1991 Reforms & 2021 Crisis

Note: This topic is important for TISSNET.

The liberalisation regime, which began in 1991 and ended in 2021, has been in place for 30 years. 1991 was a watershed point in India’s post-independence history, fundamentally altering the nature of the economy.

In 1991, a significant balance of payments problem precipitated a catastrophic economic downturn. In response, India’s economic establishment embarked on a multi-pronged reform plan aimed at repairing the country’s macroeconomic balance sheet and re-igniting growth.

Three decades later, the country is facing yet another major challenge in the form of the Covid-19 pandemic. While the two crises have dramatically different content and organisation, their severity is entirely comparable.

Significance of 1991 Reforms

India’s Post-1990 Economic Strategy

  • The massive network of restrictions and permits that dominated the economic system was abolished.
  • It recast the government’s function as a neutral regulator and facilitator of economic transactions, rather than as a key provider of goods and services.
  • It resulted in a shift away from an import substitution policy and a full integration into the global trade system.

Effect of Reforms

  • India became known as one of the fastest growing emerging markets in the first decade of the twenty-first century.
  • The 1991 reforms energised Indian businesses, provided consumers with unprecedented choice, and transformed the Indian economy.
  • Rather than increasing, poverty decreased significantly for the first time.

Comparing 1991 Crisis With 2021

High Fiscal Deficit

  • 1991 Crisis:  Excess domestic demand sucked in imports and widened the current account imbalance, resulting in the 1991 crisis (CAD)
    • A loss of confidence resulted in a fund outflow, and financing CAD necessitated a significant reduction of reserves.
  • 2021 Crisis: Economic activity came to a halt as a result of the pandemic-induced lockdown, resulting in a dramatic economic recession.
    • Following the interruption created by the epidemic, this has resulted in a drop in production, which has led to a  drop in demand.
    • It is appropriate to increase the fiscal deficit in the face of a drop in demand. Last year, the administration allowed the fiscal deficit to rise to 9.6%.

Macroeconomic Situation

  • 1991 Crisis: To avoid a sovereign debt default, India had to pledge tonnes of gold. Then we were on the verge of running out of  foreign currency to pay for vital goods.
  • 2021 Crisis: The economy is currently contracting at a rapid rate, with the federal government unable to meet its revenue obligations to the states.
    • We have ran out of work for our legions of jobless today, and poverty is on the rise after decades of decline.

Criticism of the Reform

  • 1991 Reforms:  The 1991 reform package was heavily criticised for being dictated by the World Bank and the International Monetary  Fund (IMF).
    • Furthermore, some of the measures were viewed as a betrayal of capitalists.
  • 2021 Reforms:  A centralised approach to improvements may no longer be viable. Three farm laws have sparked outrage, as evidenced  by the protests.


  • Sustaining Public Expenditure: In the short term, maintaining government spending is critical to recovering growth.
    • Public spending is currently highly desirable in order to provide additional funding for immunisation and to meet increased demand for the MGNREGA, which is proven to be a crucial safety net.
    • In addition, a credible path for deficit reduction over the next three years must be established, as well as revenue  targets that are more realistically set.
  • Mutually Supportive Reforms: The 1991 reforms were successful because they were built around a core package of reforms that were mutually  beneficial.
    • As a result, instead of a large list of reforms, a more strategic approach is required, focusing on the most crucial  reforms that must be implemented promptly.
    • In this setting, reforms are required in the power sector, banking system, governance systems, and even  agricultural marketing.
  • Improving Investment Climate: A crucial source of aggregate demand and economic growth is investment. In this situation, 
    • perceptions of future growth are crucial.
    • Entrepreneurs must be encouraged to take risks by a policy environment that encourages new investment.
    • Non-economic variables such as social cohesion and a tranquil environment are also important.
    • On all of these fronts, the government must take action.
  • Maruti Model of Disinvestment: Like the Maruti disinvestment following 1991 reforms, the government should decrease its ownership of each entity,  including banks, to 26 percent and sell it to strategic partners.
    • In this framework, PSUs such as Air India, BPCL, and Concor might be sold over the next six months, with a pledge  to sell two dozen PSUs per year for the next five years under the ‘Maruti model.’
    • This will help the government generate billions of rupees in investible surplus.
  • Multi-stakeholders Approach: Today’s reforms also necessitate a lot more debate and consensus-building. The federal government must collaborate with state governments and involve many stakeholders who will be  affected by reform choices.

The changes of 1991 aided the economy in avoiding a crisis and then blooming. It’s past time to lay out a credible new reform strategy that would not only restore GDP to pre-crisis levels, but also ensure growth rates that are greater than they were before the pandemic began.

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