Economic Reforms Since 1991 and the Political Economy of Liberalisation for RBI Grade B ESI

Last updated: 2026-11-11 · MockMentor

"Priorities in economic reforms" and the reforms of 1991 run through the whole Indian Economy unit of the RBI Grade B Phase 2 Economic and Social Issues (ESI) syllabus. Industrial policy, monetary policy, fiscal policy, trade and banking all changed because of them. This chapter explains the political economy behind reforms, what was done in 1991 and after, how reforms have been carried out in a democracy, and what the priorities are now.

In one line: India's reforms moved the economy from state control towards markets in stages, usually pushed by a crisis and limited by politics, and the unfinished work now lies in land, labour, the states and the quality of public institutions.

Basic concepts

• Political economy: the study of how politics and economics shape each other: how governments make economic choices, who gains and who loses, and how interest groups, voters and institutions influence policy.
• Economic reforms: changes in laws, rules and institutions that alter how an economy works, such as removing controls, opening trade or reforming taxes.
• First-generation reforms: the reforms of the 1990s that dismantled the licence system, opened trade and investment and stabilised the economy. They could be carried out largely by the Union government.
• Second-generation reforms: deeper institutional reforms in factor markets (land, labour, capital), the legal system, public enterprises and the states, which need wider political agreement.
• Rent-seeking: using political influence to gain income without creating value, for example by lobbying for a licence that keeps competitors out.
• Crony capitalism: an economy where business success depends on close ties with those in power rather than on efficiency.
• Washington Consensus: a set of ten policy prescriptions associated with the IMF, the World Bank and the US Treasury in the 1980s and 1990s: fiscal discipline, tax reform, trade and investment liberalisation, privatisation, deregulation and secure property rights.

Why in News?

1. In April 2026, Parliament passed the Jan Vishwas (Amendment of Provisions) Bill, 2026, decriminalising more than 1,000 provisions across 79 central laws, so that minor and technical lapses attract fines instead of jail.
2. The Goods and Services Tax (GST) rate rationalisation, often called GST 2.0, took effect on 22 September 2025, moving most goods into two main slabs of 5% and 18%. Gross GST collections reached ₹22.27 lakh crore in 2025-26, up from ₹20.55 lakh crore in 2024-25.
3. The four labour codes, merging 29 central labour laws, came into force on 21 November 2025, more than five years after Parliament passed them.

What political economy means

Economics often asks what the best policy is. Political economy asks why governments choose the policies they do, and why good policies are sometimes not adopted at all. A reform that raises national income may still be blocked if its costs fall on a well-organised group, such as workers in a protected industry or traders in a regulated market, while its gains are spread thinly across millions of consumers. Elections, coalition politics, the federal structure, courts and the media all shape what is possible.

This is why the same reform can succeed at one time and fail at another. The 1991 reforms were possible because a crisis left no choice. The farm laws of 2020 were withdrawn in 2021 after a year of protests, even though many economists supported parts of them.

Development thinking: state and market

India has rarely followed any model fully. It has moved between them, combining market reforms with a large welfare state and, more recently, with targeted support for chosen industries.

The road to 1991

Liberalisation did not begin in 1991. In the 1980s, the governments of Indira Gandhi and Rajiv Gandhi eased some industrial licensing, allowed more imports of capital goods, cut some taxes and encouraged telecom and computers. Growth rose to about 5.5% a year in the 1980s, but it was financed by rising fiscal deficits and foreign borrowing. This set the stage for the crisis of 1991, covered in our chapter on economic history and planning.

The reforms of 1991: first generation

Industrial policy

The New Industrial Policy of 24 July 1991 abolished industrial licensing except for 18 industries (now down to a few linked to security, health and the environment), cut the industries reserved for the public sector from 17 to 8 (now 2: atomic energy and railway operations), removed the asset limits of the Monopolies and Restrictive Trade Practices (MRTP) Act, and allowed automatic approval of Foreign Direct Investment (FDI) up to 51% in many industries. Our chapter on industrial and labour policy covers this in detail.

Trade and the external sector

• The rupee was devalued in July 1991, moved to a market-determined exchange rate in March 1993, and became convertible on the current account in August 1994.
• Import licensing was removed for most goods, and the peak customs duty was cut from over 300% to about 50% by the mid-1990s, and lower later.
• Portfolio investment by foreign institutional investors was allowed from 1992.

Fiscal reforms

• Income tax and corporate tax rates were cut and the tax base widened, following the recommendations of the Raja Chelliah Committee.
• Customs and excise duties were simplified, and a tax on services was introduced in 1994.
• Subsidies were cut, and the government stopped funding its deficit through automatic "ad hoc" Treasury bills from RBI by 1997.

Financial sector reforms

• The Narasimham Committee (1991) recommended cutting the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), freeing interest rates, prudential norms for income recognition and bad loans, and allowing new private banks.
• The Securities and Exchange Board of India (SEBI) got statutory powers in 1992. The National Stock Exchange (NSE) started screen-based trading in 1994.
• New private sector banks were licensed from 1993-94.

Public sector reforms

Disinvestment began in 1991-92 with the sale of minority shares in public enterprises. Loss-making units were referred to the Board for Industrial and Financial Reconstruction (BIFR).

