1991: Economic Reforms – On the Front Line

In retrospect, India’s liberalization was a mixture of successes and failures.

It can be said that 1991 was not an ideal period for India to “open up” its economy. There was the impending balance of payments and currency crisis; inflation had reached a staggering 16.7% in August of that year; the budget deficit was 8.4%; the Soviet Union, India’s longtime ally, had just collapsed; the Gulf region, which fueled the country’s remittance economy, witnessed a devastating war; and the Congress regime under PV Narasimha Rao was a minority government.

This did not deter Rao and his finance minister Manmohan Singh from introducing economic reforms that would soon change the color and character of the country. “No power on earth can stop an idea whose time has come,” Singh quoted Victor Hugo in his budget speech in July 1991.

As expected, the economic reforms released what many would now call a specter and others an auxiliary genius. Very soon, India would experience years of strong growth. From an average of around 4.4% in the 1970s and a little further in the 1980s, GDP growth began to hover above 5.5% in the 1990s and early 1990s. 2000 and jumped to 7.1 and more than 8% over the following decades. India’s GDP was valued at around $266 billion. In 2020, before COVID-19 hit the country’s economy, its GDP approached the $3 trillion mark.

In retrospect, India’s liberalization was a mixture of successes and failures. A number of sectors that fell under the raj licence, such as automotive or aviation, have directly benefited from the reforms. Vehicles have become much cheaper, transportation has become affordable, and access to places has improved in general.

The global expo has helped companies to attract foreign investors and new technologies. This created opportunities for more jobs. The services sector has boomed, although many economists now argue that the growth of IT services is not really due to reforms but to global technological advances.

The average Indian’s purchasing power has improved from just over $1,000 to around $6,000 now. Parameters such as infant mortality rates, foreign direct investment and labor employment have improved considerably.

Today, economists point to some of the negative fallout. The contribution of agriculture, which continues to feed more than half the population, to GDP declined during the reform years. The years of strong growth have not really translated into significant employment growth, especially in the rural sector and for the urban poor. The shift in focus from big capitalists in general in the 1980s and 1990s to a shortlist of crony capitalists made a handful of Indians very wealthy, widening the income gap. In 2020, India’s Gini coefficient, a measure of income inequality, was 82.3, indicating growing inequality.

As the reforms also meant greater privatization of public sector enterprises and greater withdrawal of the state from crucial sectors such as education, health and priority sector spending, India’s wealthy got richer, while the poor were deprived of social security and formal jobs.

Overall, it would appear that liberalization has not led to greater diversification of the economy or to labour-intensive activity. Critics also say it has led to environmental destruction, the collapse of the welfare state, the diversion of public money into private hands, stock market scams and a riot of the neoliberal economy.