The crisis
In 1991 India was running out of foreign currency. It had only enough reserves to pay for a few weeks of imports, and the government had to pledge gold to borrow money abroad. For decades the economy had been tightly controlled: businesses needed government licences to start, expand or change what they made, and high tariffs kept out foreign goods. This system was often called the 'licence raj'.
The response
The new government of P. V. Narasimha Rao, with Manmohan Singh as finance minister, used the crisis to change direction. Singh's July 1991 budget, and the decisions around it, did away with most industrial licensing, cut import tariffs, devalued the rupee and opened the door wider to foreign investment.
In the years that followed, India's economy grew much faster than before. Many economists, Ajay Shah among them, see 1991 as the moment India began to unlock its growth. For him, it was the reason to come back and work on Indian economic policy.
Decide for yourself
- Why do you think it took a crisis for these reforms to happen?
- Who might have lost out from opening the economy in 1991, and how?
- What barriers do you think still hold India's economy back today?