Economic Crisis in 1991
In the early 1990s, India faced a serious economic crisis. One major reason was the collapse of the Soviet Union, which had been India’s largest trading partner. At the same time, the Gulf War caused a sharp increase in global oil prices. These developments created a severe balance-of-payments crisis for India.
The country’s foreign exchange reserves fell sharply, and India faced the possibility of defaulting on its international loans. To overcome the crisis, India approached the International Monetary Fund (IMF) and received a bailout loan of about $1.8 billion. In return, the IMF required India to introduce economic reforms and reduce strict government controls over the economy.
Economic Reforms of 1991
In response to the crisis, the government led by Prime Minister P. V. Narasimha Rao and Finance Minister Manmohan Singh introduced major economic reforms in 1991.
These reforms aimed to liberalise the economy and make it more market-oriented. Key steps included removing many restrictions of the Licence Raj, reducing tariffs and interest rates, and ending several government monopolies. The reforms also made it easier for foreign investors to invest in India by allowing automatic approval of foreign direct investment in many sectors.
Continuation of Liberalisation
Since 1991, the overall direction of economic policy in India has remained focused on liberalisation and economic growth. However, governments have often avoided major reforms in sensitive areas such as labour laws and agricultural subsidies because of strong opposition from groups like trade unions and farmers.
Despite these limitations, economic reforms helped improve several social and economic indicators. Life expectancy increased, literacy rates improved, and food security expanded. However, the benefits of economic growth were not evenly distributed, as urban areas generally benefited more than rural regions.
Growth of India’s Economy
After the reforms, India’s economy started growing rapidly. The country’s GDP increased significantly and has almost doubled roughly every eight to nine years.
India’s economic position in the world also improved. By 2019, India had moved from being the ninth-largest economy to the fifth-largest economy in the world in terms of nominal GDP. In the process, it surpassed countries such as the United Kingdom, France, Italy, and Brazil.
Economic Recovery After 2013
India’s economy began to strengthen again in 2013–14 when the GDP growth rate increased to 6.4 percent from 5.5 percent in the previous year. The growth rate continued to rise in the following years.
The economy grew by 7.5 percent in 2014–15 and 8.0 percent in 2015–16. During this period, India’s economy grew faster than China, which recorded a growth rate of about 6.9 percent in 2015.
Temporary Slowdown
However, the growth rate slowed down in the following years. Economic growth declined to 7.1 percent in 2016–17 and further to 6.6 percent in 2017–18.
This slowdown was partly due to major economic changes such as the 2016 demonetisation of high-value banknotes and the introduction of the Goods and Services Tax (GST), which initially caused disruptions in businesses and economic activity.
Impact of the COVID-19 Pandemic
In 2019 and the following years, the global economy faced disruptions due to the COVID-19 pandemic. India’s economic growth also slowed during this period.
Despite these challenges, India’s economy recovered strongly in the following years. According to the World Bank, India has remained one of the fastest-growing major economies in the world and has often recorded higher growth rates than China in recent years.