From the Permit Raj to the Billionaire Raj: Corruption, Liberalization, and Income Inequality in India

For over a year, tens of thousands of Indian farmers camped on the highways of New Delhi in protest of three new agricultural laws heralded by Prime Minister Narendra Modi. Those laws proposed a national framework for liberalizing the country’s heavily-regulated agricultural markets, allowing farmers to sell their crop yields on the private market rather than selling at fixed prices in government-regulated wholesale markets. While Modi and other proponents of the laws argued that these regulated markets failed to improve farmers’ livelihoods and were rife with corruptionopponents feared that the laws would create an unregulated free market dominated by large, exploitative corporations. On September 5, the protests against the laws culminated in a mass rally of over half a million farmers. Two months later, Modi announced that he would be repealing the laws, a stunning public reversal that few had expected from the ordinarily unyielding Prime Minister. 

To put these most recent developments in a broader context, the dispute over the farm laws showcases a debate over liberalization and deregulation in India that has been raging for more than half a century. It is a story not only of competing visions for the country’s economy, but also of the deep interrelation between corruption and income inequality. As the agriculture fight demonstrates, liberalization has been offered as a mechanism to solve both problems. But a closer look at India’s experience with liberalization complicates this theory. Liberalization may have helped fuel the country’s precipitous economic rise, but it only further exacerbated income inequality while further entrenching the systems of corruption that favor the country’s wealthy elite. At best, unchecked liberalization in India has simply repackaged corruption in new forms; at worst, it has allowed corruption to flourish.

The system at issue in the agriculture debate is one of the last remnants of what used to be the dominant form of economic organization in India. From Independence in 1947 up to the early 1990s, India imposed a strict, centralized scheme of government control over most industries in the private sector, which became known as the “License-Permit-Quota Raj” (or sometimes just the License Raj). The License Raj was built upon the Nehruvian philosophy that the state’s involvement in the development of certain industries could help curb poverty and inequality. The consequence of this philosophy was a vast, multilayered regime, one that vested relatively unchecked regulatory power in bureaucrats and politicians. Unfortunately, but predictably, many of those bureaucrats and politicians abused this power by demanding bribes as a prerequisite for receiving licenses and passing inspections. This extortion became a normal part of doing business in India, inculcating a culture of corruption that lingers to this day. Furthermore, only the wealthy and well-connected could afford to do business under the License Raj; lower-income people were effectively shut out of the formal economy. As a result, the License Raj enabled a select few wealthy and influential families and companies to consolidate market dominance in capital-intensive industries without fear of competition—a development that worsened India’s extreme inequality.

Not only did the License Raj and its associated corruption deepen India’s economic inequality problem, but increasing inequality also worsened other forms of corruption. The families and conglomerates that got rich (or got richer) under the License Raj welcomed the heavy state hand in regulating the economy as a “means of self-preservation.” They therefore used their influence to shape government regulation, while at the same time exempting themselves from that regulation. More broadly, this excessively wealthy elite was able to capture the political process and machinery of government (including the administration of justice). 

Liberalization—in the form of dismantling the License Raj through deregulation—was widely thought to be the way out of this pernicious cycle. Many people both inside and outside of India were therefore optimistic when, in 1991, the Indian government essentially abolished the License Raj for most industries. But within a couple of decades, it became clear that the corruption problem was not going away. In fact, liberalization may have exacerbated corruption by creating openings for the powerful families that had accumulated wealth under the License Raj to take control of vast industrial empires through bribery and cronyism (see here and here). These families’ existing advantages of wealth and influence gave them a leg up during the privatization race in the 1990s, and as a result, many of the same families that dominated the economy during the License Raj remain the most wealthy and powerful families post-liberalization today. To be sure, the liberalizing economic reforms of the early 1990s generated enormous wealth and lifted many out of poverty. However, inequality only worsened, and wealth concentration is becoming denser every year: Today, India’s richest 1% hold four times the wealth of the poorest 70%, the greatest disparity in any large country.

Furthermore, the Indian state did not completely disentangle itself from the public sector after liberalizing the economy; rather, state and political actors maintained and even expanded their close ties with the business community. These relationships have allowed the government to guide the country’s economic growth to some extent, but they have also created new opportunism for cronyism and corruption—a known consequence of blurring the boundaries between public and private spheres in transitioning economies. The weak coalition governments that governed India from the 1990s until 2014 were particularly vulnerable to this form of state capture.

Liberalization, then, has clearly been a lopsided endeavor, favoring many of the same individuals and companies that took advantage of the corruption and cronyism of the License Raj. The License Raj has been replaced by the “Billionaire Raj,” and the ability of India’s economic elite to use their enormous wealth to further skew the system in their favor has only increased. 

The lesson here is that while deregulating the economy can help eliminate a stifling bureaucratic system that is prone to widespread petty corruption, such deregulation does not necessarily address the arguably more significant source of the inequality-corruption vicious cycle: a system that allows a handful of people to reap nearly all the rewards of increased productivity, thereby giving that economic elite the clout and the incentive to capture the state (through bribery or other more subtle means) so as to preserve an unfair system that works to benefit the elite at the expense of ordinary citizens, especially the poor. This is not to call for a return to the License Raj—that system was also unfair and saturated with corruption. But it makes little sense to embrace wholesale deregulation without simultaneously pursuing additional reforms to reduce inequality and counter the risks associated with excessive concentrations of wealth and power.The farmers who protested Modi’s agriculture bills seemed to understand this intuitively. Liberalizing the agriculture sector might boost India’s GDP, and might cut off opportunities for relatively low-level bureaucratic corruption. But, the farmers and their supporters insist, this is not enough. Pushing for liberalization and deregulation without simultaneously acting to redress inequality and to rein in the power of wealthy individuals and corporations will only further solidify the influence of the country’s most wealthy over bureaucrats and politicians

2 thoughts on “From the Permit Raj to the Billionaire Raj: Corruption, Liberalization, and Income Inequality in India

  1. Great article! Similar analyses (not the same, obviously) could apply for other times and places. But for Mozambique in the 1980s it is very clear that the primary cause of massive increases in corruption was compliance with deregulation and structural adjustment programs imposed by the World Bank and western donors. The state administered system would clearly not have been sustainable even without the Renamo insurgency fueled by Rhodesia and then South Africa. But there were new massive incentives for corruption of state and ruling party officials when a driver for a foreign embassy or aid agency in Maputo could earn significantly more than most government officials in purchasing power.

    • Thank you for the thoughtful comment! I’m glad to see this post can be helpful in other contexts as well. It’s quite stunning to see how many unintended consequences resulted from the reforms of the Washington Consensus in the 1980s (e.g., corruption in India and Mozambique).

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