An appropriate way to judge the famed economic reforms of 1991

Source: Livemint  

Relevance:  Economic reforms of 1991 revolutionized the Indian economy. It is important to analyze their success and failures.


Four big structural constraints have eased after 1991: savings, food, foreign exchange, and a small home market. However, there are newer structural constraints on the horizon that needs to be tackled. 

  • The Indian economy had begun to gather pace around the 1980s with tentative changes in fiscal, monetary, trade, tax, exchange rate, and industrial policies.
  • However, the policy reforms of that decade were within the boundaries of the earlier system of economic management.
  • In July 1991, a web of interconnected reforms were launched to address the problems surrounding the Indian economy.


  • Due to the severe balance of payments crisis, the country was on the verge of defaulting
  • Macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, etc.
  • Further indiscriminate protection to domestic players had weakened the incentive to export.
  • The country also had a weak financial system that was not allocating capital efficiently.  
What was the objective of the 1991 reforms?
  • The objective was to evolve a pattern of production which is labor-intensive and generates larger employment opportunities in productive sectors. 
  • It aimed to reduce the disparities in income and wealth between rural and urban areas.
  • The implicit goal of the 1991 economic reforms was to create a new economy that had learned the right lessons from the success stories of East Asia.
Impact of reforms:


  • Economic growth since 1991 has been far more stable. One simple indication of this is the external account. 
    • Independent India had a severe balance of payments crisis almost once every decade: 1957, 1966, 1981, 1990. There has been no comparable crisis over the past 30 years, despite a scare in 2013.
  • All four macroeconomic constraints (domestic savings, foreign exchange, food, and aggregate demand) have eased after 1991.
    • The domestic savings rate to fund domestic investments has undoubtedly come down since the peak it hit in 2008. But it is still almost eight percentage points higher than the average of the 1980s. 
    • The availability of foreign exchange is no longer a major worry. The occasional balance of payments surpluses in recent years show that India receives more international savings than it can absorb.
    • The food constraint had already begun to ease after the Green Revolution. India now has excess food stocks as a buffer against sudden shocks to farm production.
    • The aggregate demand constraint meant that there was not enough domestic demand for industrial goods because of high poverty levels. Rising incomes, as well as exports, have eased this as well.


  • The reforms failed to generate enough jobs in formal enterprises. This led to the proliferation of informal employment in the country.
  • Further, enhanced political pressure was created to use fiscal resources for subsidies or income support rather than on the creation of public goods.
Way Ahead:
  • The 1991 reforms played a big part in loosening the four traditional structural constraints that had dominated Indian economic thinking for many decades.
  • The focus should be now placed on newer structural constraints: 
    • The health and education crises during the pandemic have underlined inadequate investments in human capital. 
    • India still does not have adequate state capacity and regulatory capacity for a $3 trillion economy. 
    • Ecological stress, as well as climate change, will create new forms of constraints on sustainable economic growth.
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