Introduction 

The Indian economy has gone through different phases that have transformed it to the one we see today. One such watershed moment was the economic metamorphosis of 1991, when the then finance minister Dr. Manmohan Singh and Prime Minister PV Narsimha Rao decided to morph the Indian economy to a liberal and dynamic one from the closed economy India had earlier had. The policies of liberalisation, globalisation and privatisation led India to an era of unprecedented growth in different sectors like trade, fiscal policy, foreign investment etc. These reforms had such far reaching impacts that they fundamentally altered the relationship between the state, the private entities and the market structure as a whole.

What led to this turning point?

Before 1991, the Indian economy was dominated by government regulation and the public sector in a mixed economy model. To remedy the horrors of the partition, the Indian government was following the socialist model aiming for self reliance and public welfare. However, the restrictive policies led to an extremely protectionist economy with License Raj which had high tariffs and higher import quotas, insulating the Indian economy from the global market and foreign investment.

With such policies, the Indian economy could only survive and not thrice. There was a low GDP growth rate with wide disparities in the demography. This growth rate was unsustainable as there was a rising fiscal deficit and declining foreign exchange reserves.

The boiling point was reached in 1990-91 when India faced a severe balance of payments. Worsening this situation was the fall of the Soviet Union and the outbreak of the Gulf War. The situation became so dismal that India had to ask for financial assistance from the international monetary fund and the world bank which came with widespread structural and economic reforms.

What was the LPG Policy?

The government brought out the LPG Policy that stands for liberalisation, privatisation and globalisation. 

Liberalisation aimed at cracking down on the License Raj and reducing the chaos of regulations. Licensing requirements were not only reduced but were also abolished in certain sectors. This reform allowed private entities to step in areas like power, aviation and telecommunications that were previously reserved for the public sector. Private entities brought with them competition and enterprise with increase in quality and decrease in costs. Foreign investment started pouring in seeing the conducive liberal market system. Along with them came avenues for innovation and employment opportunities.

Privatisation on the other hand allowed a newfound focus on the private sector being the facilitator of the economy. State owned enterprises were sold by the government partially or completely to the private sector. This also included closing or restructuring of loss making state owned enterprises. This reform reduced the fiscal burden on the government and also increased the responsibilities and accountability of private entities. At the same time, new avenues for innovation and competition developed.

Globalisation changed the Indian economy from a closed and protectionist economy to a global economy. This involved a range of reforms in the financial sector like removal and reduction of trade barriers, quotas and subsidies. The devaluation of the rupee and the changes in the exchange rate aided the Indian exports to become more competitive. With globalisation, the quality of life also increased along with the level of compensation. Many companies adopted the outsourcing policy that allowed them to recruit services from outside. It also allowed for exchange of technology and research between countries. Consumer choices increased with an increase in per capita income.

What were the reforms in the financial sector?

Under the 1991 reforms, major changes were made in  the financial sector.  The interest rates were deregulated, credit controls were removed and new instruments like treasury bills, certificates of deposit and commercial papers were introduced. These reforms made it easier for new financial institutions to enter in the market with lesser barriers. The Securities and Exchange Board of India (SEBI) was now given the powers to make resolutions, conduct investigations on its own and adjudicate issues in its quasi judicial capacity. SEBI utilised this reform and introduced the disclosure norms, corporate governance guidelines, insider trading rules and worked for investor awareness. Market surveillance increased to decrease the gaps in the financial sector. Private players entered the banking and the insurance industry as a result of the liberal policies.

What fiscal reforms were made?

The government aimed at reducing the fiscal deficit by controlling government expenditure. This was done by reducing the subsidies on petroleum products, food, fertilisers etc. Defence expenditure was revamped and user charges were introduced for public utilities and services. Public sector enterprises were disinvested and private sector participation was  encouraged. The existing tax regime was also restructured. The marginal rate of personal income decreased from 56% to 40%. The corporate income tax was reduced to 46% while the average amount of customs duty was decreased to a mere 65% from the previous 200%.

What reforms were made in the industrial sector?

The industrial policy of 1991 aimed at the de-reservation of the public sector except areas like arms and ammunition, railways, mineral oils and atomic energy. Upto 51% of the foreign direct investment was allowed in 47 high priority industries. The Monopolies and Restrictive Trade Practices (MRTP) Act was amended and threshold limits of assets were removed. Public sector units were given a higher level of autonomy and were governed through Memorandum of Understanding (MoU) between the enterprise and the concerned ministry.

How did these reforms impact the Indian economy?

The reforms brought in 1991 had a far-reaching impact in different sectors. Inflation was reduced from 17% to 8.5% in almost 2.5 years. Poverty decreased to a large extent.  The previously neglected sectors like biotechnology, telecommunications, research and development, pharmaceuticals saw an immense boost.

However the reforms only affected the formal organised sectors of the economy, sectors like agriculture, forest dependent communities were still untouched. This led to uneven growth and a widening of the gap between the rich and the poor. Sectors like health and education continued to languish.