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When India Tried Socialism: The Failure of the License Raj
By GT3 ·
From 1951–1991, India tried socialism with an economic system called the License Raj, which was directly inspired by Soviet central planning. As I explain in this thread, its results were incredibly poor, with the License Raj being marked by corruption & poor economic growth.
The foundation of the License Raj was the Industrial Policy Resolution of 1956, which had the explicit goal of establishing a "socialist pattern of society". One of the things it did was reserve over a dozen key industries to be exclusively run by state monopolies. These state-owned enterprises suffered mass inefficiencies. For one example, when the steel industry was mostly in state hands, the average Indian steel plant operated well below capacity. This changed in 1991 when the steel industry stopped being reserved for the public sector. State-owned steel plants were inefficient for several reasons. One reason was that managers had to go through multiple layers of state approval to make decisions. This slowed down decision-making, which made plants struggle with things like maintenance & adopting new technology. Additionally, because there was almost no competition from private companies, & because the Indian government frequently covered losses, the government-owned steel plants did not have a strong incentive to cut their costs or to increase their efficiency.
The industries that were left to the private sector were subject to heavy regulation & licensure requirements. In the License Raj, firms needed a license to do really anything. For instance, you needed approval from up to 80 government agencies just to simply start a firm. Furthermore, firms needed licenses to build & upgrade plants, to buy new equipment & materials, to hire new employees, & to increase efficiency. All of these licenses came with their own wait times & fees, which greatly ate into the revenue of firms, thus hampering their growth.
As is true of any system of regulatory economics, the License Raj incentivized a lot of corruption. Businesses engaged in bribery to get the licenses that they needed, & many bureaucrats started holding up license requests indefinitely in order to extract money out of businesses. In practice, many licenses were only granted to the politically connected. This helped to insulate large corporations from facing competition with small businesses. These large corporations then would lobby the state to keep the licensure requirements privileging them in place.
Moreover, large corporations were largely insulated from foreign competition. One way this insulation occurred was with tremendously high tariff rates. For instance, by the late '80s, Indian tariffs were 123% on intermediate goods, 115% on capital goods, & 129% on consumer goods. For comparison, in Trump's 2nd term, US tariff rates are on average 7% on all those categories, meaning that late '80s India had about 15x higher tariffs rates than modern US. Even when Trump put temporary targeted tariffs on China, those rates were just half of '80s India's. Some other ways that the Indian government helped largely insulate large corporations from foreign competition was by requiring licenses to import equipment, by requiring government permission for most investment, & by barring most foreign investment into India.
The effects of these policies were most visible on India's automobile industry. During the License Raj, only 3 companies were licensed for car production. Yet, only 2, Hindustan Motors & Premier Automobiles Limited, were actually competitive, so there was an effective duopoly. Due to this duopoly giving Indian consumers little options, a singular car, the Hindustan Ambassador was able to dominate the Indian automobile market from the 70s' to 80s' with over 70% of the market share. This was despite the Ambassador being overpriced & having poor millage. Additionally, because manufacturers needed to get a permits for every little thing related to expanding production, the supply of cars trailed far behind demand. This created severe scarcity, & as a result of this scarcity, people faced wait times of 1–5 years just to get a car.
By & large, the License Raj system was a negative for India in that it constrained India's growth. This is evidenced by how India's GDP growth rate was barely above its population growth rate during the 40 years of the License Raj, which is an incredibly abysmal performance. For comparison, more laissez-faire Asian countries had much better GDP growth to population growth ratios. From 1960–1989, South Korea's GDP growth was over 5x greater than its population growth, Taiwan's was over 4.5x, Singapore's was over 4x, & Hong Kong's was close to 4x.
Sources:
The Industrial Policy Resolution of 1956:
https://www.dpiit.gov.in/static/uploads/2025/07/51cb252d5e39c9c2afd70515623b8ebb.pdf
India's '80s tariff rates:
GDP & population growth rate of India & other Asian countries:
https://www.adb.org/sites/default/files/publication/549191/asias-journey-appendixes.pdf
Additional Sources:
https://web.archive.org/web/20260518124031/http://news.bbc.co.uk/2/hi/south_asia/55427.stm