Indian Economy

Indian Economic Development (1950-1991): Policies,

Public Sector & Bank Nationalisation
Context at Independence (1947):​
India inherited a colonial economy characterized by:

1.​ Stagnant Agriculture: Low productivity, exploitative land tenure systems (Zamindari,
Ryotwari, Mahalwari), dependence on monsoons, frequent famines.
2.​ Weak Industrial Base: De-industrialization during British rule, limited modern industries
(mostly consumer goods like cotton, jute, sugar), lack of capital goods industries.
3.​ High Poverty & Inequality: Widespread poverty, illiteracy, poor health indicators, vast
income disparities.
4.​ Partition Disruptions: Loss of fertile lands (jute, cotton areas to Pakistan), refugee
crisis, severed economic links.
5.​ Infrastructure Deficit: Railways developed for colonial resource extraction, not for
balanced regional development; power and communication were inadequate.

Guiding Philosophy & Objectives (Post-1950):​

The newly independent Indian government adopted a mixed economy model with a strong
socialist orientation, aiming for:

1.​ Rapid Economic Growth: To raise living standards.

2.​ Self-Reliance: Reducing dependence on foreign aid and imports, especially in critical
sectors.
3.​ Social Justice & Equity: Reducing poverty and income inequalities, ensuring balanced
regional development.
4.​ Modernization: Transforming agriculture and developing a diversified industrial
structure.
5.​ Full Employment: Providing productive employment to the workforce.

I. Key Economic Policies & Instruments:

A. The Planning Commission & Five-Year Plans (FYPs):

●​ Established in March 1950 by a resolution of the Government of India.

●​ Role: To formulate FYPs for the "most effective and balanced utilisation of the country’s
resources."
 ●​ Approach: Centralized planning, setting targets for various sectors, allocating
resources.
●​ Key Early Plans:
○​ First FYP (1951-56): Focused on agriculture, irrigation (e.g., Bhakra-Nangal
Dam), and power projects. Based on the Harrod-Domar model. Largely
successful due to good monsoons and post-war reconstruction effects.
○​ Second FYP (1956-61): Based on the Mahalanobis Model, it emphasized rapid
industrialization with a focus on heavy and capital goods industries. This laid
the foundation for public sector dominance. Aimed at building a strong industrial
base for long-term self-sufficiency.
○​ Subsequent Plans: Continued the broad strategy, with shifts in emphasis based
on emerging challenges (e.g., food security after wars, poverty alleviation).
●​

B. Industrial Policy Resolutions (IPRs):​

These laid down the framework for industrial development.

1.​ IPR 1948:

○​ Outlined a mixed economy approach.
○​ Industries divided into four categories:
■​ Strategic industries (arms, atomic energy, railways) - Exclusive state
monopoly.
■​ Key/Basic industries (coal, iron & steel, aircraft, shipbuilding, telecom) -
New units by state; existing private units could continue for 10 years.
■​ Important industries (20 specified) - Subject to central regulation.
■​ Other industries - Open to private sector.
○​
○​ Recognized the role of small-scale and cottage industries.
2.​
3.​ IPR 1956 (Often called the "Economic Constitution of India"):
○​ Explicitly stated the objective of a "socialist pattern of society."
○​ Strengthened the role of the public sector.
○​ Industries reclassified into three schedules:
■​ Schedule A (17 industries): Exclusive responsibility of the State (e.g.,
arms, atomic energy, iron & steel, heavy machinery, coal, mineral oils,
aircraft, railways, shipbuilding, electricity, telecom).
■​ Schedule B (12 industries): State would take the initiative in establishing
new units, but private sector could supplement (e.g., aluminum, machine
tools, fertilizers, road transport, sea transport).
■​ Schedule C: Remaining industries, primarily left to the private sector, but
subject to licensing and regulation.
○​
○​ Emphasized development of backward regions, role of small-scale industries,
and fair labor practices.
4.​
C. Licensing System ("License Permit Raj"):

●​ Industries (Development and Regulation) Act, 1951: Mandated licensing for starting
new industries, substantial expansion, or changing product lines.
●​ Objectives: Channel investment into desired areas, prevent concentration of economic
power, promote regional balance, protect small-scale industries.
●​ Consequences: Led to delays, corruption, inefficiency, restricted competition, and
protected inefficient firms. It became a significant barrier to industrial growth.

D. Trade Policy: Import Substitution Industrialization (ISI):

●​ Goal: To achieve self-reliance by producing domestically what was previously imported.

●​ Measures:
○​ High Tariffs: Heavy import duties on foreign goods to make them expensive.
○​ Quantitative Restrictions (Quotas): Limiting the volume of specific goods that
could be imported.
○​ Foreign Exchange Controls: Strict regulation of foreign exchange.
●​
●​ Impact:
○​ Positive: Nurtured domestic industries, diversified industrial base to some
extent.
○​ Negative: Shielded domestic industries from foreign competition, leading to
inefficiency, poor quality goods, high costs for consumers, and an anti-export
bias. Neglected development of export-oriented industries.
●​

E. Agricultural Policies:

1.​ Land Reforms:

