Written by Nidhi Parihar
Fact Checked & Verified
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Written by Nidhi Parihar
Fact Checked & Verified
It has been a little over two decades since the implementation of the economic reforms. This is a fairly moderate period to assess the major developments in the Indian economy during this time.
After presenting a brief outline of the features of reforms introduced during this period, we will attempt a critical assessment of the reform policy as it has affected different aspects of the economy. Most of these steps were undertaken in the initial phase of the reforms programme, but the entire reform menu could not be completed.
Some of the important features of the reforms process have been as follows:
1) The approach towards reforms has been cautious, with appropriate sequencing of measures, complementary reforms across sectors (for example, the monetary, fiscal, and external sectors), and development of financial institutions and markets.
2) The pace and sequencing of liberalisation has been responsive to domestic developments, especially in the monetary and financial sectors, and the evolving international financial architecture.
3) The approach to reform was ‘gradual but steady’ rather than a ‘big bang’ approach.
4) The major thrust driving the reform process was the quest for higher growth and efficiency, along with macro-economic stability. At the same time, the reforms had to be ‘inclusive’ meaning that benefits were to be shared by all sections, particularly the vulnerable ones.
Researchers use different methodologies for evaluating the impact of reforms. Generally, two approaches are followed:
1) Model-based counterfactual simulations which attempt to contrast actual outcomes under alternative reforms scenarios.
2) The ‘before and after’ approach.
We will use the latter approach to assess the impact of reforms.
The least that can be said about the achievements of the economic reforms is that the economy has been saved from the massive heart attack it suffered in 1990-91. But that is not all. There is no doubt that the economic situation has changed compared to what it was in June 1991.
In the new economic environment, the vocabulary itself has undergone a change. Earlier, the key words and phrases were control of commanding heights, nationalisation, employment generation, protection of domestic industry, indigenisation of technology, appropriate technology, and public monopoly.
Today, the key words and phrases are international competitiveness, efficiency, profitability, technology upgradation, foreign capital, globalisation, and golden handshake.
Let us recount some of the major changes.
It is gratifying to record that over the last two decades, the management of the external sector has been characterised by a judicious combination of ‘outward orientation’, investment liberalisation, and vigilance in rupee convertibility. The principal result has been that extreme volatility in global currency markets had minimal impact on India.
A remarkable pick-up in export performance has strengthened the perception that the ‘Made in India’ concept is gaining ground. Export intensity of the private corporate sector nearly doubled from 13.37% in 1998–99 to 24.23% in 2008–09. Top business houses, foreign-owned, and government companies also showed improved export-to-sales ratios. Export sales are now yielding higher returns than domestic markets, in contrast to the pre-liberalisation era.
The product composition of exports is shifting toward technology-intensive and high-value products. A surge in auto exports even surpassed software exports in the current decade, allowing India access to ‘upmarket’ and ‘niche’ global destinations.
Import intensity (imports per unit of exports) dropped from 114.35% in 1998–99 to 86.86% in 2008–09, indicating more efficient use of imports. Corporates are adding higher value to imported goods despite rising capital goods and imported raw material expenses.
Indian corporates have become net foreign exchange earners. The private sector shifted from a negative -14.35% in 1998–99 to a positive 13.14% in 2008–09. Among the top 50 business houses, this figure jumped from -41.3% to 17.5%, showing that exports are now driven by efficiency gains, not just incentives.
The ‘hawala’ exchange rate has almost vanished. Foreign exchange reserves grew from less than $1 billion in June 1991 to over $300 billion. Foreign Direct Investment (FDI) approvals crossed $100 billion (1991–92 to 2011–12), compared to only $20 million annually in the 1980s. Foreign Institutional Investments (FIIs) totaled $40 billion between 1993–2009, from virtually zero before.
Over 5,000 Indian companies have now obtained ISO 9000 certification, compared to fewer than five just seven years ago.
Indian companies are now actively engaging in global joint ventures, acquisitions, and licensing deals. Factors aiding this trend include low asset prices in developed markets, global liquidity, cheap dollar credit, and strong domestic growth. Outward FDI flows now exceed $15 billion annually, signaling the rise of potential Indian multinationals.
India has been selected for the IMF’s Financial Transactions Plan, which provides funds to distressed economies. This makes India a creditor nation to the IMF, no longer a borrower.
The achievements in the external sector are noteworthy due to coherent, far-reaching policy measures implemented together. Key changes include:
All trade now falls under a unified payment regime (no longer divided into ‘hard’, ‘soft’, and ‘rupee’ areas).
Exchange rate unification and convertibility on current account.
Abolition of restrictions on most imports and exports.
Dramatic reduction in import tariffs and liberalised imports of gold and silver.
A new, efficient export incentive system with tax breaks replaced outdated schemes like cash compensation and replenishment licenses.
Near-total removal of restrictions on foreign investments marked a major policy breakthrough.
These reforms have been fundamental to India's external sector transformation.
It is being argued that the vulnerability of the Indian economy on the external front is becoming increasingly manifest. The analogy often used is that integrating India into the global economy is like merging a mouse with a herd of elephants.
