The License Raj Beckons

When India gained its independence after World War II, its first Prime Minister was a wealthy man named Jawaharlal Nehru. Educated at Harrow and Cambridge, followed by qualification as a barrister at Inner Temple, he was both an establishment Englishman and an aristocratic Kashmiri Brahmin, down to his Fabian socialist core beliefs.

The author Jon Perdue wrote, “The logo of the Fabian Society, a tortoise, represented the group’s predilection for a slow, imperceptible transition to socialism, while its coat of arms, a ‘wolf in sheep’s clothing,’ represented its preferred methodology for achieving its goal.”

So, eschewing the path taken by the Soviet Union and China in deviating from capitalism, Nehru chose a third way. It leveraged the central planning and bureaucracy put in place by his British predecessors in prosecution of the war. Its opponents later labeled it as the License Raj. This would be the mechanism for India’s slow transition to socialism.

“’Licence Raj’, also known as ‘Permit Raj’ or the ‘Licence-Permit Raj,’ is pejorative for a system of government that adhered to strict rules, regulations, and control over the Indian economy. Under this system, businesses in the country required licences to operate. These licences were difficult to get, which led to the term ‘licence raj’ which reportedly was a play on the term ‘British raj.’

“According to an article by the BBC in 1998, due to high restrictions, businesses sometimes had to receive approval from up to 80 agencies before they were granted licences to produce.

“Moreover, the state would decide what was produced, along with the quantity of production, market price as well as the course of the capital used in production. Additionally, the government also restricted firms from conducting layoffs and closing factories.”

For the consumer-facing businesses subject to the licensing requirements, regulators didn’t own the means of production. They controlled the means of production, though. Ownership remained in the hands of private actors. The authorities ensured autarkic conditions by denying foreigners access to India’s large population. It was a controlled economic experiment. The government nationalized other industries deemed strategically significant, e.g.,  banking, airlines, infrastructure, etc.

Couple this with the corruption India is infamous for enduring and the License Raj meant in practice that people who had the licenses possessed what amounted to a Golden Ticket: they could make exorbitant amounts of money with little to no risk. These people, many of whom occupied leading industrial positions or enjoyed political connections at the moment of independence, sat on massive, low-growth annuities.

·        Step 1: Get a license for a particular category, possibly by bribing the officials who hand them out or by leveraging personal connections

·        Step 2: Make sure that nobody else can get a license by bribing the officials to deny any potential competitors when they apply for their own licenses

·        Step 3: Ensure that price and quota decisions are set so that you make a ton of money by bribing the officials

·        Step 4: Repeat in a new category

There was only one rule: keep the authorities onside.

On the face of it, regulators in this scenario don’t care who is making the widgets; they just want to make sure that they get to dictate what kind of widgets are made, how many are made, and what price at which they are sold. Also, they want to make sure that they themselves can wet their beaks. Win/win.

Families like the Tatas, the Birlas, the Thapars, the Kirloskars, the Goenkas, the Mafatlals, and the Shri Rams were dominant. We’ve spoken in the past about how bureaucracy caters to the large. India’s License Raj was no different.

“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.”

The equilibrium between the public sector and the private sector was a delicate one. Too much power flowing into the hands of the private sector brought with it additional regulatory tightening such as increased oversight of the largest players and restrictions on growth. The lucky few got too greedy, it would seem. Or perhaps they threatened the political power of the Nehru family regime, leadership of which had transitioned to his daughter, Indira Gandhi. The Indira Gandhi of the Emergency Declaration. The Indira Gandhi whose son Sanjay Gandhi inspired the Jama Masjid Turkman Gate shootings. The Indira Gandhi of the forced sterilization programs.

“Pushing back the private enterprises’ control over the economy, the Monopolies and Restrictive Trade Practices (MRTP) Commission was established in 1969 which mandated business groups with assets worth more than 200 Cr INR to undergo scrutiny and clearance by the group before any substantial expansion. The Commission aimed at preventing the concentration of economic power in the hands of few rich companies and public sector enterprises were exempted from this scrutiny. In effect, the Act completely stopped the growth and expansion of private-sector industries.