○​ Abolition of Intermediaries: Zamindari, Jagirdari systems abolished to bring
cultivators into direct contact with the state. Largely successful.
○​ Tenancy Reforms: Aimed to provide security of tenure to tenants, regulate rent,
and enable tenants to acquire ownership. Mixed success due to legal loopholes
and lack of political will.
○​ Land Ceilings: Fixed limits on landholdings to distribute surplus land to the
landless. Largely ineffective due to benami transfers, exemptions, and poor
implementation.
2.​
3.​ Green Revolution (mid-1960s onwards):
○​ Context: Food shortages, dependence on PL-480 imports from the USA.
○​ Strategy: Introduction of High Yielding Varieties (HYV) seeds (wheat and rice
initially), increased use of chemical fertilizers, pesticides, and expansion of
irrigation.
○​ Impact:
 ■​ Positive: Achieved self-sufficiency in food grains, increased agricultural
production and productivity, benefited farmers in certain regions.
■​ Negative: Increased regional disparities (benefited Punjab, Haryana,
Western UP most), benefited larger farmers more than small/marginal
ones, environmental concerns (soil degradation, water depletion).
○​
4.​

F. Other Regulatory Measures:

1.​ Monopolies and Restrictive Trade Practices (MRTP) Act, 1969:

○​ Objective: To prevent concentration of economic power and control monopolies
and restrictive trade practices.
○​ Required large industrial houses to seek government approval for expansion or
setting up new ventures.
○​ Further constrained private sector growth.
2.​
3.​ Foreign Exchange Regulation Act (FERA), 1973:
○​ Objective: To conserve foreign exchange and regulate foreign investment.
○​ Imposed strict controls on foreign exchange transactions and foreign companies
operating in India (e.g., mandatory dilution of foreign equity).
○​ Discouraged foreign investment.
4.​

II. Public Sector Dominance:

Rationale:

1.​ "Commanding Heights" of the Economy: PSUs were seen as crucial for controlling
key sectors vital for national development.
2.​ Capital Intensive Industries: Private sector lacked capital and risk-taking ability for
large, long-gestation projects (steel, heavy engineering).
3.​ Infrastructure Development: Essential for overall economic growth.
4.​ Social Justice & Regional Balance: PSUs were expected to generate employment,
develop backward regions, and ensure equitable distribution of benefits.
5.​ Preventing Concentration of Wealth: Counterbalancing private monopolies.
6.​ Self-Reliance: Reducing dependence on foreign capital and technology in strategic
areas.

Expansion:
 ●​ Rapid expansion of Public Sector Undertakings (PSUs) in diverse areas: manufacturing
(BHEL, SAIL, HMT), mining (Coal India), energy (ONGC, NTPC), banking, insurance
(LIC, GIC), aviation (Air India), etc.
●​ Significant investment poured into PSUs through FYPs.

Performance & Issues:

●​ Achievements:
○​ Created a diversified industrial base.
○​ Developed critical infrastructure.
○​ Generated employment.
○​ Contributed to technological capabilities.
●​
●​ Problems ("PSU Sickness"):
○​ Low Profitability/Losses: Many PSUs became chronically loss-making, draining
public resources.
○​ Inefficiency: Overstaffing, low productivity, underutilization of capacity.
○​ Bureaucratic Control & Political Interference: Lack of autonomy, slow
decision-making.
○​ Lack of Commercial Orientation: Social objectives often overshadowed
commercial viability.
○​ Poor Management: Often headed by bureaucrats rather than professional
managers.
○​ "Administered Price Mechanism": Prices of PSU goods/services often set
below cost for social reasons, affecting viability.
●​

III. Bank Nationalisation:

Background:

●​ Private commercial banks dominated the banking sector.

●​ Accusations: Banks favored large businesses, neglected agriculture and small-scale
industries, contributed to concentration of wealth, and had limited rural penetration.

Key Events:

1.​ 1949: Banking Regulation Act passed to streamline banking operations.

2.​ 1955: Imperial Bank of India nationalized and renamed State Bank of India (SBI) to
expand rural credit and banking facilities.
3.​ 1969 (Major Step): 14 major commercial banks with deposits over ₹50 crore were
nationalized by the Indira Gandhi government.
○​ Rationale/Objectives:
 ■​ Social Banking: Channel credit to "priority sectors" (agriculture,
small-scale industries, weaker sections).
■​ Mobilization of Savings: Tap savings from a wider population.
■​ Rural Expansion: Extend banking facilities to unbanked and rural areas.
■​ Curbing Private Monopolies: Reduce control of a few industrial houses
over banks.
■​ Professional Management: Improve banking practices.
○​
4.​
5.​ 1980: 6 more private banks were nationalized.

Impact of Bank Nationalisation:

●​ Positive:
○​ Branch Expansion: Significant increase in bank branches, especially in rural
and semi-urban areas.
○​ Credit to Priority Sectors: Increased flow of credit to agriculture, SSIs, and
export sectors.
○​ Mobilization of Deposits: Growth in bank deposits.
○​ Financial Inclusion: Brought more people into the formal banking system.
○​ Reduced Regional Imbalances: Spread of banking to previously neglected
areas.
●​
●​ Negative:
○​ Declining Profitability: Due to directed lending, subsidized interest rates, and
social obligations.
○​ Reduced Efficiency & Poor Customer Service: Lack of competition,
bureaucratic culture.
○​ Political Interference: In lending decisions and appointments.
○​ Rise in Non-Performing Assets (NPAs): Due to politically motivated loans, poor
appraisal, and loan waivers (though NPAs became a bigger issue later, seeds
were sown).
○​ Complacency: Lack of innovation and competition.
●​

Overall Assessment of the 1950-1991 Period:

Achievements:

1.​ Diversified Industrial Base: India developed capabilities in a wide range of industries,
including capital goods.
2.​ Self-Sufficiency in Food Grains: Green Revolution transformed India from a
food-deficit to a food-surplus nation.
 3.​ Expansion of Infrastructure: Significant progress in power, transport, and
communication.
4.​ Development of Scientific & Technical Manpower: Investment in higher education
created a skilled workforce.
5.​ Reduced Dependence on Imports: For many essential goods.
6.​ Growth in National Income: Though modest ("Hindu rate of growth" of around 3.5%), it
was an improvement over the colonial period.

