What really changed in 1991?

For those of us born after the mid-1990s, much of what we take for granted about India’s economy simply did not exist before 1991. Multiple car brands competing for our purchase. Private television channels. Affordable flights. A mobile phone in every pocket. Consumer goods from around the world in Indian shops. These are not small things. They are the texture of modern Indian life. And virtually none could exist without the reforms that were done in 1991. Let’s understand what has made all this possible.   

By the late 1980s, the Indian economy was visibly straining. The planning apparatus — the five-year plans, the production targets, the allocation of capital by committee — had never quite delivered what it promised. Growth had been slow: roughly 3.5% a year through the 1960s and 70s, barely enough to keep pace with a growing population. And the License system had hardened into something that strangled initiative at every turn. The world, meanwhile, was thriving. South Korea, which had been poorer than India in 1960, had become a middle-income country by the 1980s and was building industries that competed globally. Japan had gone from rubble in 1945 to the world’s second-largest economy by 1970s. China had opened its economy in 1978 and was growing at a pace we had never seen. These were no longer Western success stories that could be dismissed as products of some other culture or history. They were our neighbors. And the one thing they had in common was that they had chosen, to compete with the world rather than hide from it. 

Inside the Indian government, a generation of economists had been watching this and drawing the obvious conclusions. Montek Singh Ahluwalia, working in the Finance Ministry through the 1980s, was one of the clearest voices making the case from within the system. He and others like him wrote papers, ran the numbers, and argued that the licensing system was strangling investment, that tariffs were protecting the wrong industries, and that the foreign exchange controls were leaving businesses unable to get inputs needed to grow. But while the intellectual argument for reforming existed, the resistance to reforms was political. 

This is because every license had an owner. Every quota protected someone who had built their business around that protection and had both the motive and the money to preserve it. The politicians who had spent careers allocating state patronage were not looking to dismantle the system that gave them influence. 

But then in August 1990, Iraq invaded Kuwait. Oil prices spiked and with it the country’s current account deficit started to rapidly rise. It is important to note that through the 1980s, the Indian government had been borrowing heavily to fund its spending — running large deficits and patching the gap with short-term external loans. One can think of it as using one credit card to pay the loan on another credit card. But because of the conflict in the middle east, hundreds of thousands of Indian workers in the Gulf — whose remittances had been a quiet but steady source of foreign exchange — needed to be evacuated almost overnight. Remittances stopped, but the import bill kept going up. And the lenders who had been rolling over India’s short-term loans began to ask for their money back. Within months, foreign exchange reserves had fallen to the point where India could cover roughly two weeks of imports. This provided us with the political opening required to execute the reforms. 

Then in June 1991, Prime Minister Narasimha Rao appointed Manmohan Singh — an economist who had spent years understanding exactly what was broken — as Finance Minister. What followed was a partial execution of the reform agenda. Industrial licensing was abolished for most sectors. The rupee was devalued and made convertible for trade. Import duties were sharply reduced. Foreign investment, long treated with suspicion, was invited in. The July 1991 budget speech contained a line that has been quoted ever since: “No power on earth can stop an idea whose time has come.” The line was true. But the more honest version is that the idea had been ready for a decade. It took a crisis to give it a hearing. 

The reforms were real, but they were also partial. And the question of what remained unfinished — and what finishing it requires — is exactly where our understanding of Viksit Bharat ambition should begin.