“The Industrial Licensing Act of 1970 categorized industries based on their total assets into Core, Middle, Non-Core Heavy Investment and De-licensed Sectors. The Act required private industries exceeding a certain asset limit, to be scrutinized and to obtain licenses to continue their operations. The number of licenses needed for big industries starting from importing supplies to exporting products was often large and these acts constricted their operating potential. The strong and often unhealthy rivalry among the companies to gain licenses was the breeding ground for growing corruption and intermixing of politics and business affairs. Further, the Foreign Exchange Regulation Act(FERA) was passed in 1973 and it required the multinational investors to dilute their share in their Indian subsidiaries to 40%. It also imposed severe restrictions on the exchange of foreign currency among individuals as well as industries. This act severely limited foreign investments in India. Thus, the acts passed by the government gave an impression to the general populace that Indira Gandhi is against private enterprises and vests total power with the state which is in contrast to Jawaharlal Nehru’s policies of striking a balance between socialist and capitalist state of the economy.”

This over-engineered cacophony of rules explained the so-called “Hindu rate of growth.”

“The term ‘Hindu growth rate’ was coined by late economist Raj Krishna in 1978 to describe the slow growth in the country.

“It basically refers to the low pace of economic growth rates during 1950s to 1980s. During this period, the Indian economy averaged 3.5%.”

For comparison, from 1960 to 1980, growth rates for other Asian countries overwhelmed India’s anemic progress: Singapore 9.2%, South Korea 8.8%, Taiwan 9.6%, Hong Kong 9.9%, Thailand 7.4%.

Reforms of the License Raj started substantially in the mid-1980s and accelerated in a Big Bang in 1991. The unsustainability of the fiscal path had rendered the License Raj a Fabian luxury that India could no longer afford.

Ironically, the gradualist approach to socialist transition was undone by time. The tortoise had starved to death.

One industry that emerged during the License Raj was technology services. It benefited from Special Economic Zones.

“A special economic zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's domestic economic laws. India has specific laws for its SEZs.

“The category 'SEZ' covers a broad range of more specific zone types, including free-trade zones (FTZ), export processing zones (EPZ), free zones (FZ), industrial estates (IE), free ports, urban enterprise zones and others. Usually, the goal of a structure is to increase foreign direct investment by foreign investors, typically an international business or a Multi National Corporation (MNC).”

The technology services industry thrived in this zoology of exceptions.

“The Electronics Committee also known as the "Bhabha Committee" created a 10-year (1966–1975) plan laying the foundation for India's IT Service Industries. The industry was born in Mumbai in 1967 with the establishment of Tata Consultancy Services who in 1977 partnered with Burroughs which began India's export of IT services. The first software export zone, SEEPZ – the precursor to the modern-day IT park – was established in Mumbai in 1973. More than 80 percent of the country's software exports were from SEEPZ in the 1980s.”

In a sense, it’s correct to say that India’s IT services industry was born in its exclusion from the License Raj. The bureaucracy, the large family-owned businesses that dominated commerce, and the corruption that enveloped the system would have combined to kill it in the creche otherwise.

Perhaps technology as an industry was seen by the authorities as not being interesting enough or having sufficient potential to warrant oversight. India’s greatest contemporary economic strength may be a direct product of the myopia of its bureaucratic class.

Instead, US companies leveraged the native talent of the Indian developer population, later augmented by Indian engineers repatriating from Silicon Valley. These native entrepreneurs had learned how to run businesses. They had developed American networks. They wanted to create opportunities so that the next generation would not be forced into professional exile, as they had been.

The Indian government, instead of seeking to control the outcome, had created the conditions for success. Unwittingly, but still.

Once technology took off, there was no political possibility of putting it under the government thumb again. It was too lucrative.

So, when we talk about AI regulation here in the US, at this nascent stage in the development of Generative AI as an industry category, is it possible that we are following the precise inverse of the Indian liberalizing experience?

Is this why we see such a broad push to regulate AI? Would we rather nip in the bud the kind of commercial miracle that could produce a material improvement in our quality of life because of a preoccupation with the eventual allocation of the new massive economic and political power among different groups?

Where the Indians emancipated technology, the West seeks to enslave it. Where the Indians created the conditions for success, the West would engineer the outcome. If Generative AI is to be as powerful and transformational as the pundits suggest, then it will become uncontrollable in rapid order. It will be impossible to put the cork in the bottle, if that isn’t already the case.

The best that policy can hope for, especially in such fluid environments, is to stick to a set of fundamental principles for enabling growth and the expression of entrepreneurial vigor, while establishing guidelines for what kinds of products are unacceptable. Optimize conditions and the right outcomes will emerge. This is, of course, a leap of faith. Doing anything else that smacks of trying to determine the final conclusion means that we are unlikely to reap the benefits of this new technology (likely ceding leadership to other venues with more liberal regimes). The Frankenstein that results from Western regulatory intervention may have its own iatrogenic consequences. It is likely to have unintended side effects, all of which will be excused by insiders post facto.

The road to hell is paved with the arrogance of the planners.