1991: The Year that Transformed the Indian Economy

Introduction:

Through the 1970s and 1980s, India was widely regarded as a backwater, a third-world country in the heart of Asia, for the reach of globalization had not yet reached its borders. The turn of the decade brought about India’s greatest change; indeed, 1991 will always be remembered as the year that placed it on the world map as a flourishing market. So, how did this happen? The answer lies in a series of economic reforms, chiefly led by Prime Minister P. V. Narasimha Rao. The Finance Minister at the time, Manmohan Singh, also played a part in this change, for he was the one, along with Rao, who proposed the economic goal of 1991 to bring stability to the national economy.

The Economic Reforms of 1991:

Primarily among these key economic strategies of 1991 included India’s Fiscal, Monetary, and Financial Sector Reforms.

The strategy of reforms introduced in India in July 1991 presented a mixture of macroeconomic stabilization and structural adjustment, guided by short-term and long-term objectives. Stabilization was necessary even in the short-run, as it was needed to restore the balance of payments equilibrium and to control inflation.

Stabilization was mainly brought about by restoring the economy’s fiscal discipline, through a combination of tax collection compliance policies and incentives. By cutting the government’s fiscal deficit by 2% in just one year, from 8.4% in 1990 to 6.4% in 1991, the government smoothly restored the fiscal integrity of the economy.

However, some consider the most effective strategy implemented in 1991 to have been the rationalization of India’s exchange rate policy. To make Indian exports more competitive in global trade, the government devalued the Indian Rupee (INR) to bridge the gap between real and nominal exchange rates in the world. This made the total value of Indian exports rise to the equivalent of US$17,940 million.

The reforms were largely successful, attributing to a period of high economic growth sustained from 1991 until 2011. Not only did the economy experience an exponential rise in its GDP from US$270 Billion to US$1.82 Trillion through this period, it saw a decline in the absolute poverty rates, from close to 93% of the relatively poor earning less than US$5.50 a day in 2005, to only 87% of these earning less than US$ 5.50 a day in 2011.

All in all, these effective, rapid reforms brought about massive change to India, propelling its growth to become the global powerhouse it is today.

Written By: Harini Vasan, Tanuj Waghray, Chandreyi Banerjee

Edited By: Tanuj Waghray, Yashas Ramakrishnan

Bibliography:

• 1991: Economic Reforms | India Before 1991

• Looking Back at 1991’s Reforms

• How the Indian economy changed in 1991-2011 - The Economic Times