Thursday, October 25, 2007
License Raj and Entrepreneurship
India was in the system of License Raj prior to the reforms in 1991. It began with the Industries Act of 1951, which required an entrepreneur to get a license to set up a new unit, to expand it, or to change the product mix. The purpose of the licensing was to a)to create a planned pattern of investment, b)to counteract monopoly and the concentration of wealth, c)to maintain regional balance in locating industries, d) to protect the interests of small-scale producers and encourage the entry of new entrepreneurs etc. All these were with good intensions, but the way the bureaucracy went about administring the licensing system created a nightmare for the entrepreneurs.
An untrained army of underpaid, third-rate engineers at the Directorate General of Technical Development, operating on the basis of inadequate and ill-organized information and without clear-cut criteria vetted thousands of applications on an ad hoc basis. The low level functionaries took months in futile microview of an application and finally sent it for approval to the administrative ministry. The ministry again lost months reviewing the same data before it sent the application to an interministerial licensing committee of senior bureaucrats, who were equally ignorant of entrepreneurship realities, and who also operated upon an ad hoc criteria in the absence of well ordered priorities. Once that got cleared from licensing committee, it was sent to the minister for approval. After the minister's approval, the investor had to seek approval from import of machinery from the capital goods licensing committee. If a foreign collaboration was involved, an interministerial foreign agreements committee also had to give its consent. If finance was needed from a state finance institution, the same scrutiny had to be repeated afresh. The result was enormous delays, sometimes lasting years, with staggering opportunities for corruption. By the time the backbreaking process of moving files from office to office was completed, many an entrepreneur had lost heart!
Large business houses set up parallel bureacracies in Delhi to follow up on their files, organize bribes and win licenses. If the entrepreneur did finally get started and made success of his enterprise, he was again in trouble. It was an offense punishable under law to manufacture beyond the capacity granted by the license. We became the only country in the non-communist world where the production of goods sorely needed by the people was punishable by law!
Thus licensing fostered monopolies and encouraged uneconomic-scale plants employing second-rate technology in remote, uncompetitive locations. The endless delay in clearing applications discouraged the entry of efficient and honest entrants and rewarded wily, inefficient producers who could manipulate the system. Thus licensing was an unmitigated disaster. We killed at birth any hope for an industrial revolution.
This is pre-reforms in India, but I wonder how it is for an entrepreneur to start up business in India presently. Considering that India is ranked 120th among 178 countries in "Doing Business -2008" report by World Bank, has anything changed atall??