Economic liberalisation in India refers to the policy changes, made mainly from 1991 onwards, that opened the Indian economy to foreign trade and investment and gave markets and private enterprises a larger role. Although some attempts at liberalisation occurred in 1966 and the early 1980s, a more comprehensive reform came in 1991.
The 1991 reforms followed a balance-of-payments crisis in which foreign exchange reserves fell to about three weeks of imports. The crisis followed a decade of large fiscal deficits and rising external debt, and was triggered by the oil-price spike and the loss of Gulf remittances caused by the Gulf War of 1990–91, as well as the collapse of trade with the Soviet Union. The reforms dismantled most industrial licensing, cut tariffs, moved the rupee to a market-determined exchange rate, opened many sectors to foreign investment, and freed interest rates and capital markets. India borrowed from the International Monetary Fund (IMF) and the World Bank, whose loans carried policy conditions; how far those conditions, rather than the government's own programme, drove the reforms is disputed. At his now famous budget speech that instituted the reforms, Manmohan Singh said on 24 July 1991: "Let the whole world hear it loud and clear. India is now wide awake."
Growth has been faster since the reforms than in earlier decades, and poverty has fallen sharply, although economists debate how much of that fall was due to reforms. Critics point to rising income inequality, slow growth in formal employment and agrarian distress, while supporters of the reform argue that land, labour, and agricultural markets were left largely unreformed.
Pre-liberalisation policies
Indian economic policy after independence was shaped by the colonial experience, which was exploitative and began as a takeover by a British trading company, and by leaders' ideas, particularly Prime Minister Nehru's exposure to Fabian socialism. Under the Congress Party governments of Nehru and his successors, policy tended toward protectionism, with a strong emphasis on import substitution industrialisation under state monitoring, state intervention at the micro level in all businesses, especially in labour and financial markets, a large public sector, business regulation, and central planning. The annual growth rate of the Indian economy averaged around 4% from the 1950s to 1980s, while per-capita income growth averaged 1.3%.
During the brief rule of the Janata Party in the late 1970s, the government, seeking to promote economic self-reliance and indigenous industries, required multinational corporations to partner with Indian corporations. The policy proved controversial, reduced foreign investment, and led to the high-profile exit of corporations such as Coca-Cola and IBM from India. They re-entered the Indian market following the reforms.
1966 liberalisation attempt
In 1966, rapid inflation caused by the Sino-Indian War and a severe drought forced the Indian government to seek monetary aid from the International Monetary Fund (IMF) and World Bank. Pressure from the Bretton Woods institutions caused a shift toward economic liberalisation, in which the rupee was devalued to combat inflation (even though devaluation results in increased import costs) and cheapen exports and the former system of tariffs and export subsidies was abolished. However, a second poor harvest and subsequent industrial recession helped fuel political backlash against liberalisation, characterised by resentment at foreign involvement in the Indian economy and fear that it might signal a broader shift away from socialist policies. As a result, trade restrictions were reintroduced, and the Foreign Investments Board was established in 1968 to scrutinise companies investing in India with more than 40% foreign equity participation.
As it became evident that the Indian economy was lagging behind its East and Southeast Asian neighbours, the governments of Indira Gandhi and subsequently Rajiv Gandhi began pursuing economic liberalisation. The New Computer Policy of 1984 was instrumental, as it eased import restrictions on technology, encouraged private investments, and provided incentives for software exports. This policy led to rapid growth in India's hardware and software sectors. Organizations like NASSCOM (established in 1988) supported the industry by fostering development, standardizing practices, and promoting Indian IT firms globally. India also established Software Technology Parks (STPs) to provide infrastructure, tax benefits, and faster data communications, enabling companies to export software services globally. The governments loosened restrictions on business creation and import controls while also promoting the growth of the automobile, digitalization, telecommunications and software industries. These reforms coincided with a rise in average GDP growth from 2.9 percent in the 1970s to 5.6 per cent in the 1980s, although they dismantle the Licence Raj. Despite Rajiv Gandhi's dream for more systemic reforms, the Bofors scandal tarnished his government's reputation and impeded his liberalisation efforts.
Growth during the 1980s was higher than in the preceding decades but fragile. It not only culminated in a crisis in June 1991 but also exhibited significantly higher variance than growth in the 1990s. Central to the high growth rate in the 1980s was the high growth of 7.6 percent during 1988–1991. Dani Rodrik and Arvind Subramanian attribute the rise in productivity from around 1980 to a "pro-business" shift in government attitudes rather than to market liberalisation.
Liberalisation of 1991
With the liberalisation of trade in high-value goods like automobiles, electronics, fridges, washing machines, air conditioners, etc., in the 1980s, Indian imports shot up as significant components were imported. Combined central and state fiscal deficits rose from about 8% of GDP in the first half of the 1980s to 10.1% in the second half, and external debt rose from $20.6 billion in 1980-81 to 64.4 billion in 1989-90. A study by Valerie Cerra and Sweta Saxena found that real overvaluation of the rupee under the fixed exchange-rate regime, current account deficits and investor confidence all contributed to the 1991 currency crisis.
The First Gulf War in 1991, after the Iraqi invasion of Kuwait, resulted in a huge blow to the Indian economy from a spike in oil prices and a drop in remittances from Indian expats in the Gulf region. The government was close to default on its external debt and foreign exchange reserves had fallen to the point that India could barely cover three weeks' worth of imports.