Failures/Shortcomings:

1.​ Slow Economic Growth: Lagged behind many other developing countries.
2.​ Inefficiency and Low Productivity: In both public and private (protected) sectors.
3.​ "License Permit Raj" & Corruption: Stifled entrepreneurship and led to rent-seeking.
4.​ Fiscal Imbalances: Growing government expenditure, especially non-developmental,
led to high fiscal deficits.
5.​ Poor Performance of PSUs: Became a drain on public resources.
6.​ Neglect of Export Promotion: ISI strategy led to an anti-export bias and balance of
payments difficulties.
7.​ Limited Impact on Poverty & Inequality: While some progress was made, a large
population remained poor.
8.​ Regional Imbalances Persisted: Despite policy pronouncements.
9.​ Neglect of Consumer Goods Industries: Focus on heavy industry led to shortages
and poor quality of consumer goods.

The Road to 1991 Crisis:​

By the late 1980s, the Indian economy was facing serious macroeconomic imbalances:

●​ High Fiscal Deficit: Government expenditure consistently exceeded revenues.

●​ Rising Current Account Deficit (CAD): Imports exceeded exports, fueled by oil price
shocks (e.g., Gulf War 1990-91) and a stagnant export sector.
●​ Mounting External Debt: Borrowing to finance deficits.
●​ Low Foreign Exchange Reserves: By 1991, reserves dwindled to barely cover a few
weeks of imports.
●​ High Inflation: Due to supply-side constraints and fiscal profligacy.

This culminated in the Balance of Payments (BOP) crisis of 1991, forcing India to approach
the IMF and World Bank, and ushering in an era of comprehensive economic reforms
(Liberalization, Privatization, Globalization - LPG).
Indian Economy: Five-Year Plans – Key Goals and Main
Achievements
Context: After independence, India adopted a system of centralized economic planning to
guide its development. The Planning Commission (established 1950, replaced by NITI Aayog in
2015) was responsible for formulating these plans.

Overall Objectives of Planning:

●​ Rapid economic growth

●​ Self-reliance
●​ Reduction of poverty and inequality
●​ Modernization of agriculture and industry
●​ Employment generation
●​ Balanced regional development

Key Five-Year Plans: Goals and Achievements

1. First Five-Year Plan (1951-1956)

●​ Focus/Goals: Primarily on agriculture, irrigation, and power projects to address food

shortages and build basic infrastructure. Rehabilitation of refugees from Partition.
●​ Model: Based on Harrod-Domar model (emphasizing savings and investment).
●​ Key Achievements:
○​ Successful in boosting agricultural production (helped by good monsoons).
○​ Initiation of major irrigation projects like Bhakra-Nangal, Hirakud, Damodar Valley
Corporation.
○​ Community Development Programme launched (1952).
○​ Target growth rate: 2.1%; Achieved: 3.6%. Considered a success.
●​

2. Second Five-Year Plan (1956-1961)

●​ Focus/Goals: Rapid industrialization, with emphasis on heavy and basic industries

(steel, heavy engineering, machine tools, chemicals). Development of the public sector
as the "commanding heights" of the economy.
●​ Model: Based on the P.C. Mahalanobis model (two-sector model, focusing on capital
goods).
●​ Key Achievements:
○​ Establishment of steel plants at Bhilai, Durgapur, and Rourkela (with foreign
collaboration).
○​ Increased production of coal and development of atomic energy.
 ○​ Industrial Policy Resolution 1956 adopted.
○​ Shortcomings: Neglect of agriculture led to food shortages later. Inflationary
pressures and foreign exchange crisis.
○​ Target growth rate: 4.5%; Achieved: 4.27%.
●​

3. Third Five-Year Plan (1961-1966)

●​ Focus/Goals: Aimed at self-sufficiency in food grains and continued development of

basic industries. Balanced regional development.
●​ Key Challenges & Failures:
○​ Sino-Indian War (1962) and Indo-Pak War (1965) diverted resources to defense.
○​ Severe droughts (1965-66) led to food crisis.
○​ Plan failed to achieve its targets.
○​ Target growth rate: 5.6%; Achieved: 2.84%. Considered a major failure.
●​

Plan Holidays (1966-1969)

●​ Due to the failure of the Third Plan, three Annual Plans were formulated.
●​ Focus: Addressing food crisis, groundwork for Green Revolution, managing resources
post-wars. Devaluation of the Rupee (1966).

4. Fourth Five-Year Plan (1969-1974)

●​ Focus/Goals: "Growth with Stability" and "Progressive Achievement of Self-Reliance."