Second-generation reforms

From the late 1990s, reforms moved into areas that needed new institutions and the support of states.

Reforms after 2014

The IBC has changed the relationship between borrowers and lenders, since promoters now risk losing control of their companies if they default. But its results have weakened over time. In 2025-26, financial creditors recovered about 31% of their admitted claims on average, and resolution took over 700 days on average, far beyond the 330-day limit in the law.

The political economy of liberalisation

Reform by stealth

India's reforms have mostly been gradual and pragmatic. Governments rarely announced a full programme; they changed one rule at a time, often without public debate. Economists have called this "reform by stealth". It reduced opposition, but it also meant that reforms were seldom explained to voters, who then saw them as decisions taken for business.

Crisis as a trigger

The biggest reforms have often followed crises: 1991 after the balance of payments emergency; the FRBM Act after the fiscal stress of the late 1990s; the IBC and bank clean-up after the bad loan crisis of the 2010s. When things are going well, the pressure to reform fades.

Federalism and coalition politics

Many key subjects, such as land, agriculture, power distribution, water and much of labour law, are with the states or shared with them. So reforms in these areas need either the agreement of states or state-level action. GST was possible only because the Centre and states pooled their taxing powers through a constitutional amendment and agreed to work through the GST Council. Coalition governments from 1996 to 2014 often found it hard to push contentious reforms.

Interest groups

Every protected market has people who gain from protection: licence holders, workers in public enterprises, traders in regulated farm markets, and sometimes officials. These groups are usually better organised than the consumers or taxpayers who would gain from reform. Reforms that hurt organised groups, such as the farm laws, labour law changes and land acquisition rules, have faced the strongest resistance.

Reform and welfare together

One lesson from India is that reforms have been more lasting when combined with a safety net. The rural employment guarantee, food security, Jan Dhan accounts and direct transfers have helped build public support for market reforms, by protecting those who feel threatened by them.

What the reforms achieved

• Average growth rose from about 3.5% a year before 1980 to more than 6% since 1991, and India became one of the five largest economies in the world at market exchange rates.
• Extreme poverty fell sharply.
• India became a global leader in IT services and a major exporter of pharmaceuticals, engineering goods and, recently, mobile phones.
• Foreign exchange reserves rose from about US$1 billion in 1991 to over US$600 billion.
• Consumers gained choice and lower prices in telecom, air travel, cars and consumer goods.
• The financial system became deeper, with a large stock market, private banks and new payment systems.

Criticisms

• Jobless or job-poor growth: growth was driven by capital-intensive and skill-intensive sectors, and manufacturing did not become a mass employer.
• Inequality: income and wealth became more concentrated at the top, and the gap between states widened.
• Neglect of agriculture: public investment in farming fell in the 1990s, and farm distress persisted.
• Informality: most workers remained in the informal sector.
• Crony capitalism: the allocation of natural resources such as coal blocks and telecom spectrum led to major controversies in the early 2010s, until auctions became the rule.
• Weak state capacity: reforms freed markets but did not improve the police, courts, schools and health system that markets depend on.

Priorities in economic reforms now

1. Factor markets: clear land titles and simpler land acquisition and leasing; implementing the labour codes in all states; deeper corporate bond markets for long-term finance.
2. Deregulation: cutting the compliance burden on small firms, especially at the state and municipal level, through self-certification and fewer inspections, as the Economic Survey 2024-25 recommended.
3. Manufacturing and exports: reducing input tariffs, joining global value chains and signing trade agreements, alongside the National Manufacturing Mission announced in the Budget 2025-26.
4. Agriculture: better markets, price discovery and storage; a move from input subsidies to direct support; crop diversification away from water-intensive rice and sugarcane.
5. Human capital: learning outcomes in schools, skills training linked to industry, and stronger public health.
6. Judicial and administrative reform: faster courts and contract enforcement, and better-paid, accountable public administration.
7. Fiscal consolidation: bringing down the debt of the Centre and states while protecting capital spending.
8. Energy transition and climate: markets for power, a credible carbon market and green finance.

Way forward

• Explain reforms to the public and build consensus with states before acting, so that reforms are not reversed.
• Pair each reform with a safety net for those who lose from it.
• Shift the focus from the Centre's laws to states' rules and implementation, where most of the compliance burden lies.
• Use digital public infrastructure to make government services faster and more transparent.
• Measure reforms by their results: jobs, productivity and ease of living.

Possible exam and interview questions

1. What is meant by the political economy of reforms? Explain why some reforms succeed and others fail in a democracy, with examples from India. (420 words)
2. Distinguish between first-generation and second-generation economic reforms. What should be the priorities for the next phase of reforms in India? (620 words)
3. Critically assess the outcomes of the economic reforms of 1991 for growth, poverty and employment.
4. "Reforms in India have been driven by crisis rather than by conviction." Do you agree?
5. Interview: Has the Insolvency and Bankruptcy Code met its objectives?

Related reading: economic history and planning, industrial and labour policy, and our RBI Grade B Phase 2 Finance guide.

More in ESI

• National Income
• Human Development
• Poverty
• Employment
• Sustainable Development

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