A key characteristic of the Licence Raj was a
Planning Commission that centrally administered the economy of the country. Like a
command economy, India had
Five-Year Plans on the lines of the
five-year plans in the
Soviet Union. However, unlike Soviet Union, private sector also played a significant role. The Planning Commission was set up in 1950 to survey the available resources in the country and formulate plans to raise the standard of living. Planning Commission enacted the First Five Year Plan in 1951, aimed at developing the agricultural sector amid severe food shortages and an influx of refugees from the
Partition, and that plan led to a 4% increase in GDP, higher than the projected 2%. Nehru's government hoped to build on the success of the First Five Year Plan with their more ambitious Second Five Year Plan aimed at continuing agricultural and infrastructure investment while developing heavy industry and increasing employment. But this plan failed to reach its goal of 5% growth and the heavy spending in the plan depleted the country's foreign currency reserves as the country did not have sufficient domestic resources to fund these projects and therefore had to rely on imported capital and technology. Next, the Industrial Policy Resolution of 1956 extended these restrictions by designating certain industries known as Schedule A to be exclusively under state control, and certain other industries under Schedule B to be majority state-owned. Industries in Schedule A included defence production, metallurgy, mining, and transportation. During the 1960s, the Indian banking sector came under criticism for being controlled by a few big industrialists in large cities, and thus failing to meet the needs of rural Indians and small-scale industry. In response, the government of
Indira Gandhi began pursuing "social control" of banking institutions, with Deputy Prime Minister
Morarji Desai spearheading the Banking Laws (Amendment) Bill in 1968 to regulate the commercial banks' leadership. The bill stipulated that at least 51% of the directors should not be directly connected monopolies and big business, that industrialist chairmen had to be replaced by professional bankers, and that banks could not form relationships with companies tied to their own directors. Additionally, Desai forged the National Credit Council (NCC) to regulate credit allocations in order to bring more credit to rural areas and small industry. However, many of these changes were rendered moot when Indira Gandhi decided to fully nationalise 14 major banks in 1969, with 6 additional banks coming under state control in 1980. Indian
capital controls started as wartime restrictions imposed by the British on cross-border transactions during World War II, eventually growing into a complex framework of restrictions on the
current account and
capital account. After independence the Indian government introduced restrictions on the flow of
foreign exchange reserves, and following a
balance of payments crisis from 1956 to 1957, the government became more concerned with carefully allocating foreign exchange between different sectors of the economy. After a failed attempt at liberalisation in 1966, the Foreign Investments Board was established in 1968 to scrutinise companies investing in India with more than 40% foreign equity participation. Foreign investment that did not involve technology transfers was severely restricted, and foreign collaboration with local companies was conditioned on export quotas. This tight control over foreign investment became a core part of a broader policy of
import substitution industrialisation, the belief that countries like India needed to rely on internal markets for development, not international trade. To achieve this goal, the Indian government erected strict import restrictions and a complex system of tariffs that featured high rates which varied by industry. One consequence of the Licence Raj was that it benefited large corporations at the expense of smaller businesses. Because large corporations were often better able to navigate the complex bureaucracy of the Licence Raj and secure the necessary licences, they were able to dominate many sectors of the economy. This made it difficult for small businesses to compete, and contributed to a concentration of economic power in the hands of a few large corporations. Another criticism of the licensing system in India was that it was prone to corruption, as businesses and individuals had to navigate a complex bureaucracy in order to obtain licences and permissions, and may have had to pay bribes or engage in other forms of corruption in order to obtain the necessary approvals.This corruption was fuelled by a broader environment of corruption in India, which was characterised by a lack of transparency and accountability in the government, a weak legal system, and a culture of corruption that had been allowed to persist for many years. ==Fall of the Licence Raj==