Concept of Economic Reforms 1991
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Concept of Economic 
Reforms 1991
The economic system works on a delicate balance of numerous 
aspects that must function optimally for a strong economy; however, 
time after time, it has been observed that decisions by leaders of a 
country imbalance the economy causing inflation and can even 
collapse of the economy. The Indian economy was also close to 
collapse in 1991; however, many economic reforms helped the 
country avoid the economic crisis.
Before Economic Reform 1991
As India attained independence in 1947, the entire population of 
the country was looking forward to a developed economy, and the 
leaders were set out with the goal of converting India into a self-
sustaining. Although the goal was noble as it should be, the 
approach to this goal was what led the Indian economy to plummet 
before 1991. A complex regime to conserve the foreign exchange 
was introduced, along with an approach to expand public 
investment. Although private businesses were allowed to operate, 
the introduction of strict policies made it difficult. Moreover, key 
sectors were controlled by the state. Unsurprisingly, excessive 
intervention from the government resulted in fluctuating market 
prices, wages, and interest rates, while also causing galloping 
inflation. At the beginning of 1991, the Indian economy was on the 
brink of collapse. To save the economy, drastic measures were 
taken, which came to be known as the Economic Reforms of 1991.
The Goal of the Economic Reform
Undoubtedly, saving the economy of India from the collapse was the 
primary objective of these reforms; however, the ministry of finance 
has aimed to achieve other goals as well. The secondary target for the 
economic reforms of 1991 was to increase the rate of income and 
employment in the entire country. Increasing the standard of living 
was another major concern for the government, as nearly half of the 
population was living under the poverty line. To put that into 
perspective, presently, the poverty rate in India is 22.5 percent; 
however, in 1987, it was over 50 percent.
Key Steps in the Economic Reform 1991
Fiscal Reforms
As mentioned previously, the key sectors were ruled by the state, and 
to sustain productivity in those sectors, significant capital was 
required, which was simply not there, resulting in a fiscal deficit of 8.4 
percent of GDP in 1990. Therefore, balancing the fiscal discipline 
through stabilization efforts was important, and a new budget was 
introduced for 1991-92 that aimed at reducing the fiscal deficit by 2 
percent, from 8.4 percent to 6.5 percent of GDP. Drastic steps were 
taken by the government, such as reducing the subsidy on fertilizers, 
removing sugar subsidy, removing the investment from certain public 
sectors, and lastly, accepting the Tax Reforms Committee. All of these 
combined led to a stable fiscal balance.
Financial Sector Reforms
Before the Economic Reform 1991, the Indian banking system was 
also struggling with distorted interest rates. One of the key sectors 
controlled by the government at the time was the banking system, 
the Reserve Bank of India (RBI) controlled the rates of deposits of 
maturities, loans, and the size of loans. The state began with 
decontrolling the deposits of maturities and allowed the deposit of 
shorter deposits. Liberalization of the banking sector had a profound 
effect on the economy of India, it increased competition among 
public, private, and foreign banks. The Economic Reform 1991 was 
crucial for private banks, as this was the time that allowed private 
banks to relocate and open specialized branches. Statutory liquidity 
ratio (SLR) and cash reserve ratio (CRR) were also reduced, these 
were brought from 38.5 and 25 percent to 25 percent and 10 percent, 
respectively.
Capital Market Reforms
Once again, to remove the control of the government in the capital 
market, these reforms were introduced. It was decided that a regulatory 
framework must replace the government to allow regulators to report 
objectively. Additionally, the Narasimham Committee set up the 
Securities & Exchange Board of India (SEBI) in 1988, which aimed at the 
security of the market, along with the efficient allocation of funds.
Industrial Policy Reforms
Industries contribute tremendously not only to the economy of a 
nation but also to the increase the standard of living by providing 
products based on the demand. Unsurprisingly, industries were 
heavily regulated by the state before 1991. Deregulation of industries 
occurred that promoted the competition. Additionally, industrial 
licensing was removed, along with the monopoly act that restricted 
large companies from expanding. Lastly, areas dedicated to the 
public sector were shrunk to make room for the private industries.
Trade Policy Reforms
Part of the reason why India was doing poorly before 1991 was its 
strict policies for international trade for goods and services. Tariff 
rates were set at 300 percent. Unsurprisingly, slashing import duties 
was the first step to enable businesses to conduct more trades, and 
the tariff rates in 1991 were reduced to 150 percent. These kept on 
decreasing with the annual budget. Restrictions on items were also 
removed. Previously, items that were banned for import were in triple 
digits, which were reduced to 71 following the 
Economic Reform 1991.
Encouraging Foreign Investment
Foreign Direct Investment (FDI) is a method that boosts the productivity of 
businesses tremendously, in turn contributing to the economy. To encourage 
FDI, the equity limitation was raised from 51 percent to 75 percent, then 100 
percent, especially for technology and high-investment priority industries.
Devaluation of the currency
Traditionally, the countries that face inflation try to combat it by 
printing more money in hopes of people purchasing more so that the 
economy could stabilize; however, this approach never works. 
Thankfully, India decided to devalue its currency by 20 percent in two 
successions, and this proved effective.