Emphasis on social justice (influenced by Indira Gandhi's "Garibi Hatao" slogan).
●​ Key Achievements/Events:
○​ Nationalization of 14 major commercial banks (1969).
○​ Green Revolution gained momentum, leading to increased food grain production.
○​ Indo-Pak War (1971) and creation of Bangladesh led to refugee influx and
economic strain.
○​ First oil shock (1973) impacted the economy.
○​ Target growth rate: 5.7%; Achieved: 3.3%. Mixed results.
●​

5. Fifth Five-Year Plan (1974-1979)

●​ Focus/Goals: "Removal of Poverty (Garibi Hatao)" and "Attainment of Self-Reliance."

Emphasis on employment, agriculture, and core sector industries.
●​ Key Initiatives:
○​ Minimum Needs Programme (MNP) launched for basic amenities.
○​ Focus on import substitution.
○​ The plan was terminated one year ahead of schedule in 1978 by the new Janata
Party government.
○​ Target growth rate: 4.4%; Achieved: 4.8%.
 ●​

Rolling Plan (1978-1980)

●​ Introduced by the Janata Party government. An alternative approach with flexible annual
targets. Discontinued when Congress returned to power.

6. Sixth Five-Year Plan (1980-1985)

●​ Focus/Goals: Direct attack on poverty, strengthening infrastructure for agriculture and

industry, employment generation. Beginning of some economic liberalization.
●​ Key Achievements/Initiatives:
○​ Integrated Rural Development Programme (IRDP), National Rural Employment
Programme (NREP).
○​ NABARD established (1982).
○​ Nationalization of 6 more banks (1980).
○​ Growth rate target was exceeded.
○​ Target growth rate: 5.2%; Achieved: 5.7%. Considered a success.
●​

7. Seventh Five-Year Plan (1985-1990)

●​ Focus/Goals: Emphasis on "Food, Work, and Productivity." Modernization,

technological upgradation, and self-sufficiency. Continued focus on poverty alleviation.
●​ Context: Rajiv Gandhi era, push for computerization and telecom.
●​ Key Achievements:
○​ Good performance in agriculture and industry.
○​ Further liberalization measures were initiated, albeit slowly.
○​ Shortcomings: Growing fiscal deficit and balance of payments pressures by the
end of the plan, setting the stage for the 1991 crisis.
○​ Target growth rate: 5.0%; Achieved: 6.0%.
●​

Annual Plans (1990-1992)

●​ Due to political instability at the Centre and the severe Balance of Payments (BoP) crisis,
the Eighth Plan could not be launched on time. Two annual plans were implemented.
●​ This period witnessed the unfolding of the 1991 economic crisis and the initiation of
major economic reforms.

8. Eighth Five-Year Plan (1992-1997)

●​ Focus/Goals: First plan in the post-reform era. Human development as the core
objective. Modernization of industries, controlling population growth, universalization of
elementary education, poverty reduction, employment generation. Indicative planning
rather than directive planning.
 ●​ Key Achievements:
○​ Implementation of structural adjustment programs (LPG reforms).
○​ High average growth rate achieved.
○​ Panchayati Raj Institutions (73rd & 74th Amendments) strengthened.
○​ Target growth rate: 5.6%; Achieved: 6.8%. Highly successful.
●​

(Subsequent Plans - Brief Overview)

●​ Ninth FYP (1997-2002): "Growth with Social Justice and Equity." Impacted by Asian
Financial Crisis, Kargil War, sanctions.
●​ Tenth FYP (2002-2007): Aimed at doubling per capita income in 10 years. Monitorable
targets for human development. Achieved highest average growth rate (around 7.6%).
●​ Eleventh FYP (2007-2012): "Towards Faster and More Inclusive Growth." Impacted by
global financial crisis of 2008.
●​ Twelfth FYP (2012-2017): "Faster, More Inclusive and Sustainable Growth." This was
the last Five-Year Plan.

Overall Achievements of FYPs (Pre-1991):

●​ Diversified industrial base.

●​ Self-sufficiency in food grains.
●​ Development of infrastructure (though often inadequate).
●​ Growth of scientific and technical manpower.

Overall Limitations of FYPs (Pre-1991):

●​ Relatively slow "Hindu rate of growth" (around 3.5% average before the 1980s).
●​ Inefficiencies in the public sector.
●​ "License-Permit Raj" stifled private initiative.
●​ Fiscal imbalances and BoP problems.
●​ Poverty and inequality remained significant challenges.

Liberalisation, Privatisation and Globalisation (LPG) Era

Since 1991
Context: The 1991 Economic Crisis​
India faced an unprecedented Balance of Payments (BoP) crisis in 1991, characterized by:

●​ Critically low foreign exchange reserves (barely enough for a few weeks of imports).
●​ High fiscal deficit (government spending far exceeding revenue).
●​ High current account deficit.
 ●​ Rising inflation.
●​ Downgrading of India's credit rating.
●​ Impact of Gulf War (1990-91) on oil prices and remittances.

To overcome the crisis, India approached the International Monetary Fund (IMF) and World
Bank, which necessitated undertaking structural economic reforms. The government under
Prime Minister P.V. Narasimha Rao, with Dr. Manmohan Singh as Finance Minister, launched
the New Economic Policy (NEP) based on LPG.

