How India Averted Crisis and Liberalized its Economy

In June 1991, the government collapsed in the midst of the crisis, leading to the election of P.V. Narasimha Rao as Prime Minister...

...and Manmohan Singh as Finance Minister, in a new Congress government.

In response to the crisis, Rao and Singh would usher in a new era of economic liberalization for India – making the country more attractive to private enterprise and foreign investment by scrapping many of the restrictions that had been in place throughout the 20th century. 

These reforms set India on the road to becoming a modern, globalized economy, created millions of new jobs, and – crucially – averted the crisis that had so seriously threatened the country.

That involved getting rid of the Licence Raj, the system of licenses and regulations that had hampered private enterprise since 1947. The Licence Raj meant that up to 80 government agencies had to be satisfied before a business could produce something –  a maze of bureaucracy that hindered even the most committed of entrepreneurs.

Then, the Rao government eliminated restrictions on foreign investment, allowing foreign companies to bring modern technology and industrial development to India. The government also reduced import tariffs, opened up the public sector to private enterprise, and cut back on state spending.

These reforms led to significant improvements in India’s economic situation. Millions of new jobs were created across the nation. India became globally competitive in many different sectors,...

...including telecommunications, software, pharmaceuticals, biotechnology, research and development...

... and auto components.

Foreign investment in the country increased from $132 million in 1991–92 to $5.3 billion in 1995–96. Then, due to the increase in economic activity and job creation, poverty decreased from 36 percent in 1993-94 to 26.1 percent in 1999-00.

While not all areas of the country benefited equally – as urban dwellers saw more prosperity than their rural counterparts – Rao’s administration improved economic prospects for millions of people.

The reforms of 1991 were a turning point for India. Though they had been enacted to avert an impending crisis, they soon became deeply embedded in the thinking of subsequent Indian governments. 

From the 1990s onwards, no governing coalition would challenge the new consensus brought about by P.V. Narasimha Rao and Manmohan Singh. India had become a fully-fledged free-market economy.