The License Raj in India

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The License Raj

In 1947, India had already developed all the institutions of a modern market Economy. Right after Independence, Extensive government control began . Firms in the formal economy became completely dependent on government approvals for the most basic business decisions. Regulations in one area interacted with those in another to give teeth to the regulatory system. Thus, the reforms needed were not just a matter of freeing prices and trade, but were a task of undoing a complex system of controls that moved the economy faraway from allocational efficiency, created numerous rents and vested interests, and was grounded in numerous pieces of legislation and institutions. Prior to the reforms started in July 1991, India had one of the world’s most controlled investment regimes, a severely license restricted trade regime with very high import tariffs, regulated agriculture, tightly regulated labor and capital deployment. Reform in the 1980s

Unlike 1966, Indian engagement with the IMF succeeded in 1981 and a number of reforms were implemented during the 1980s. Relaxation of controls over capacity utilization, imports of capital goods and spare parts, Efficiency gains, liberalization of the trucking industry. By the end of the decade, the central government fiscal deficit increased rapidly, to 8.5 percent of GDP at its peak in 1986-87, a level never reached since and the debt to GDP ratio reached levels from which it has not yet recovered.

Indian Reforms, 1991-2001
A new Government came to power on June 21, 1991 and its most important short-term priority was to avoid defaulting on India’s external obligations. The outcome of these ten years of reform is that India has opened to the world economy. Except for restrictions on foreign investment in retail, India now has a competitive foreign investment regime.The financial sector has likewise seen the introduction of numerous reforms. Banks’ discretion over the allocation of funds has increased,...
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