Key Components of LPG Reforms:

1. Liberalisation:

●​ Meaning: Reducing government control and restrictions on economic activities, allowing

greater freedom to private sector enterprises.
●​ Key Policies & Decisions:
○​ Industrial Sector Reforms:
■​ Abolition of Industrial Licensing: For most industries (except a few like
alcohol, hazardous chemicals, defense).
■​ Dereservation of Industries: Many industries previously reserved for the
public sector were opened to the private sector. Reservation for Small
Scale Industries (SSIs) was also progressively reduced.
■​ Amendment of MRTP Act (Monopolies and Restrictive Trade
Practices Act): Threshold limits for assets of MRTP companies were
removed. Later replaced by the Competition Act, 2002.
○​
○​ Financial Sector Reforms (based on Narasimham Committee
recommendations):
■​ Banking: Reduced Statutory Liquidity Ratio (SLR) and Cash Reserve
Ratio (CRR) to increase lendable resources. Deregulation of interest
rates. Entry of new private sector banks. Greater autonomy for public
sector banks.
■​ Capital Markets: SEBI (Securities and Exchange Board of India) given
statutory powers to regulate capital markets. Foreign Institutional
Investors (FIIs) allowed to invest in Indian stock markets.
■​ Insurance Sector: Opened to private and foreign players (IRDAI
established).
○​
○​ Trade and Investment Policy Reforms:
■​ Reduction in Tariffs: Import duties were significantly reduced in a
phased manner.
■​ Dismantling of Quantitative Restrictions (Quotas): On imports and
exports.
 ■​ Exchange Rate Adjustment: Rupee devalued initially, then moved
towards a market-determined exchange rate system. Current account
convertibility achieved.
■​ Promotion of Foreign Direct Investment (FDI): Automatic approval
routes expanded, higher FDI limits in various sectors.
○​
○​ Fiscal Reforms (based on Chelliah Committee recommendations):
■​ Tax Reforms: Simplification of direct and indirect tax structures, reduction
in tax rates, broadening the tax base. Introduction of Service Tax (later
subsumed into GST).
■​ Fiscal Consolidation: Efforts to reduce fiscal deficit (e.g., Fiscal
Responsibility and Budget Management - FRBM Act, 2003).
○​
●​

2. Privatisation:

●​ Meaning: Transfer of ownership, management, and control of public sector enterprises

(PSUs) to the private sector. Also includes disinvestment (selling a part of PSU equity to
the public/private sector).
●​ Key Policies & Decisions:
○​ Disinvestment: Selling minority stakes in PSUs to raise resources, improve
efficiency, and encourage wider public ownership.
○​ Strategic Sale: Selling a significant portion of government stake (often majority)
along with transfer of management control to a private entity. (e.g., BALCO,
Modern Foods, VSNL initially).
○​ Rationale:
■​ Improve efficiency and performance of PSUs.
■​ Reduce fiscal burden on the government.
■​ Generate resources for social sector spending or debt reduction.
■​ Introduce competition and market discipline.
○​
○​ A Department/Ministry of Disinvestment was created (now DIPAM - Department
of Investment and Public Asset Management).
●​

3. Globalisation:

●​ Meaning: Integrating the Indian economy with the world economy. Involves free flow of
trade, capital, technology, information, and people across borders.
●​ Key Policies & Decisions:
○​ Trade Liberalisation: Reducing tariffs and non-tariff barriers (as mentioned
above).
○​ Opening up to Foreign Investment: Allowing FDI and FII inflows.
 ○​ Membership of WTO (World Trade Organization): India became a founding
member in 1995, committing to multilateral trade rules.
○​ Encouraging Exports: Various export promotion schemes.
○​ Facilitating Technology Transfer: Easing norms for foreign collaborations.
○​ Partial Capital Account Convertibility: Allowing freer movement of capital for
certain purposes.
●​

Results and Impact of LPG Reforms (Post-1991):

Positive Results:

1.​ Higher Economic Growth: India moved from the "Hindu rate of growth" to an average
of 6-8% GDP growth in subsequent decades (with some fluctuations).
2.​ Increased Foreign Investment: Significant inflows of FDI and FII, boosting capital
formation and technology absorption.
3.​ Rise in Foreign Exchange Reserves: From critically low levels to comfortable and
robust reserves.
4.​ Control of Inflation: Generally, inflation was brought under better control compared to
the pre-reform period, though it remains a challenge.
5.​ Diversification of Exports: Growth in service exports (especially IT and BPO sectors)
became a major strength.
6.​ Improved Consumer Choice and Quality: Increased competition led to better quality
goods and services and more choices for consumers.
7.​ Rise of the Service Sector: The service sector became the dominant contributor to
India's GDP.
8.​ Poverty Reduction: Accelerated economic growth contributed to a faster decline in
poverty rates, though debates on the extent and inclusiveness continue.
9.​ Increased Competitiveness: Indian industries became more competitive globally.
10.​Integration with Global Economy: India became a more significant player in the global
economic landscape.

