Rakesh Mohan analyses the roots and impact of India’s 1991 economic reforms, highlighting their crisis-driven origins, achievements, and remaining challenges in building a competitive industrial economy.
India’s old licence-permit system was not created simply out of ideology, Rakesh Mohan argues, but from a post-colonial conviction that the country needed rapid industrialisation, a higher savings rate and a central role for the state in steering investment. In an interview with Business Standard, Mohan said the model reflected the planning ethos of the 1950s and 1960s, when governments across the developing world looked to state-led development and import substitution as the route out of colonial-era stagnation. Research on the 1991 reforms by the Stanford King Center and the Mercatus Centre similarly places the old regime in the broader context of import-substituting industrial policy, fixed exchange rates and strict trade controls that shaped much of the post-war global economy.
Mohan said India’s system was unusual in one important respect: private industry had to seek central approval to expand, creating a dense web of permissions that went well beyond the controls seen in many other countries. He traced the origin of much of this machinery not to socialism, but to wartime regulations introduced under the Defence of India Act in 1939, later carried into the early years after Independence and eventually embedded in the Industrial Development and Regulation Act of 1951. The reservation of large parts of industry for the public sector, he said, reflected the belief that low domestic savings left the state to shoulder investment, while small-scale industry reservations and urban land restrictions were distinctive Indian inventions.
The 1991 break, Mohan said, came only when crisis met a changed world. India was under pressure from a balance-of-payments emergency, while Asia’s export-driven economies had already shown that opening to trade and competition could coexist with planning. He also pointed to the collapse of the Soviet Union, rising oil prices during the Gulf crisis and years of accumulated fiscal strain. Douglas Irwin’s research on the dismantling of the licence raj describes the same period as one in which reform-minded officials used the crisis to push exchange-rate adjustment, lower import barriers and weaken entrenched controls.
Mohan said the speed of the 1991 overhaul owed much to preparation inside government before the crisis peaked. According to his account, an industrial policy reform paper had already been drafted in 1990, cleared by the Cabinet and placed before Parliament. That meant, once P.V. Narasimha Rao became prime minister and Manmohan Singh took charge at the finance ministry, the government had a ready-made blueprint. He said the reforms were pushed through in about six weeks and were designed in India, not dictated by the World Bank or the International Monetary Fund. Studies of the reforms broadly agree that the crisis opened the way for a shift to a more market-oriented framework, with trade liberalisation, industrial deregulation and greater room for private investment.
Looking back, Mohan called the reforms a statement of national confidence. He said the early devaluation helped blunt the impact of steep tariff cuts, while domestic deregulation released far more entrepreneurial energy than officials expected. Over time, he added, India scrapped several key controls, reworked tax policy, opened parts of aviation, power and other sectors to private participation, and replaced the old monopolies law with modern competition policy. The gains, however, have been incomplete. Manufacturing has not risen to the centre of growth as he expected, labour reform stalled, small-scale reservations lasted too long and spending on research and development has remained stuck at about 0.7% of GDP. Mohan’s larger point is that the 1991 reforms changed India’s economic direction, but they did not finish the job of building a competitive industrial economy.
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