Economic reforms of 1991: India had foreign exchange for barely two weeks of imports when Manmohan Singh presented his first Budget on July 24, 1991. Inflation was in double digits and the Centre’s fiscal deficit had crossed 8 per cent of GDP. Singh nevertheless ended the speech by calling India’s emergence as a major economic power “an idea whose time has come”. The Budget formed part of the larger break made by PV Narasimha Rao’s government. Industrial licensing was sharply reduced. Import controls were loosened, and more sectors were opened to foreign investment. The state gave up much of its power to decide who could produce what and on what scale.
India’s per capita GDP rose from $371 in 1990 to $2,703 in 2025. The World Bank estimates that 5.3 per cent of the population lived below its $3-a-day poverty line in 2022. Many factors contributed to this record, and later governments did not always follow the logic of 1991. But an economy still governed by industrial permits and import controls would not have produced the same expansion.
READ | 30 years of liberalisation: What did India achieve, what it didn’t
Thirty-five years later, the 1991 measures cannot answer the constraints of 2026. The task then was to reduce state control over production and investment. The task now is to improve the state’s ability to regulate, adjudicate and provide public services.
India’s economic reforms remain incomplete
The size of India’s economy conceals the distance still to be covered. India remains a lower-middle-income country. China, which had a lower nominal per capita income than India in 1990, recorded $13,862 in 2025 against India’s $2,703. Vietnam’s per capita income rose from less than $100 to $5,066 over the same period.
India has grown rapidly, but it has not converged fast enough with the more successful Asian economies. Poverty has fallen. Poor schooling, inadequate healthcare and weak access to productive employment continue to restrict what economic growth can achieve.
The policy constraint has changed. Excessive controls restricted economic activity in 1991. India now suffers from weak state capacity in areas required by a more complex economy. Firms face overlapping regulation, uncertain enforcement, slow contract resolution and barriers to expansion. The IMF has identified regulatory costs, weak firm growth, inadequate innovation and limited trade integration as constraints on productivity.
The next generation of reform cannot be a replay of 1991. It has to improve the quality of government.
Deregulation must move to the states
Prime Minister Narendra Modi announced in February 2025 that the government would establish a Deregulation Commission. The Economic Survey for 2024-25 placed deregulation at the centre of its medium-term growth argument.
The exercise should examine the stock of laws, licences, inspections and reporting requirements accumulated by the Union, state and local governments. Removing obsolete provisions will not be enough. India needs to identify rules that duplicate one another, give officials excessive discretion or impose costs unrelated to the public purpose they claim to serve.
Departments should publish consolidated versions of the rules they administer. Regulations that impose large costs should carry expiry dates unless renewed after review. Inspections should be based on risk rather than administrative routine. The Economic Survey itself places much of this responsibility on state governments, which regulate land, buildings, labour welfare, electricity and local commerce.
The industrial licence raj has receded. A dense compliance regime has taken its place. Large companies can employ lawyers and consultants to manage it. Smaller firms lose management time and capital.
READ | Women and employment: How economic liberalisation failed to address inequalities
Judicial reform is economic reform
More than five crore cases remain pending across Indian courts. Commercial claims, tax disputes and insolvency proceedings can take years to resolve.
A contract has limited value when enforcement is uncertain. Delays raise the cost of credit, weaken smaller firms in disputes with larger companies and encourage unfavourable settlements. They also reward parties that can use procedure to postpone payment or possession.
The Insolvency and Bankruptcy Code was designed to replace prolonged negotiations with a time-bound process. Its effect has been reduced by delays in tribunals and courts. The same weakness affects land cases and tax appeals.
Judicial capacity must expand. Courts require more judges and staff, tighter control over adjournments and better case management. Commercial courts need personnel familiar with business disputes. Digitisation can improve filing and scheduling, but it cannot fill vacancies or correct procedures that reward delay.
Fiscal reform must create room for the state
A programme built around better courts, schools, hospitals and research institutions raises a fiscal question that the first draft left unanswered. These services require sustained public spending. They cannot be financed through repeated borrowing or occasional windfalls.
India needs continued fiscal consolidation, but the composition of that adjustment matters. Cutting productive expenditure to meet a deficit target would weaken the institutions the reform programme seeks to build. The Union and the states have to widen the tax base, reduce poorly targeted subsidies and protect capital and priority social expenditure.
The IMF has called for a medium-term fiscal framework covering the Union and state governments, with a clearer deficit path and lower public debt. It has also warned against using one-off revenues to finance permanent recurrent commitments.