Negative Results/Challenges:

1.​ Increased Inequality: Widening gap between rich and poor, and between urban and
rural areas. Benefits of growth not evenly distributed.
2.​ Jobless Growth/Employment Concerns: High GDP growth did not always translate
into proportionate employment generation, especially in the formal sector.
3.​ Agricultural Distress:
○​ Reduced public investment in agriculture in the initial reform years.
○​ Exposure to international price volatility due to trade liberalization (WTO impact).
○​ Issues like farmer suicides, indebtedness remained serious concerns.
4.​
 5.​ Impact on Small-Scale Industries (SSIs): Faced increased competition from large
domestic players and imports. Many struggled to survive.
6.​ Volatility from Global Markets: Increased integration made India more susceptible to
global economic shocks (e.g., 2008 financial crisis, recent pandemic).
7.​ Social Sector Neglect (initially): Initial focus was heavily on fiscal consolidation,
sometimes at the cost of social sector spending (health, education), though this was later
addressed to some extent.
8.​ Environmental Concerns: Rapid industrialization and urbanization without adequate
safeguards led to environmental degradation.
9.​ Regional Disparities: Some states and regions benefited more from reforms than
others, leading to widening regional imbalances.
10.​Slow Pace of "Second Generation Reforms": Reforms in critical areas like land, labor,
and administrative procedures have been slower and more contentious.

Conclusion:​
The LPG reforms of 1991 were a watershed moment in India's economic history. They rescued
the economy from a severe crisis and propelled it onto a higher growth trajectory. While the
reforms have brought significant benefits, they have also posed new challenges related to
inclusiveness, sustainability, and equity, which continue to be addressed by policymakers. The
reform process is ongoing, with successive governments introducing further changes to adapt to
evolving domestic and global economic conditions.

Performance of Indian Economy Since 1991

The economic reforms initiated in 1991 marked a paradigm shift in India's economic policy,
moving from a state-dominated, inward-looking economy to a more market-oriented,
outward-looking one.

I. Growth Performance (GDP):

●​ Accelerated Growth: India transitioned from the "Hindu rate of growth" (around 3.5%
average pre-1980s) to a significantly higher growth trajectory.
○​ 1992-1997 (8th Plan): Averaged 6.8% GDP growth.
○​ Early 2000s: Growth picked up further, touching 8-9% in the mid-2000s
(2003-2008 often called the "dream run").
○​ Post-Global Financial Crisis (2008): Growth moderated but remained relatively
strong compared to many global economies.
○​ Recent Years: Experienced fluctuations due to domestic policy changes
(demonetization, GST implementation) and global events (COVID-19 pandemic
leading to a sharp contraction in FY21, followed by a strong recovery).
●​
 ●​ Structural Shift: The composition of GDP changed, with the service sector becoming
the largest contributor, followed by industry and then agriculture.
●​ Per Capita Income: Significant increase in per capita income, leading to improvements
in living standards for a section of the population, though unevenly distributed.

II. Fiscal & Revenue Deficits:

●​ Context: High fiscal and revenue deficits were key contributors to the 1991 crisis.
●​ Post-1991 Trend:
○​ Initial years saw efforts towards fiscal consolidation.
○​ Fiscal Responsibility and Budget Management (FRBM) Act, 2003: Enacted to
institutionalize fiscal discipline, setting targets for reducing fiscal and revenue
deficits.
■​ While targets were often revised or paused (especially during economic
shocks), the Act provided a framework.
○​
○​ Challenges in Adherence: Fiscal deficit often remained above target due to
populist spending, global shocks (2008 crisis, COVID-19 stimulus), and revenue
shortfalls.
○​ Revenue Deficit: A persistent concern, indicating that government's revenue
expenditure exceeds its revenue receipts, leading to borrowing for non-asset
creating expenses.
●​
●​ Quality of Expenditure: Concerns remain about the quality of public expenditure, with a
need for greater allocation towards capital formation.
●​ Public Debt: While the overall debt-to-GDP ratio has been managed, it saw a significant
spike post-COVID-19.

III. Trade, Commerce & Balance of Payments (BoP):

●​ Trade Liberalisation:
○​ Drastic reduction in import tariffs.
○​ Dismantling of quantitative restrictions (quotas).
○​ Increased integration with the global economy.
●​
●​ Trade Volume: Significant increase in both exports and imports.
○​ Exports: Diversification from traditional goods to manufactured goods and,
crucially, services (especially IT/ITES).
○​ Imports: Driven by industrial needs (capital goods, raw materials), oil, and
consumer goods.
●​
●​ Balance of Payments (BoP):
○​ Current Account Deficit (CAD): Generally remained within manageable limits
for most of the period, though it has seen spikes due to high oil prices or gold
 imports. The services trade surplus often helped cushion the merchandise trade
deficit.
○​ Capital Account: Strengthened significantly due to robust inflows of Foreign
Direct Investment (FDI) and Foreign Institutional Investment (FII)/Foreign
Portfolio Investment (FPI).
○​ Foreign Exchange Reserves: Built up substantially from the crisis levels of
1991 (a few weeks of import cover) to robust levels (often covering 10-15 months
of imports), providing a strong buffer against external shocks.
●​
●​ Exchange Rate: Moved from a fixed/managed float to a more market-determined
exchange rate system. The Rupee has seen periods of depreciation and appreciation
based on market forces and RBI interventions.

