1991: the year India opened its economy

By mid-1991 India faced a balance of payments crisis. Foreign exchange reserves had fallen to a level covering only a few weeks of imports, and the country was close to defaulting on external payments. The immediate causes were a high fiscal deficit, the Gulf War's effect on oil prices and remittances, and years of borrowing to sustain imports. The government of Prime Minister P. V. Narasimha Rao, with Manmohan Singh as Finance Minister, responded with a package that changed the direction of economic policy.

In July 1991 the rupee was devalued in two steps, making exports cheaper and imports dearer. Industrial licensing was abolished for most industries, ending the system under which firms needed government permission to expand or start production. Import licensing was progressively dismantled and tariffs reduced. Foreign investment, long restricted, was welcomed in many sectors, and the Monopolies and Restrictive Trade Practices regime was diluted. A new industrial policy, a new trade policy and a move toward a market-determined exchange rate followed in quick succession.

The results were substantial. Growth accelerated, moving above the roughly 3.5 per cent a year often called the Hindu rate of growth in earlier decades; foreign investment and trade expanded; and later shocks, such as the Asian financial crisis of 1997, were weathered without a payments collapse. Poverty, measured by the Tendulkar methodology, fell from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12, though that decline owed much to growth and to welfare programmes as well as to the reforms themselves.

The reforms also drew criticism that remains relevant. Agriculture and small industry, critics say, received too little attention; job creation in organised manufacturing stayed weak; and inequality widened. The 1991 package is best understood not as a single event but as a break: before it, the state directed industrial investment; after it, markets and private firms took the lead, with the state regulating and providing infrastructure and welfare.