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Post at: Jul 22 2021

Three Decades of Economic Reforms

Why in News?
In July 2021 India completed three decades of economic liberalization which were ushered in 1991.
Why Were reforms needed in 1991?

  • India faced a full-scale macroeconomic crisis in late 1980 that reached to its climax in 1991.


  • The long term constraints of the preceding decades, especially the 1980s, combined with certain immediate factors gave rise to this economic crisis.
  • The Nehru-Mahalanobis Strategy of import substitution industrialization made the Indian Industry inefficient and technologically backward due to the absence of competition.
  • Heavy regulation of private sector through the system of licences (license – raj) and permits caused a great damage to entrepreneurship & innovation.
  • The public sector that dominated this strategy became highly inefficient & even sick due to excessive political interference.
  • The preoccupation of the strategy with self-sufficiency caused export permission.

What were the reforms, which were ushered in?

  • The sixth five year plan (1980-1985) indicated the first hesitant steps towards liberalization.
  • But it was the Manmohan Singh’s July 24, 1991 budget speech, which is considered as the harbinger of economic reforms in India.
  • So, India’s New Economic Policy was announced on July 24, 1991 known as the LPG or Liberalization, Privatisation and Globalization model.


What did these reforms entail in the last three decades?

GDPs (Gross Domestic Products)

  • According to the 2004-05 GDP series, India’s GDP in 1961-62 was 1.5 times it’s 1951-52 value.
  • This multiple went down in succeeding two decades. This trend reversed itself in the 1980s & kept gaining momentum for the following decades.
  • The period between 2001-02 and 2011-12 was the best in terms of economic growth and India’s GDP increased by multiple of 2.1 during the decade.
  • A slowdown since 2016-17 & the pandemic-driven contraction in 2020-21 has made the decade from 2011-12 to 2021-22 the worst in terms of GDP growth in the post reform period.

Employment Generation :

  • While GDP growth has improved post liberalization, it has failed to create enough jobs for the masses.
  • Between 1991-92 & 2017-18 the compound annual growth rate (CAGR) of employment has been a meagre 1.04%.
  • Incidentally, if we consider the pre-liberalization period of 1980-81 to 1990-91, the CAGR of jobs created was 2.02%.
  • One of the main reason for the lack of overall job growth was the exodus of people from agriculture.


  • Also India’s labour force participation rate (LFPR), defined as the number of people seeking work devided by the working age population, has been coming down.
  • India’s LFPR was 58.4% in 1990, by 2018 it had gone down to 50.2%.
  • This decline was propelled by women withdrawing from the workforce female LFPR was 30.3% in 1990, which fell to 23.3% by 2017-18.

Poverty :

  • Between 2004-05 & 2011-12, the last year for which official date on poverty are available, about 140 million people were pulled above the poverty line.

Foreign Exchange Reserve :

  • The country’s forex reserve rose to a lifetime high a $ 610.01 billion as of 2 July, 2021.
  • India had the forex reserves of Rs. 2,500 crore ($ 1.1 billion) when the then FM Manmohan Singh delivered his 1991-92 budget speech.

Banking Sector :

  • In 1990, there were 75 banks & the size of the banking sector was 50% of the GDP.
  • SBI constituted nearly 91% of the banking system, with private banks contribution merely 3.4%.
  • In the past 30 years GDP multiplied manifold and the banking assets are now 135% of the GDP.
  • Also the share of PSBs in total banking liabilities is 61%, while that of new private banks stands at 26% in 2020.
  • Despite the growth in banking assets, we don’t see similar growth in the number of banks.
  • If we remove the foreign banks & small finance banks, the number of banks decline from 53 (1990) to 34 (2020).

Agriculture :

  • At least 43% of India’s workforce is still engaged in agriculture, with contribution of less than 17.8% of the total Gross Value Added (GVA) in the year 2019-20 (Economic Survey part-I Pg 35)

Manufacturing :

  • Manufacturing did not get much of a boost during the reform period.
  • The share of manufacturing in India’s GVA was 15% in 1990-91, reached a peak of 16.4% in 2017-18 & had come down to 16.9% in 2020-21.
  • Manufacturing accounted for 15.1% of Gross value added (GVA) even in 2019-20.

Regional Inequalities

  • Regional inequalities have worsened during the post reform period :
    • The gross state domestic product (GSDP) of Bihar was almost the same as that of Gujarat in 1990-1991.
    • By 2018-19, Gujarat State GDP was two times the combined GSDP of Bihar & Jharkhand.

Way Forward

  • To conclude, the reforms are partial and focused only on some areas. This may also be due to the fact that they were initiated as a compulsion & hence the emphasis was on those that were mandated from outside.
  • What is needed is a big second wave of reforms; but this time not by compulsion & not selective, but by a forward-looking comprehensive strategy.

Anubhav Upadhyay

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