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Writer's pictureManal Shah

Historical Underpinnings VIII: 1991's Creative Destruction


Any/all views expressed herein are solely of the author's and do not reflect the views of any organization.


I am unacquainted with the level of understanding of the readers about India’s 1991 reforms. I admittedly had a rather cursory understanding about it until the literature review that went into this blogpost. Invariably, this blogpost is a mere attempt at capturing some key nuances that had an indelible impact on the Indian economy. It is not meant to be exhaustive and comprehensive.


The crisis had been building up for a couple of years preceding 1991. What crisis you say? The dual balance of payment and fiscal crisis. What this means is explained below.


What was the crisis afterall?

Balance of payments (“BOP”) is a record of all economic transactions between residents of a country and the rest of the world, meant to summarize the same.[1] It consists of a current account (flow of goods and services in the form of export-import); capital account (volume of foreign investment, public grants and loans from other countries and multilateral agencies); and the official reserve asset account (reserves of the nation).[2] The current and capital account ought to always be offset by the balance on the official reserves asset account. If the balance on the former is negative, it represents a BOP deficit.[3]


Sharply rising oil prices on account of the gulf crisis tripled the import bill of petroleum, oil and lubricants (“POL”) in India between June 1990 and January 1991[4]. The necessity to import oil to prevent domestic shortages despite the steep price rise, led to the monthly trade deficit doubling from an average of Rs. 619 crore in June-August 1990 to the subsequent 6 months.[5]


This led to a BOP crisis, further compounding on developments in capital account – leading ultimately to dwindling foreign exchange reserves from Rs. 5480 crores in August 1990 to Rs. 1666 crore in January 1991.[6] Emergency borrowings from the International Monetary Fund (“IMF”) did not go a long way and by June 1991, the level of foreign exchange reserves dropped to the extent that it was barely sufficient to finance imports for a fortnight.[7] 


Now, Structurally what led to this?

The now infamous License Raj had been the result of a complex and established command-and-control economic system.[8] Beyond commonly known facts about the License Raj, i.e., the innumerable license requirements and control from bureaucracy that clouded almost every aspect of production and distribution, there were other factors too. For instance, there was the reserved list which included a long list of items including clothing, stationery, toys etc., for exclusive manufacturing by smaller industries. Then there were restrictions on where industries could be set up (not linked to environmental factors).


Industries however continued to grow. The higher industrial growth of the 1980s may have been attributable to the fiscal excesses of financing higher public sector investments.[9] Notably, it was the excesses of the late 1980s that followed the aforesaid crisis. Notably, there was also a hesitant liberalization, i.e., flexibilities were introduced at margin, leaving the control system in place and liable to reversal at any time.[10] 


It merits recollecting that the downfall of the Indian National Congress in 1989 marked the beginning of coalition politics in India.[11] VP Singh’s National Front Government remained in power in 1989-1990, followed by Chandra Sekhar’s Government in 1990-1991. By the time the new government came to power on June 21, 1991, the economic situation was dire – inflation in double digits and foreign exchange reserves at rock bottom.[12]



The Reforms

The need to remove barriers to growth, to look outwards, and to integrate with the world economy were now felt in a way which could not be ignored. This called for introducing a slew of reforms towards ease of doing business and towards easing exports and imports. Though the 1991 reforms were founded on homegrown thought and planning, they were catalyzed by the crisis situation and also the conditions imposed by the World Bank and IMF. Other catalysts were the fall of soviet union and the popularization of Thatcherism and Reaganomics.


The New Industrial Policy was published by the new government on July 24, 1991 and were effectuated therefrom.



Other reforms were also announced in the budget speech that day. In essence the reforms comprised two components, first, a conventional macroeconomic consolidation package aimed at reducing fiscal deficit to lower aggregate excess demand spilled over into the BOP.[13] The other component was structured reforms designed to raise productivity and make the economy more competitive, laying the foundation for more rapid growth.[14] This was a shift from the previous system of excessive control over domestic industries to the opening up of the economy, push for exports and openness to foreign direct investment (“FDI”).



The key actionable changes mentioned in the budget speech were the abolition of industrial licensing (saving for a handful industries essential for strategic and environmental reasons); reduction of the reserved list of industries from 18 to 8; ending the control over investment by large entities covered by the Monopolies and Restrictive Trade Practices Act; enhancing FDI to 51% from earlier 40% and easing restrictions by restricting discretion; easing import controls; streamlining working of public sector undertakings; and financial sector reforms based on the report of the Narasimhan Committee.


Financial Sector Reforms

The need for financial sector reforms was felt hand-in-hand with the aforementioned structural reforms in the economy. In his budget speech in July 1991, Dr. Manmohan Singh noted that:

Excerpt of the budget speech of Shri Manmohan Singh on 24th July 1991.

Thus, capital market reforms were a corollary of the 1991 reforms. The changing economic scenario, market structure and liberalization emphasized the need to review the office of the Controller of Capital Issues (“CCI”). A consensus was finally reached that the design of the office of CCI was in itself ineffective.


The monthly receipt of complaints by the not-yet-statutory-SEBI had gone up tremendously from 89 in April 1990 to 2880 in January 1991.[15] In the context of the economic backdrop as discussed above, it is key to note that complaints at this time related to:[16]

  • delays in refund of application money or allotment letters;

  • delays in receiving dividend and interest warrants on shares, debentures and fixed deposits and delays in receiving the maturity value of fixed deposits and debentures on redemption;

  • post issue stage of security or those arisen in course of dealing in security on stock exchange; and

  • non-receipt of annual reports of companies and application forms for new and right issues and inadequate disclosure in prospectus.


The Estimates Committee (1991-92) had noted the lack of machinery to check for misstatements in prospectus or to ensure that claims made in the prospectus are adhered to.[17] It recommended that after the intended repeal of CCI Act, alternative safeguards including empowering SEBI to take action and levy penalty against companies or persons for misleading investors.[18]


[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Rakesh Mohan, The Road to the 1991 Industrial Policy Reforms ad Beyond: A Personalized Narrative from the Trenches, India Transformed 25 years of Economic Reforms (2017)

[9] Ibid.

[10] Montek Singh Ahluwalia, India’s 1991 Reforms: A Retrospective Overview, India Transformed 25 years of Economic Reforms (2017).

[12] Rakesh Mohan, The Road to the 1991 Industrial Policy Reforms ad Beyond: A Personalized Narrative from the Trenches, India Transformed 25 years of Economic Reforms (2017).

[13] Montek Singh Ahluwalia, India’s 1991 Reforms: A Retrospective Overview, India Transformed 25 years of Economic Reforms (2017).

[14] Ibid.

[15] Questions and Answers, eparlib.nic.in.

[16] Ibid.

[18] Ibid.

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