Comment: Economic liberalisation in India. (1993, 20 Marks)
Economic liberalisation means dismantling the state’s control over who may produce what, where and with whose capital, and recasting the state from controller into regulator. India’s version, LPG — liberalisation, privatisation, globalisation — began in 1991: forced by a crisis, carried out gradually and left unfinished, with its politics explaining its shape.
From loosening to rupture
- The 1980s prelude. In the 1980s the Indira Gandhi and Rajiv Gandhi governments delicensed some industries, allowed broadbanding of product lines and eased MRTP asset limits. The 1985 budget cut income and corporate taxes; MODVAT followed in 1986. Growth rose to about 5.6%. Dani Rodrik and Arvind Subramanian date India’s growth turn to this attitudinal shift, not to 1991.
- The catch. That growth was paid for with borrowed money. External debt more than tripled in the decade, and the Gulf War of 1990-91 left India unable to pay for its imports.
- 1991. The P. V. Narasimha Rao government, with Manmohan Singh as Finance Minister, abolished most industrial licensing, devalued the rupee, cut tariffs, opened an automatic route for FDI, freed capital issues and began selling government shares in public enterprises.
Why an unpopular programme survived
- Rob Jenkins (Democratic Politics and Economic Reform in India, 1999) calls it reform by stealth. Changes came by notification rather than statute, were presented as continuity with Nehruvian aims, and pushed unpopular costs down to the states; because losers were scattered, no losers’ coalition formed.
- Ashutosh Varshney separates elite politics from mass politics. Reform survived while it stayed with issues voters do not feel directly, such as tariffs and exchange rates. It stopped wherever it touched daily livelihoods. The three farm laws, repealed in November 2021, show this most clearly.
- Atul Kohli argues that the state became pro-business rather than pro-market. It did not step back; it changed sides, allying with incumbent capital instead of welcoming open competition.
The record to 2026
- Growth: about 6% in the 1990s, 8–9% in 2003-08, and 7.7% in 2025-26 on the new 2022-23 base series.
- External strength: current-account convertibility in 1994, a capital account kept closed through the 1997 Asian crisis, and services exports as the distinctive success.
- Second-generation reform: the Insolvency and Bankruptcy Code (2016), GST (2017; GST 2.0, September 2025), direct benefit transfers built on JAM (Jan Dhan–Aadhaar–mobile), and the four Labour Codes, in force from 21 November 2025.
- Poverty: NITI Aayog estimates that about 24.82 crore people escaped multidimensional poverty between 2013-14 and 2022-23.
Critiques
- Capability deficit. Jean Drèze and Amartya Sen (An Uncertain Glory, 2013) argue that growth was not matched by public investment in health and schooling. India ranks 130th of 193 on the HDI (2025 report), and inequality cuts its HDI by 30.7%.
- Jobless structure. Manufacturing’s share of output has been stuck near 16–17%, and 43% of workers were still in agriculture in 2025 (PLFS).
- Unbalanced opening. Product markets were freed, but land and labour markets, agricultural marketing and power distribution were largely left as they were. The benefits went mainly to states that already had better infrastructure.
- Rents moved. Abolishing licences did not end cronyism. Rent-seeking shifted to state-allocated resources, as the 2G spectrum and coal-block cancellations of 2012 and 2014 showed, until auctions became mandatory.
Conclusion
Liberalisation succeeded in what it set out to remove: the licence raj and the foreign-exchange constraint. It is incomplete as a development strategy. Carried through quietly as a set of withdrawals, it has stalled on reforms that require the state to build — land records, courts, schools, regulators. Its future depends on developing that state capacity, not on opening markets further.