Fiscal reform is therefore part of state-capacity reform. A government that cannot redirect expenditure from politically convenient schemes to courts, municipal services or primary healthcare will remain administratively weak even when its revenues rise.
The problem is sharper in the states. Their fiscal positions differ widely, while many of the services that determine productivity fall within their control. A common borrowing limit cannot substitute for state-level assessments of debt, expenditure quality and future liabilities.
Skills and manufacturing cannot be separated
India’s demographic advantage is being eroded by weak learning and slow creation of productive jobs. Higher enrolment has produced more graduates, but qualifications often do not translate into skills that employers can use.
The objective can no longer be enrolment alone. Schools and universities have to be judged by learning, completion and employment outcomes. India cannot raise manufacturing productivity or absorb new technology while companies retrain graduates for basic work.
Make in India and the production-linked incentive schemes have attracted investment in selected industries. Manufacturing has nevertheless failed to generate employment on the scale once expected. India’s exports of goods and services amounted to 22.3 per cent of GDP in 2025, below the 24 per cent recorded in 2022.
Subsidies can encourage investment in a new industry. They cannot compensate indefinitely for weak skills, uncertain regulation, slow dispute settlement and expensive imported inputs. Factory announcements are not evidence of structural change unless firms become competitive without permanent protection.
The Union government cannot deliver these reforms alone
The discussion of the Indian state often treats it as a single institution headquartered in New Delhi. Most reforms in this article depend on state governments and municipalities.
School education, public health, policing, land records, electricity distribution and municipal permissions are administered largely below the Union level. A small business encounters state inspectors, urban authorities, electricity boards and local tax offices more often than it deals with a central ministry.
The Sixteenth Finance Commission describes the devolution of governance and financial powers to local bodies as unfinished. It also records wide differences in the money transferred by states to municipalities and panchayats. Local governments remain dependent on state governments even for functions assigned to them under the Constitution.
This makes federal reform central to the next growth programme. The Union government can set standards and use financial incentives. States must change regulations and strengthen service delivery. Municipalities need predictable revenue, trained staff and authority over the functions for which they are held responsible.
Competition between states can help. It can also conceal weak local institutions when reforms consist of changing rules on paper without improving enforcement. Rankings and portals are poor substitutes for functioning land records, predictable building approvals or a municipal office able to collect property tax.
State capacity must support public goods
The reforms of 1991 did not require the state to withdraw from education, healthcare or infrastructure. Manmohan Singh’s Budget speech argued that markets served those who could participate in them, leaving government responsible for services such as education, healthcare, water and roads.
India has since made substantial gains in household electrification, sanitation, financial inclusion and digital transfers. Public systems remain weak where service quality depends on schools, hospitals, police stations, laboratories and municipalities functioning each day.
Private schools, coaching centres and hospitals compensate for some of these failures. They also increase the burden on households and widen the difference between citizens who can buy reliable services and those who depend on government provision.
Public spending on health and education remains modest relative to India’s development ambitions. The weakness lies in the amount spent and in the ability of departments to convert budgets into staff attendance, medicines, teaching and measurable outcomes.
READ | India growth strategy: From resilience to indispensability
The political economy of reform has changed
The reforms of 1991 were concentrated in the Union government. A limited number of decisions on industrial licensing, tariffs, foreign investment and finance could alter incentives across the economy.
The present agenda is dispersed. It runs through state departments, courts, universities, regulators and municipalities. Each institution has its own procedures and interests. Many reforms threaten powers exercised by officials, professional groups or local political networks.
There is also no crisis comparable to 1991. Reform without a visible emergency is harder to organise. The benefits arrive gradually, while the groups that lose discretion or protection can identify their losses at once.
This explains why the next phase will produce fewer dramatic announcements. Its progress will be measured through shorter case durations, simpler state regulations, better municipal accounts and improved learning outcomes. These changes require political attention long after the launch of a scheme or commission.
India needs an outward-looking reform agenda
The global economy is less favourable than it was in the early 1990s. Trade barriers have risen, geopolitical rivalries influence investment decisions and supply chains are being reorganised.
These conditions increase the value of competitiveness. India will attract production seeking alternatives to concentrated supply chains only when firms can import efficiently, export at predictable costs and rely on stable rules.
The lesson of 1991 was that government had to stop doing many things that restricted enterprise. The economy of 2026 faces a different problem. Governments have to clear fewer permissions, settle disputes faster, spend more carefully and deliver services through the states and municipalities.
The economy of 1991 was constrained by controls. The economy of 2026 is constrained by its institutions.