monopoly.

Each form of privatization has differing implications for the labour, consumers and the economy. Degeneration, for instance, is likely to have little immediate adverse impact on employment. Degeneration, because of the removal of entry barriers, may motivate additional investments and offer enlarged employment opportunities. It is, however, possible that new private sector entrants may indulge in ‘poaching’ of senior and experienced employees of the public sector by offering attractive emoluments.

The outgoing public sector employees would carry the advantage and access to business networks and knowledge of the market with them. This phenomenon has already been seen in the aviation sector and communications industry. Privatization could lead to a reduction in the workforce if the new managements were to opt for modernization and automation. This, in all probability, is unavoidable.

Under the Indian planning system public sector investments are financed through financial allocations by the government. While there were no administrative restrictions on cottage, village and small scale industries most large investment proposals by the private sector have had to pass through the scrutiny by a multiple of regulatory agencies.

Soon after the initiation of development planning in India it became evident that the public sector was an economic necessity for the economy and the private sector.1 Public sector was envisaged as a major instrument for pursuance of plan targets. It was universally accepted that the Indian private sector was neither capable of making the necessary large investments nor was it expected to take up projects with long gestation periods and carrying low rates of return.

Industrial Policy Resolution, 1956 reserved a large sector both for exclusive and priority development by the public sector. The government took upon herself the task of providing essential infrastructure and utilities as also heavy industries.

Public sector in India has two main forms. One, the departmentally owned and managed establishments like railways, posts, telecommunication, irrigation, and power projects; and two, enterprises established under the Companies Act, 1956 and under special statutes. At the end of 1992, there were 1,180 undertakings in which government owned majority equity capital and which were categorized as government companies.

Public sector has been an important employer, especially in the organized labour market. The sector accounted for 56.84 per cent of the total number of 14.3 million employees in the organized sector1 in 1980-81. From about 8.1 million in 1980-81, those employed in public sector manufacturing increased to 9.8 million by 1990-91.

Public sector in India follows the same policy of preferences in employment for women and the underprivileged sections of the society as the government. The underprivileged categories are based on socio-economic considerations like membership of Scheduled Castes and Tribes, backward classes, weaker sections, women and the handicapped.

Some of the public sector enterprises have closed down certain of their activities by subcontracting them to private parties. Contractualisation of specific tasks has been assisted by the general ban imposed by government on new recruitments. The activities privatized and brought under subcontracting include catering; message and courier service; and security, cleaning and maintenance of office buildings and office transport (staff cars). Railways appear to have taken to sub-contracting of services in a big manner.

Each form of privatization has differing implications for the labour, consumers and the economy. Dereservation, for instance, is likely to have little immediate adverse impact on employment. Dereservation, because of the removal of entry barriers, may motivate additional investments and offer enlarged employment opportunities. It is, however, possible that new private sector entrants may indulge in ‘poaching’ of senior and experienced employees of the public sector by offering attractive emoluments.

Regulatory bodies

Privatization of large public enterprises and entry of private sector in erstwhile reserved areas has the potential of giving rise to establishment of private monopolies. The interest of the consumers may therefore have to be protected from the normal instinct of private monopolies to exploit consumers in order to maximize their profits. One should not stretch the point too far as for the tendency of a public monopoly to be always better.


Security Exchange of India

Electricity Regulatory Commission,

Telecom Regulatory Authority of India

Insurance Regulatory Development Authority.


Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbours to the east and is trying to sell herself as a safe and profitable destination for FDI.

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Globalization has many meanings depending on the context and on the person who is talking about. The process of globalization not only includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, growing importance of MNC’s, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution. The term globalization refers to the integration of economies of the world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it also contains free inter-country movement of labour.

In context to India, this implies opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity in India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import liberalization programs by switching over from quantitative restrictions to tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in India.

Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was flying out of the country and we were close to defaulting on loans.

Major measures initiated as a part of the liberalization and globalization strategy in the early nineties included the following:

Devaluation: The first step towards globalization was taken with the announcement of the devaluation of Indian currency by 18-19 percent against major currencies in the international foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis

Disinvestment-In order to make the process of globalization smooth, privatization and liberalization policies are moving along as well. Under the privatization scheme, most of the public sector undertakings have been/ are being sold to private sector.

Dismantling of The Industrial Licensing Regime At present, only six industries are under compulsory licensing mainly on accounting of environmental safety and strategic considerations. A significantly amended locational policy in tune with the liberalized licensing policy is in place. No industrial approval is required from the government for locations not falling within 25 kms of the periphery of cities having a population of more than one million.

Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging non-debt flows. The Department has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further liberalize the FDI regime

Non Resident Indian Scheme the general policy and facilities for foreign direct investment as available to foreign investors/ Companies are fully applicable to NRIs as well. In addition, Government has extended some concessions especially for NRIs and overseas corporate bodies having more than 60% stake by NRIs

Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

The removal of quantitative restrictions on imports.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that applies now.

Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors, including the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of foreign/private sector competition

The Bright Side of Globalization

The rate of growth of the Gross Domestic Product of India has been on the increase from 5.6 per cent during 1980-90 to seven per cent in the 1993-2001 periods. Today Indian Economy is growing at 9% annually. Prime Minister Manmohan Singh is confident of having a 10 per cent growth in the GDP in the Eleventh Five Year Plan period.

The foreign exchange reserves (as at the end of the financial year) were $ 39 billion (2000-01), $ 107 billion (2003-04), $ 145 billion (2005-06) and $ 180 billion (in February 2007). Today (4th Nov 2010) India has $ 300 billion foreign exchange reserves and ranking at 6 number on world chart.

The total cumulative amount of FDI inflows in India were Rs 563,656 million, about US$129,656 million over a decade from 1991 to January 2010. The sectors attracting highest FDI inflows are electrical equipments including computer software and electronics (18 per cent), service sector (13 per cent), telecommunications (10 per cent), transportation industry (nine per cent), etc. In the inflow of FDI, India has surpassed South Korea to become the fourth largest recipient.

Dark Side of Globalisation

Every coin has two sides; globalisation is also not out of it. There are many disadvantages of Globalisations as well. The main disadvantage of globalisation is in Agriculture field. In 1951, agriculture provided employment to 72 per cent of the population and contributed 59 per cent of the gross domestic product. However, by 2001 the population depending upon agriculture came to 58 per cent whereas the share of agriculture in the GDP went down drastically to 24 per cent and further to 22 per cent in 2006-07. This has resulted in a lowering the per capita income of the farmers and increasing the rural indebtedness.

The number of rural landless families increased from 35 per cent in 1987 to 45 per cent in 1999, further to 55 per cent in 2005. The farmers are destined to die of starvation or suicide. Replying to the Short Duration Discussion on ‘Import of Wheat and Agrarian Distress’ on May 18, 2006, Agriculture Minister Sharad Pawar informed the Rajya Sabha that roughly 1,00,000 farmers committed suicide during the period 1993-2003 mainly due to indebtedness.

In his interview to The Indian Express on November 15, 2005, Sharad Pawar said: “The farming community has been ignored in this country and especially so over the last eight to ten years. The total investment in the agriculture sector is going down. In the last few years, the average budgetary provision from the Indian Government for irrigation is less than 0.35 percent.”

Globalisation also leads to unemployment in labour class people according to Minister for Labour and Employment informed the Lok Sabha on March 19, 2007, that the enrolment of the unemployed in the Employment Exchanges in 2006-07 was 79 lakhs against the average of 58 lakhs in the past ten years.

The lives of the educated and the rich had been enriched by globalization. The information technology (IT) sector was a particular beneficiary. But the benefits had not yet reached the majority, and new risks had cropped up for the losers-the socially deprived and the rural poor.

Growth of Slum Capitals

In his 2007-08 Budget Speech, Finance Minister Chidambaram put forth a proposal to promote Mumbai as a world class financial centre and to make ‘financial services’ the next growth engine of India. Of its 13 million populations, Mumbai city has 54 per cent in slums. It is estimated that 100 to 300 new families come to Mumbai every day and most land up in a slum colony. Prof R. N. Sharma of the TATA Institute of Social Science says that Mumbai is disintegrating into slums. From being known as the slum capital of India and the biggest slum of Asia, Mumbai is all set to become the slum capital of the world.

The population of Delhi is about 14 million of which nearly 45 per cent population lives in slums, unauthorized colonies, JJ clusters and undeveloped rural parts. During dry weather these slum dwellers use open areas around their units for defecation and the entire human waste generated from the slums along with the additional wastewater from their households is discharged untreated into the river Yamuna.

To make Globalization Work

India should pay immediate attention to ensure rapid development in education, health, water and sanitation, labour and employment so that under time-bound programmes the targets are completed without delay. A strong foundation of human development of all people is essential for the social, political and economic development of the country.

The government should take immediate steps to increase agricultural production and create additional employment opportunities in the rural parts, to reduce the growing inequality between urban and rural areas and to decentralize powers and resources to the panchayati raj institutions for implementing all works of rural development.

At the present, we can also say about the tale of two Indias: “We have the best of times; we have the worst of times. There is sparkling prosperity, there is stinking poverty. We have dazzling five star hotels side by side with darkened ill-starred hovels. We have everything by

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