IV. Inflation:

●​ Trend:
○​ Early 1990s: High inflation due to the crisis.
○​ Mid-1990s to mid-2000s: Inflation generally moderated.
○​ Late 2000s - Early 2010s: Experienced periods of high inflation, partly due to
global commodity price shocks and domestic supply-side issues.
○​ Mid-2010s onwards: Inflation largely brought under control, aided by monetary
policy reforms.
●​
●​ Policy Response:
○​ Shift towards inflation targeting by the Reserve Bank of India (RBI).
○​ Establishment of the Monetary Policy Committee (MPC) in 2016 with a mandate
to maintain CPI inflation within a target band (currently 4% +/- 2%).
●​
●​ Drivers: Food inflation (due to supply shocks, monsoon dependence), fuel inflation
(global crude prices), and core inflation (demand-side pressures).

V. Growth of Service Sector:

●​ Dominant Sector: The service sector has been the primary engine of India's growth
since 1991, contributing over 50-55% to GDP.
●​ Key Sub-Sectors:
○​ Information Technology (IT) and IT-Enabled Services (ITES)/Business
Process Outsourcing (BPO): A flagship success story, making India a global
hub.
○​ Telecommunications: Rapid expansion and high teledensity.
○​ Financial Services: Banking, insurance, capital markets.
○​ Trade, Hotels, and Restaurants.
○​ Transport, Storage, and Communication.
○​ Real Estate and Business Services.
●​
 ●​ Impact:
○​ Major contributor to export earnings (services exports).
○​ Significant employment generation, especially for skilled and semi-skilled labor.
○​ Increased economic dynamism and productivity.
●​
●​ Challenges: Heterogeneity within the sector (high-productivity formal services vs.
low-productivity informal services), need for upskilling.

Key Challenges and Responses Post-1991

I. Agriculture and Food Security:

●​ Challenges:
○​ Slowing Growth & Stagnant Productivity: Compared to the Green Revolution
era, yield growth has slowed for many crops.
○​ Farmer Distress: Indebtedness, low profitability, price volatility, rising input
costs.
○​ Water Scarcity & Climate Change: Over-exploitation of groundwater, erratic
monsoons, increased frequency of extreme weather events.
○​ Market Inefficiencies: Fragmented markets, lack of adequate storage and
processing infrastructure, limited direct access for farmers to consumers
(intermediaries dominate). APMC issues.
○​ Land Issues: Land fragmentation, difficulties in land leasing.
○​ Post-Harvest Losses: Significant losses due to inadequate infrastructure.
○​ Food Security: Ensuring availability, accessibility, and affordability of nutritious
food for all, especially vulnerable sections. Shift towards nutritional security.
●​
●​ Key Responses & Policies:
○​ Income Support: Pradhan Mantri Kisan Samman Nidhi (PM-KISAN).
○​ Crop Insurance: Pradhan Mantri Fasal Bima Yojana (PMFBY).
○​ Irrigation: Pradhan Mantri Krishi Sinchayee Yojana (PMKSY).
○​ Market Reforms: Model APMC Act, e-NAM (National Agriculture Market),
promotion of Farmer Producer Organizations (FPOs). (Note: The three farm laws
introduced in 2020 were later repealed due to protests).
○​ Soil Health: Soil Health Card Scheme.
○​ Minimum Support Price (MSP): Continued procurement at MSP, with policies
aiming for MSP at 1.5 times the cost of production (based on Swaminathan
Commission recommendations).
○​ National Food Security Act (NFSA), 2013: Legal entitlement to subsidized food
grains through the Targeted Public Distribution System (TPDS).
○​ Agricultural Infrastructure Fund (AIF): To finance post-harvest management
infrastructure.
 ○​ Diversification: Encouraging horticulture, animal husbandry, fisheries.
●​

II. Industrialisation:

●​ Challenges:
○​ "Jobless Growth" in Manufacturing: Manufacturing sector's share in GDP and
employment has not grown as expected.
○​ Competition: Increased competition from imports, especially from China.
○​ Infrastructure Bottlenecks: Inadequate power, transport, logistics.
○​ Ease of Doing Business: While improving, issues like complex regulations,
bureaucratic hurdles, and contract enforcement persist.
○​ Land Acquisition & Labor Laws: Contentious issues hindering large-scale
investments.
○​ Credit Access: Particularly for Micro, Small, and Medium Enterprises (MSMEs).
○​ Skill Gaps: Lack of adequately skilled workforce for modern manufacturing.
○​ Low R&D Expenditure: Affecting innovation and competitiveness.
●​
●​ Key Responses & Policies:
○​ "Make in India" Initiative (2014): To promote India as a global manufacturing
hub.
○​ Production Linked Incentive (PLI) Schemes: For various sectors to boost
domestic manufacturing and exports.
○​ Startup India & Standup India: To foster entrepreneurship and innovation.
○​ National Manufacturing Policy (2011): Aimed to increase the share of
manufacturing in GDP (though largely subsumed by Make in India).
○​ Corporate Tax Cuts (2019): To incentivize investment.
○​ Infrastructure Development: National Infrastructure Pipeline (NIP), PM Gati
Shakti National Master Plan.
○​ MSME Support: Various schemes for credit, technology upgradation, and market
access (e.g., MUDRA Yojana).
○​ Skill India Mission: To address skill gaps.
●​