The collapse of the Chandra Shekhar government in the midst of the crisis and the assassination of Rajiv Gandhi led to the election of a new Congress government led by P. V. Narasimha Rao. He selected Amar Nath Verma to be his Principal Secretary and Manmohan Singh to be finance minister and gave them complete support in doing whatever they thought was necessary to solve the crisis. Verma helped draft the New Industrial Policy alongside Chief Economic Advisor Rakesh Mohan, and it laid out a plan to foster Indian industry in five points.
- Firstly, it abolished the License Raj by removing licensing restrictions for all industries except for 18 that "related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues."
- To incentivise foreign investment, it laid out a plan to pre-approve all investment up to 51% foreign equity participation, allowing foreign companies to bring modern technology and industrial development. To further incentivise technological advancement, the old policy of government approval for foreign technology agreements was scrapped.
- The fourth point proposed to dismantle public monopolies by floating shares of public sector companies and limiting public sector growth to essential infrastructure, goods and services, mineral exploration, and defense manufacturing.
- Finally the concept of an MRTP company, where companies whose assets surpassed a certain value were placed under government supervision, was scrapped.
Meanwhile, Manmohan Singh worked on a new budget that would come to be known as the Epochal Budget. The primary concern was getting the fiscal deficit under control, and he sought to do this by curbing government expenses. Part of this was the disinvestment in public sector companies, but accompanying this was a reduction in subsidies for fertilizer and abolition of subsidies for sugar. He also dealt with the depletion of foreign exchange reserves during the crisis with a 19 per cent devaluation of the rupee with respect to the US dollar, a change which sought to make exports cheaper and accordingly provide the necessary foreign exchange reserves. The devaluation made petroleum more expensive to import, so Singh proposed to lower the price of kerosene to benefit the poorer citizens who depended on it while raising petroleum prices for industry and fuel. Manmohan Singh presented the budget alongside his outline for broader reform. During the speech he laid out a new trade policy oriented towards promoting exports and removing import controls. Specifically, he proposed limiting tariff rates to no more than 150 percent while also lowering rates across the board, reducing excise duties, and abolishing export subsidies.
In August 1991, the Reserve Bank of India (RBI) Governor established the Narasimham Committee to recommend changes to the financial system. Recommendations included reducing the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) from 38.5% and 15% respectively to 25% and 10% respectively, allowing market forces to dictate interest rates instead of the government, placing banks under the sole control of the RBI, and reducing the number of public sector banks. The government heeded some of these suggestions, including cutting the SLR and CRR rates, liberalizing interest rates, loosening restrictions on private banks, and allowing banks to open branches free from government mandate.
External financing and conditionality
On 12 November 1991, based on an application from the Government of India, World Bank sanctioned a structural adjustment loan/credit that consisted of two components – an IBRD loan of $250 million to be paid over 20 years, and an IDA credit of SDR 183.8 million (equivalent to $250 million) with 35 years maturity, through India's ministry of finance, with the President of India as the borrower. The loan was meant primarily to support the government's program of stabilization and economic reform. This specified deregulation, increased foreign direct investment, liberalisation of the trade regime, reforming domestic interest rates, strengthening capital markets (stock exchanges), and initiating public enterprise reform (selling off public enterprises). As part of a bailout deal with the IMF, India was forced to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to the Bank of England and Bank of Japan.
The reforms drew heavy scrutiny from opposition leaders. The New Industrial Policy and 1991 Budget was decried by opposition leaders as "command budget from the IMF" and worried that withdrawal of subsidies for fertilizers and hikes in oil prices would harm lower and middle-class citizens. Critics also derided devaluation, fearing it would worsen runaway inflation that would hit the poorest citizens the hardest while doing nothing to fix the trade deficit. In the face of vocal opposition, the support and political will of the prime minister was crucial in order to see through the reforms. Rao was often referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government.
Compliance Raj after liberalization
PM Modi dismantled the Planning Commission in 2014. Since 2020s, the administration has eliminated over 42,000 unnecessary compliances and decriminalized more than 3,700 legal provisions to enhance the ease of doing business and living. In 2022, The government has decided to wind up Tariff Commission, one of the remnants of the licence permit raj, which had outlived its utility.
Impact
A 2025 study found that the trade liberalization reduced crony capitalism and productivity loss in India, as politically connected firms lost some of their advantage over other firms.
Credit boom of the 2000s
Private investment in infrastructure significantly increased during the 2000s, driven by an influx of global finance.
Reforms in India in the 1990s and 2000s aimed to increase international competitiveness in various sectors, including auto components, telecommunications, software, pharmaceuticals, biotechnology, research and development, and professional services. These reforms included reducing import tariffs, deregulating markets, and lowering taxes, which led to an increase in foreign investment and high economic growth. From 1992 to 2005, foreign investment increased by 316.9%, and India's GDP grew from $266 billion in 1991 to $2.3 trillion in 2018.
According to one study, wages rose on the whole, as well as wages as the labor-to-capital relative share.
Extreme poverty reduced from 36 percent in 1993–94 to 24.1 percent in 1999–2000.
The liberalisation policies have been criticised for increasing income inequality, concentrating wealth, worsening rural living standards, causing unemployment, and leading to an increase in farmer suicides.