Is India Heading Towards License Raj Again?

The Wire

22-05-2025

Illustration: Pariplab Chakraborty.
Notwithstanding the Indian government's recent reiteration of the value of the Production Linked Incentive Scheme, launched in 2021, the larger question persists on the quiet return of the discretionary economic policy regime that stands akin to the days of the pre-1991 'license raj'.
This policy reversal more than three decades after India's liberalisation now manifests across many areas of business activity. With India having missed major opportunities in pre-liberalisation times, the current ecosystem of controls and approvals that constrains entrepreneurship is unlikely to deliver the manufacturing growth and employment objectives envisaged by the government.
The policy shift has once again led to perplexed and hapless businesspersons walking the corridors of various ministries to ask for policy relaxations, just as they did before the 1991 reforms.
Small and medium enterprises are simply staying away from manufacturing with the share of manufacturing enterprises in total unincorporated sector enterprises declining from 28.9% in 2021-22 to 27.4% in 2022-23, according to the Annual Survey of Unincorporated Enterprises.
Similarly, the share of manufacturing companies in the corporate sector has dropped from 21% in March 2023 to 19% in March 2025, as per the monthly report of the Union Ministry of Corporate Affairs.
Let us take a look at each of the policies which reflect tighter control on the manufacturing sector.
Goods and Services Tax
The first is with the Goods and Services Tax (GST) introduced in 2017, with multiple returns and slabs. With each GST Council meeting, the goal of just a few rates is driven further away and complex contortions are carried out on different versions of similar products. There can be no better example than the GST applicable on popcorn, 'clarified' at the 55th GST Council meeting, which varies on how it is sold, where it is sold, who it is sold by and what its flavours are.
Each meeting sees some rates being clarified, some rates being raised and some rates being reduced across the different slabs. Then there is cess that varies across products. All of this encourages businesspersons to urge for changes in the slabs applicable to them.
Tariff rate structure
The second is the tariff rate structure. Trade liberalisation was a key objective of the reforms and about two decades ago, one of the Union budgets promised to bring down basic peak customs duty to competitor nation rates. It came down to 10% a few years later but remains at the same level, with both government and industry reluctant to face the impact of lower rates. However, since 2017, there have been multiple tweaks to import tariffs in an attempt to promote domestic manufacturing.
About 22% of all imported products were subjected to tariff increases between 2013 and 2023. Less than 10% products saw a decline in tariffs in this period. Tariffs were raised for over 2,300 items between 2017 and 2019 and the average tariff rate saw a rise from 13.5% in 2017 to 17.3% in 2018, causing consternation among foreign observers.
The scope for continuous tinkering remains despite the Union Budget 2025 announcement of reducing the number of slabs from 15 to 8 and bringing down the average tariff to 10.66%.
PLI Scheme
The third crucial example of a discretionary manufacturing policy is the PLI scheme itself. At the outset, the scheme, announced at the peak of the pandemic and applicable for a limited period, had an inbuilt element of selectiveness. Various carefully crafted criteria for eligibility of sectors as well as applicants was incorporated in the scheme documents. The scheme applies to 14 sectors and has 'approved' 764 applications with 176 being MSME. In March 2025, a PLI was announced for electronic components as well.
Predictably, the incentives offered under the scheme have also attracted a plethora of calls from other industry sectors for such provisions to be offered to their own sectors. Each year, industry has submitted to the government requests for employment linked incentives, design linked incentives, R&D linked incentives, incentives for new and emerging sectors, gendered employment, or any other factor that would bring their particular sector within the purview of the scheme.
This is despite the fact that the incentive amount so far disbursed is only Rs 14,020 of the total Rs 2.04 trillion initially planned to be spent. A rumour about the PLI schemes' shelf life and them not being extended to more sectors has sent frissons among industry players.
Ease of doing business is another reform area that has seen somewhat of a setback. While various online forms have been introduced, manual verifications may be required in some and the same information has to be submitted to multiple agencies. Allocation of land, approvals for construction, power connections and other requirements suffer from delays and the introduction of single window systems complicate operations further.
Anusandhan National Research Foundation Fund
The fifth area of discretionary decision-making is in the Anusandhan National Research Foundation Fund, meant to support R&D and provide grants for research proposals. It is well-known that most of India's meagre 0.6% gross expenditure on R&D to GDP ratio is undertaken by the public sector with private companies contributing less than half of this.
A fund of Rs 1 trillion is to be raised to boost private sector investment in sunrise technologies. In Budget 2025, a deep tech fund worth Rs 20,000 crore and another for startups, worth Rs 10,000 crore, were announced. Selecting research projects for funding will likely involve a committee reviewing submitted proposals and picking winners.
Similar arbitrariness can be found in the foreign direct investment (FDI) policy, remission of duties and taxes on exported products (RoDTEP) rates, power tariffs, interest rate equalisation scheme, inclusion in infrastructure sector and industry recognition, employment incentives, quality control orders, tax rates for various different asset classes, application of cess and levies and other areas.
The applicability of the relevant provisions may depend from extension to extension for short periods of time, sector to sector, size of the enterprises, location of the enterprise and many other factors. States too add on to this multi-layered complex system with their own policy decisions, which appear to change with every change in leadership.
No wonder then that it feels as if the country is moving backwards from its reform agenda into a domestic economic environment that is increasingly uncertain and restrictive in the backdrop of an increasingly complex and evolving global economic system.
The reforms initiated in 1991, with opening up of sectors to the private sector and removal of the licensing requirement for manufacturing capacity expansion, were followed up with sequential and progressive reforms related to permission to foreign investors to enter the Indian market, lowering of tariffs, financial sector reforms, de-reserving sectors reserved for small enterprises, reducing corporate tax rates and disinvestment of state enterprises. Many sectoral policies also supported a rise in new sectors such as IT and telecom.
A new wave of reform policies is now required where hurdles to ease of doing business, reducing cost of doing business, igniting the private sector through access to finance, withdrawal of the state from the markets and boosting social sectors of health and education for employment would be new priorities for the government to consider.
Indirect taxes need to be rationalised, complicated approval mechanisms must be simplified, finance and land should be readily available and entrepreneurship must flourish in a competitive and sustainable manner with workers being adequately empowered to be their productive best. India's unfinished liberalisation journey must accelerate to reach its developmental goals at the earliest.
Sharmila Kantha is the author of several books on business history.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.