III. Poverty Alleviation & Employment:

●​ Challenges:
○​ Poverty: While poverty has declined significantly (as per various estimates), a
substantial number of people still live below the poverty line. Multi-dimensional
poverty (health, education, living standards) remains a concern.
○​ Employment:
■​ Underemployment & Disguised Unemployment: Prevalent, especially
in agriculture and the informal sector.
■​ Informal Sector Dominance: Majority of the workforce is in the informal
sector with low wages, no social security, and poor working conditions.
 ■​ Skill Mismatch: Gap between skills possessed by the workforce and
skills demanded by the industry.
■​ Low Labor Force Participation Rate (LFPR): Particularly for women.
■​ Quality of Jobs: Need for more formal, productive, and well-paying jobs.
○​
●​
●​ Key Responses & Policies:
○​ Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA),
2005: Provides guaranteed wage employment.
○​ National Rural Livelihood Mission (NRLM - Deendayal Antyodaya Yojana) &
National Urban Livelihood Mission (NULM): Self-help groups, skill
development, and self-employment.
○​ Targeted Public Distribution System (TPDS) under NFSA: Subsidized food
grains.
○​ Housing Schemes: Pradhan Mantri Awas Yojana (PMAY - Rural & Urban).
○​ Direct Benefit Transfer (DBT): To improve delivery of subsidies and welfare
payments (JAM Trinity - Jan Dhan, Aadhaar, Mobile).
○​ Skill Development Programs: Pradhan Mantri Kaushal Vikas Yojana (PMKVY).
○​ Social Security Schemes: Atal Pension Yojana, PM Jeevan Jyoti Bima Yojana,
PM Suraksha Bima Yojana.
●​

IV. Rural & Urban Infrastructure:

●​ Challenges:
○​ Rural:
■​ Connectivity (all-weather roads, digital).
■​ Power supply (quality and reliability).
■​ Sanitation and safe drinking water.
■​ Housing.
■​ Agricultural infrastructure (storage, cold chains).
○​
○​ Urban:
■​ Overburdened infrastructure due to rapid urbanization (housing, transport,
water, sewage, waste management).
■​ Slums and informal settlements.
■​ Pollution (air, water, noise).
■​ Traffic congestion.
■​ Urban governance challenges.
○​
●​
●​ Key Responses & Policies:
○​ Rural:
■​ Pradhan Mantri Gram Sadak Yojana (PMGSY): Rural road connectivity.
 ■​ Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) & Saubhagya
Scheme: Rural electrification.
■​ Swachh Bharat Mission (SBM - Gramin): Sanitation.
■​ Jal Jeevan Mission (JJM): Piped drinking water to every rural
household.
■​ BharatNet: Digital connectivity for Gram Panchayats.
○​
○​ Urban:
■​ Smart Cities Mission: To develop citizen-friendly and sustainable smart
cities.
■​ Atal Mission for Rejuvenation and Urban Transformation (AMRUT):
Basic urban infrastructure.
■​ Pradhan Mantri Awas Yojana - Urban (PMAY-U): Housing for All.
■​ Swachh Bharat Mission - Urban (SBM-U): Cleanliness and waste
management.
○​
○​ Overall:
■​ National Infrastructure Pipeline (NIP): Plan for large-scale
infrastructure investment.
■​ PM Gati Shakti National Master Plan: Integrated planning and
coordinated implementation of infrastructure connectivity projects.
○​
●​

V. Social Sector – Health, Education etc.:

●​ Challenges:
○​ Health:
■​ Low public spending on health (as a % of GDP).
■​ Inadequate public health infrastructure, especially in rural areas.
■​ Shortage of medical personnel (doctors, nurses, specialists).
■​ High Out-Of-Pocket Expenditure (OOPE) on health, pushing families into
poverty.
■​ Regional disparities in health outcomes.
■​ Quality and affordability of healthcare.
○​
○​ Education:
■​ Access vs. Quality: While enrollment has improved (e.g., due to Sarva
Shiksha Abhiyan), learning outcomes remain a major concern.
■​ High dropout rates, especially at secondary levels.
■​ Inadequate infrastructure in many schools.
■​ Teacher quality, training, and absenteeism.
■​ Employability of graduates.
■​ Skill development and vocational training gaps.
○​
●​
●​ Key Responses & Policies:
○​ Health:
■​ National Health Mission (NHM): Comprising National Rural Health
Mission (NRHM) and National Urban Health Mission (NUHM).
■​ Ayushman Bharat (2018):
■​ Pradhan Mantri Jan Arogya Yojana (PM-JAY): Health insurance
for vulnerable families.
■​ Health and Wellness Centres (HWCs): Comprehensive primary
healthcare.
■​
■​ Janani Shishu Suraksha Karyakram (JSSK): Maternal and child health.
■​ Pradhan Mantri Bharatiya Janaushadhi Pariyojana (PMBJP):
Affordable generic medicines.
■​ Increased budgetary allocations for health (though still below desired
levels).
○​
○​ Education:
■​ Right to Education (RTE) Act, 2009: Free and compulsory education for
children aged 6-14.
■​ Samagra Shiksha Abhiyan: Integrated scheme for school education
(subsuming SSA, RMSA, Teacher Education).
■​ National Education Policy (NEP) 2020: Aims to overhaul the education
system from pre-school to higher education, focusing on holistic, flexible,
multidisciplinary learning.
■​ Mid-Day Meal Scheme (now PM POSHAN).
■​ Schemes for higher education: Rashtriya Uchchatar Shiksha Abhiyan
(RUSA), Institutes of Eminence (IoE).
■​ Focus on digital education (e.g., SWAYAM, DIKSHA).
○​
●​