India Explained
ImplementedINCP. V. Narasimha Rao, minority, outside support

1991 Statement on Industrial Policy and economic reforms

In July 1991, during a balance-of-payments crisis, the government ended most industrial licensing, cut the public-sector reserved list and eased foreign investment rules, part of a wider reform package.

Liberalisation

Facts

  • The Statement on Industrial Policy was issued by the Ministry of Industry on 24 July 1991, weeks after the Narasimha Rao government took office [1][2].
  • Industrial licensing was abolished for all industries except a list of 18; the list was cut to 6 in 1999 [2].
  • Industries reserved for the public sector were reduced from 17 to 8 [2].
  • Automatic approval was introduced for foreign equity up to 51% in specified high-priority industries, and MRTP Act asset thresholds were removed [2].
  • RBI data show total foreign-exchange reserves of US$5,834 million at end-March 1991 and US$19,254 million at end-March 1994 [3].
  • The package also included an exchange-rate correction and trade and fiscal measures announced in the same period; an IMF programme accompanied it [4][5].
  • The MRTP Act was later replaced by the Competition Act, 2002, and FERA by FEMA in 1999 [2].

Why

Reasons given by those who did it

  • The government cited the balance-of-payments crisis and the need to dismantle controls to raise efficiency and growth [1][4].
  • Reform advocates described the agenda as home-grown and wider than IMF conditions [4].

Criticism of that reasoning

  • Economic adviser Ashok Desai said the IMF 'forced' liberalisation [4].
  • Critics called the resulting growth 'jobless' and said gains went disproportionately to formal and government employees [4].

Benefits and concerns

Benefits (2)

  • External position recovered quickly after the crisis.Reserves rose from US$5.8 billion (March 1991) to US$19.3 billion (March 1994) per RBI [3]; ADB notes reserves recovered quickly [5].
  • Removal of licensing widened firms' freedom to invest and expand.Licensing abolished except for 18 industries (later 6) and public-sector reservations reduced from 17 to 8 [2]. Economists Bhagwati and Panagariya state that growth accelerated in the 1990s relative to the 1980s [6].

Concerns (2)

  • Reform momentum was uneven afterwards.The ADB paper describes reforms continuing in a 'stop-go' manner [5]; ORF reports reforms stalled within about three years [4].
  • Distributional and employment outcomes are disputed.Critics call the growth 'jobless' and note that gains were concentrated among formal employees [4]. Some analysts dispute that growth in the 1990s was faster than in the 1980s; Bhagwati and Panagariya say that claim was refuted [6].

Evidence points

+15.5
points, mean of two scorers (scale −25 to +25)
+15 to +16
range between the two scorers' totals
Medium confidence
scorers agree within 1 point on every criterion
ReachHow many people did the action materially affect?
Mean +5.0A +5B +5
Outcome evidenceDo official or independent data show the intended result (or its opposite), compared with the era baseline and peers?
Mean +4.0A +4B +4
Cost and sustainabilityIs the fiscal cost proportionate, and is the effect durable?
Mean +3.5A +3B +4
Process and rightsWas it made with debate, consultation and legal soundness, and did it respect rights and court rulings?
Mean 0.0A 0B 0
DeliveryWas it implemented as announced, on time and at scale?
Mean +3.0A +3B +3

Positive meanNegative meanScorer AScorer B

Scorer A. Reserves rose from 5.8 to 19.3 billion dollars by 1994 and licensing was largely abolished, though reforms later proceeded unevenly and distributional effects are disputed.

Scorer B. Licensing was largely abolished and reserves rose from 5.8 to 19.3 billion dollars in three years, though distributional effects are disputed and later reform was uneven.

Context used when scoring

Era baseline
Before 1991 India operated a licence-and-quota system; reserves were US$5.8 billion at end-March 1991 amid a balance-of-payments crisis.
Lag before outcomes show
5 years
Shocks considered
1991-balance-of-payments-crisis, 1997-asian-financial-crisis
Uncertainty
Medium confidence. Scorer totals are +15 and +16. How uncertainty is shown.

In depth

The July 1991 industrial policy statement was one part of a larger package that included exchange-rate, trade and fiscal changes under an IMF-supported programme. The industrial changes removed most licensing, narrowed public-sector reservation and allowed higher foreign equity through automatic approval.

Supporters link the package to the recovery of reserves and to faster growth through the 1990s. Critics note that the reforms were partial and uneven, that growth did not generate commensurate formal employment, and that debate continues over how much the IMF programme shaped the content. Both views draw on the same period of data, and attribution is difficult because several policy changes, and global conditions overlapped.

This entry deals with the industrial policy statement and the broader reform package as a whole; the individual trade and exchange-rate measures were not separately verified here.

Sources

  1. Statement on Industrial Policy, 24 July 1991
    Government of India, Ministry of Industry (copy hosted by The 1991 Project)Primary
  3. Foreign exchange reserves (RBI Bulletin table)
    Reserve Bank of IndiaOfficial data
  4. Looking back on the 1991 reforms in 2021
    Observer Research FoundationMedia
  5. India's Economic Reforms: What Has Been Accomplished? What Remains to Be Done?
    Asian Development Bank (A. Panagariya, 2001)Academic
  6. India's Economic Reforms, 1991-2001
    Oxford University Press (Bhagwati and Panagariya)Academic

Last reviewed .Report an error orchallenge a score.

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