India's Economic Reforms: Achievements and Next Steps

• DOI: http://doi.org/10.1111/aepr.12239
• Date: 01 January 2019
• Published date: 01 January 2019
• Author: Montek S. Ahluwalia

India’s Economic Reforms: Achievements and

Next Steps

Montek S. AHLUWALIA†

Former Deputy Chairman of the Planning Commission of India

This paper reviews the impact of India’s reforms since 1991 on the performance of the Indian

economy. It shows that the reforms definitely achieved a significant acceleration in growth and

they also succeeded in reducing poverty. However, they have been less successful in generating

good quality jobs. There was progress in providing better access to education, health services ,

and clean drinking water and sanitation, but less than was hoped. The area where performance

has been most disappointing is environmental sustainability. The paper concludes by identifying

some of the critical policy challenges in the years ahead.

Key words: economic reforms, employment, inclusive growth, India, poverty

JEL codes: N00, E01, I31

Accepted: 11 July 2018

1. Introduction

This paper presents an assessment of India’s economic policies focusing on the reforms

initiated in 1991 and their subsequent evolution over time, through successive govern-

ments. Section 1 describes the main features of the 1991 reforms and shows how they

were significantly different from the 1980s. Section 2 identifies the areas where reforms

have succeeded, as well as those where achievements have fallen short of targets.

Section 3 presents a brief assessment of the critical policy challenges that need to be

addressed if the Indian economy is to realize its full growth potential over the next

decade and more.

2. The Reforms of 1991

For three decades after gaining Independence in 1947, India followed an economic

strategy with a strong bias in favor of the public sector, strict government controls over

private sector investment, and insulating the economy from the rest of the world

I am grateful to Utkarsh Patel for extremely careful research assistance. Thanks are also due to

the participants in the Asian Economic Policy Review conference in Tokyo where this paper was

presented, and especially to the discussants M Chatib Basri and Hideki Esho. Needless to say the

errors that remain are entirely mine.

†Correspondence: Montek S. Ahluwalia, Former Deputy Chairman of the Planning Commission

of India. Email: monteksingh.ahluwalia@gmail.com

46 © 2018 Japan Center for Economic Research

doi: 10.1111/aepr.12239 Asian Economic Policy Review (2019) 14, 46–62

through a combination of import licensing and high tariffs. Foreign investment was

discouraged, and the import of technology was strictly controlled.

The economy performed reasonably well under this control system in the first

15 years 1950–1951 to 1964–1965, when the rate of growth of gross domestic product

(GDP) (at factor cost) averaged 4.1% per year. This was lower than the plan targets of

5%, but much better than the growth rate in the pre-independence period. Besides,

other developing countries were not performing much better. However, the inefficiency

of the system became evident in the 1970s, when India was seen to be growing much

more slowly than other countries in South East Asia. It became more starkly evident in

the 1980s, when China’s dramatic reforms began to show results.

A process of liberalizi ng the control regime had s tarted in the first half of the

1980s, under Prime Mini ster Indira Gandhi, and was intensified in the second hal f

of the decade under Prime M inister Rajiv Gandhi. Ho wever, these changes were

incremental rather tha n structural. In essence, th e basic control system rem ained in

place, but it was made more flexible at the margin. Industrial licensing continued,

but some industries were exemp ted from industrial licensin g. Existing enterprises

were allowed an automat ic expansion of approv ed capacity every 5 year s to allow

them to undertake debot tlenecking, and new lic enses were given for lar ger-sized

plants in order to exploit ec onomies of scale. Import licensing continu ed, but sev-

eral items were made freely impor table and this list was slowly widen ed. Foreign

technology continued to requ ire government approvals , but these were given more

freely.

The real break with the past came in 1991, when a new Congress led coalition gov-

ernment, under Prime Minister Narasimha Rao, with Dr Manmohan Singh as Finance

Minister, had to deal with an exceptionally severe balance of payments crisis. The

country had gone through two unstable minority governments in the previous

18 months which had failed to manage the balance of payments. Foreign exchange

reserves had run down to $1.1 billion by the end of June 1991, barely enough for

2 weeks of imports, and there were widespread fears that India might be forced to

default on its external debt payments. The new government moved decisively to con-

tain the crisis through a classic stabilization program consisting of a reduction in the

fiscal deficit and a currency devaluation. It also initiated a program of structural

reforms to raise the growth rate to something nearer the true potential of the economy.

To support these efforts it negotiated a International Monetary Fund (IMF) loan in

1991, along with structural assistance loans from the World Bank and the Asian

Development Bank.

2.1. Stabilization and reforms

The stabilization component of what was attempted in 1991 was conventional but very

effective. India was able to end the IMF program much earlier than expected (see

Ahluwalia, 2016). The structural reforms were a distinct departure from the incremen-

tal changes attempted earlier. They signaled a clear shift toward a much more market-

Montek S. Ahluwalia India’s Economic Reforms: Achievements and Next Steps

© 2018 Japan Center for Economic Research 47