India’s Post-1991 Reforms: On Manufacturing & Growth

Syllabus: GS3/Economy

Context

• Recent discussions on India’s post-1991 economic reforms highlight that industrial de-licensing failed to accelerate manufacturing growth and job creation while financial markets and software exports boomed.

India Before 1991 Reforms

• India followed a mixed-economy model characterised by state-led industrialisation, import substitution, industrial licensing and extensive government controls before 1991.
• The public sector occupied a dominant position in strategic industries, while private enterprises faced restrictions on investment, production capacity and expansion.
• However, the model suffered from low productivity, bureaucratic controls, limited competition and foreign exchange constraints.
• The balance of payments crisis of 1991 compelled India to undertake structural reforms.

Key Attributes of 1991 Reforms

• The New Economic Policy (1991), based on Liberalisation, Privatisation and Globalisation (LPG), introduced:
  • Liberalisation: Abolition of industrial licensing for most industries, reduction in import restrictions and financial-sector reforms.
  • Privatisation: Greater participation of private enterprises and disinvestment in public-sector enterprises.
  • Globalisation: Encouragement of foreign investment, trade liberalisation and integration with the global economy.

India’s Economic Reforms Since 1991

• Economic liberalisation was not an entirely sudden development. Several reform initiatives had emerged during the 1980s.
• The Vadilal Dagli Committee (1979) questioned the effectiveness of industrial licensing, while the Rajaraman Committee (1981) recommended greater access to computers to promote software exports. 
• Some liberalisation measures were implemented during the 1980s, with comprehensive reforms following in 1991.
• Subsequent reforms included:
  • Introduction of the Goods and Services Tax (GST) in 2017.
  • Insolvency and Bankruptcy Code (IBC), 2016.
  • Expansion of Foreign Direct Investment (FDI).
  • Digitalisation of financial and public services.
  • Production Linked Incentive (PLI) schemes to strengthen domestic manufacturing.

Changing Role of the Public and Private Sectors

• India has witnessed a substantial shift towards private-sector participation in manufacturing and infrastructure.
• The public sector’s share in manufacturing investment declined from approximately 40% in 1980-81 to 24% in 1991-92 and just 8% in 2023-24.
• Similarly, its share in infrastructure investment decreased from around 69% in 1991-92 to 44% in 2023-24, reflecting greater private participation in electricity, roads, airports and ports.

Why Delicensing Failed to Transform Manufacturing?

• Industrial de-licensing (removal of the industrial licensing Act in 1991) has not substantially increased manufacturing’s contribution to the Indian economy despite reducing entry barriers and encouraging competition.
• Key indicators highlight this limitation:
  • Manufacturing’s share in Gross Value Added (GVA) increased from approximately 12% in 1950-51 to 18–19% by the mid-1990s but subsequently declined to around 14% in 2024-25.
  • Its share in total investment decreased from 41% in 2011-12 to 32% in 2023-24.
  • Manufacturing continues to employ only around 10–11% of India’s workforce.
• Although large conglomerates such as Tata, Reliance, Adani and Aditya Birla expanded significantly, their diversification across multiple sectors has not automatically created globally competitive manufacturing capabilities.
• Thus, removing regulatory barriers is necessary but insufficient. Industrial development requires technological innovation, skilled labour, research and development, competitive supply chains and export-oriented production.

India-China Comparison: Missing Innovation Ecosystem

• The manufacturing contributions of both economies were relatively comparable during the early 1990s.
• China subsequently developed large-scale manufacturing capabilities, specialised industrial clusters and globally competitive technology-intensive enterprises.
  • China’s success was supported by export-oriented policies, infrastructure investment, technology absorption, manufacturing ecosystems and sustained industrial policy.
• India, meanwhile, has struggled to develop a comparable ecosystem of technology-driven start-ups and specialised manufacturing enterprises.
• The lesson is that economic liberalisation needs to be complemented by innovation, research and development, economies of scale and integration into global value chains.

Financial Liberalisation

• Private-sector banks increased their share of total bank advances from approximately 17% in 2004-05 to 39% in 2024-25. Their share of banking employment also rose from 10% to 43%.
• The liberalisation of mutual funds, expansion of capital markets and simplification of securities trading further strengthened financial intermediation.
• Consequently, India’s financial system became more diversified, facilitating savings mobilisation, private investment and entrepreneurship.

India’s Success Story: Growth of Software Exports

• Software exports increased from approximately $400 million in 1991-92 to $240 billion in 2025-26, accounting for around 28% of total exports and supporting nearly six million jobs.
  • The foundations for software export were laid before 1991 through computer-import liberalisation and policy support during the 1980s.
• However, artificial intelligence is creating new challenges for India’s IT services industry, highlighting the need for continuous technological upgrading and workforce reskilling.

Way Forward: Reforms Beyond 1991

• Manufacturing-led Growth: Strengthen industrial clusters, MSMEs, logistics and integration into global value chains.
• Innovation Ecosystem: Increase R&D expenditure, university-industry collaboration and support for technology-intensive start-ups.
• Employment Generation: Promote labour-intensive sectors such as textiles, footwear, food processing and tourism.
• Agricultural Reforms: Improve irrigation, storage, agricultural marketing, food processing and farmer incomes.
• Inclusive Development: Strengthen education, healthcare, skill development and social protection.
• Competitive Markets: Ensure a level playing field, prevent excessive market concentration and improve regulatory institutions.
• AI Preparedness: Promote digital skills, technological adaptation and high-value services exports.

Conclusion

• The 1991 reforms marked a decisive departure from excessive state controls and opened new opportunities for private enterprise.
• However, the experience demonstrates that de-licensing alone cannot guarantee industrialisation, technological advancement or inclusive growth.
• India needs to move from a framework of merely enabling private investment towards one that actively builds productive capabilities, generates quality employment and promotes innovation. 
• The next generation of reforms should focus on economic growth along with its sustainability and equitable distribution.

Source: BS