India’s Licence Raj offers America important lessons

Even when a protectionist system is dismantled, its problems can endure

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Illustration of two men sitting in deck chairs on opposite sides of a barrier gate with a "STOP" sign in the middle. One man is reading The Wall Street Journal, and the other is reading The Times of India.

Photograph: Álvaro Bernis

Jul 2nd 2025

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5 min read

Jawaharlal Nehru, India’s first prime minister, and Donald Trump, America’s president, do not share many similarities. Nehru was an erudite product of Harrow School and Trinity College, Cambridge; Donald Trump, for all his expensive education, is ultimately a rough-and-tumble graduate of New York real estate. A freedom fighter before becoming prime minister, Nehru spent nine years in British-run jails having campaigned against imperial rule; Mr Trump’s tangles with the law have involved hush money for a porn star. Nevertheless, Nehru’s Fabian socialism—a patrician distrust of commerce mixed with an intellectual love of scientific progress—means his views on trade are, many years later, mirrored by Mr Trump’s America-first instincts.

On July 8th Mr Trump’s 90-day tariff pause for countries that have not negotiated a trade deal with America will expire. India is among those scrambling for an agreement. Yet the Trump administration has another reason to pay attention to the South Asian giant. The Licence Raj—as Nehru’s system of import permits and promotion of domestic industry would come to be known—holds important lessons for America’s inward turn.

Under Nehru, India’s government hoped that state-owned chemical refineries, hydroelectric dams and steel plants would create a modern, socialist economy. However, India ran a current-account deficit, and the government was unwilling to devalue the rupee to make exports more competitive, leaving the country short of the currency needed to purchase capital goods from abroad. The “solution” was to restrict imports. Firms that wanted to buy foreign kit or parts needed a permit. Consumer imports were in effect banned; they were unnecessary for development.

The example of the Licence Raj suggests that damage from trade restrictions goes far beyond just losing benefits such as cheaper imports and new export markets. Restrictions allow new distortions to proliferate: companies devote their efforts to tilting the playing field in their favour, officials discover new ways to benefit at the public’s expense and smugglers profit from breaking the law. All this has an insidious effect on the economy, politics and society, which runs far beyond the sizeable damage resulting from lower economic growth.

In 1974 Anne Krueger, then of the University of Minnesota, coined the term “rent-seeking” to refer to the way companies in developing countries compete to secure licences that offer the chance to form monopolies or oligopolies selling pricey imports. Instead of devoting resources to production, firms would use them, legally or illegally, to secure permits. “Some means of influencing the expected allocation—trips to the capital city, locating the firm in the capital, and so on are straightforward,” she wrote. “Others, including bribery, hiring relatives of officials or employing the officials themselves upon retirement, are less so.” India’s import-permit regime was the perfect example. She calculated its rents were worth 7% of India’s GDP in 1964—a time when the government was spending 1.5% of GDP on education.

Similar opportunities for cronyism abound in Mr Trump’s trade war. Consider Apple. The tech giant won an exemption from a higher rate of tariffs on Chinese-made smartphones after a phone call between Tim Cook, its chief executive, and Mr Trump. As Mr Trump straightforwardly told journalists afterwards: “I helped Tim Cook recently, and that whole business.”

Jagdish Bhagwati of Columbia University, whose work helped inspire the dismantling of the Licence Raj that began in the early 1990s, wrote of “directly unproductive, profit-seeking activities”, which included rent-seeking, but also smuggling, lobbying for a share of tariff revenue and pushing for extra tariffs. Although criminality of any kind carries a potential economic cost, dodging tariffs, even illegally, can improve economic welfare owing to the damage inflicted by the policies. “Tariff-washing”, whereby Chinese exporters move products via another country to disguise their true origin, will undoubtedly help American consumers. Mr Cook buttering up the president for a tariff exemption is better for buyers of the iPhone than the alternative, even if it is less desirable than him spending his time actually running the business.

Too many Cooks

Nehru may have been a socialist, but the Licence Raj created an economy that was unequal, and tilted towards the interests of the few conglomerates that best played the system. Consumers lacked choice, even when it came to products as uncomplicated as fizzy drinks: Coca-Cola pulled out of the country in 1977 after the government told it to hand over its recipe. Mr Trump has suggested that parents should buy their children fewer dolls.

Despite such flaws, the Licence Raj endured for four decades. In 1978 Raj Krishna, then of the Delhi School of Economics, coined the term “the Hindu rate of growth”. Only those expecting several cycles of reincarnation, he suggested, would put up with dismal advances of 3-4% a year. The assassination of Rajiv Gandhi, Nehru’s grandson and a candidate for prime minister, in 1991 set off a chain of events that, along with an IMF bail-out, led to the system’s demolition. Manmohan Singh, a reforming finance minister, scrapped import licensing and slashed tariffs. Since these changes, growth has been closer to 6% a year.

Dismantling the Licence Raj did not bring an end to corruption. Indeed, Singh’s own government, after he became prime minister in 2004, culminated in a scandal over telecommunication licences and coal concessions. Moreover, families that built wealth under the Licence Raj had a headstart when public assets were privatised. The legacy of the Licence Raj, in other words, proved sticky. Americans can only hope that the same is not true of Mr Trump’s protectionism. ■

(http://www.autoadmit.com/thread.php?thread_id=5745821&forum_id=2).#49069914)