Export achievements are questioned due to lack of any rise in India's share of global exports. Two key issues include (a) unchanged composition of exports and (b) no significant push by corporates to boost exports. Key sectors like readymade garments and leather have shown discouraging trends. Reforms are incomplete in areas like excise duties, procedural bottlenecks, labour laws, and financial services.
India’s external liabilities have sharply increased in the post-reform period. Despite rising forex reserves, much of it is hot money from the capital account, not sustainable current account surpluses—exposing India to the ‘Dutch disease’.
New forms of FDI like private equity and venture capital may not contribute to physical asset creation and can introduce volatility at the margins.
FDI inflows used to acquire existing stakes in Indian companies are often misclassified as productive investment though they do not add new physical assets.
FIIs, typically passive long-term investors, are now significantly using participatory notes and sub-accounts, increasing the risk of sudden portfolio reversals. Their origin and accountability remain opaque.
India depends heavily on foreign technology and FDI collaborations while failing to build domestic capability. This undermines long-term autonomy in pursuing equitable and sustainable development.
Rising private equity and hedge fund influence is driving shareholder activism and foreign investors' demands that could distort domestic priorities. At the WTO level, India faces pressure to surrender tariff exemptions once justified by BOP issues.
One-third of service sector income in the post-globalisation period has gone to foreign nationals, while India's share in global income remains low. This reflects disproportionate economic opening benefitting foreign entities.
Enclave economy risks are rising, with a modern, globally linked elite economy disconnected from wider India. Such structures are socially unsustainable and prone to collapse under internal conflict or exclusion backlash.
Capital inflows have driven rupee appreciation, hurting export competitiveness. Furthermore, India is vulnerable to sudden capital flight triggered by external financial crises. Growth is increasingly fragile due to these dependencies.
Volatile foreign capital inflows may now exceed India’s forex reserves. Despite prudent fiscal policy, BOP crises remain a real threat due to FII profit repatriation, reminiscent of colonial-era economic drain.
India has achieved phenomenal economic success through corporate restructuring, cost rationalisation, and productivity improvements. Key transitions are occurring from farm to non-farm, rural to urban, analog to digital, manual to tech-driven, and domestic-focus to exports.
The trend rate of GDP growth was 6.9% during the 1990s and 2001–10, significantly higher than the 5.5% in the 1980s. The average growth rates were 6.5% in the 1990s and 8.0% in 2002–10 compared to 5.8% in the 1980s.
The domestic manufacturing sector has shown remarkable resilience by rediscovering its comparative advantage and upgrading technology. This led to higher investments and expansion into foreign markets. The surge in productivity—fewer workers delivering more—results from technological advances, efficient processes, and market responsiveness.
Wage increases have occurred both as a cause and effect of higher productivity, but India still needs to catch up with systems and processes common in developed nations.
Employment growth picked up from 1.2% (1993–94 to 1999–2000) to 3.8% (2000–01 to 2004–05), exceeding the population growth rate. Real wages rose in both rural and urban areas.
Post-liberalisation (1993–94 to 2004–05), real wage growth was faster than in the pre-liberalisation phase (1983–1993–94). Regular workers benefited slightly more than casual ones, and rural wages rose faster than urban wages. However, wage differentials between regular and casual workers have increased in urban areas while slightly narrowing in rural regions.
Corporate profits have risen, but gross profit margins declined, suggesting that consumers are receiving better value. This dual benefit—a win-win for producers and consumers—is a key outcome of economic reforms promoting competition, delicensing, and liberalised imports.
Growth impulses are now spread widely. Every sector of the economy is experiencing “rhythm of growth”, from fiction to fashion, indicating vibrant economic diversification.
The liberalised regime has made the Indian business cycle less volatile compared to the controlled regime. Liberalisation has improved risk-sharing and given policymakers more tools to counteract external shocks and output fluctuations.
Customs duties have been rationalised, and now show signs of an inverse relationship between tax rates and collections, supporting the idea of tax efficiency through rational structures.
Industrial disputes have dropped by about one-third, and man-days lost have reduced by 20% in the last ten years, reflecting improved labour conditions.
High growth rates increased government revenues, enabling large-scale social programs such as:
These policies reflect a shift in mindset brought about by reforms, led increasingly by an emerging middle class that is actively embracing liberalisation and change.
These indicators confirm a remarkable economic turnaround in a short period. However, this success invites us to also examine the remaining failures and challenges.
After an initial euphoria, the reforms seemed to have lost momentum. There has been what is called ‘irrational exuberance’ surrounding the Indian economy. The kind of growth seen over recent years risks creating a false sense of permanence.
Without higher investment levels and productivity, sustaining growth is difficult. Moreover, inclusiveness cannot increase without further reforms.
The New Economic Policy (NEP) has failed to alter the fundamental structure of the economy. The industrial sector's share in GDP remains the same as in 1989-90, whereas it had been increasing earlier.
The declining share of agriculture has been offset by services, but this has not improved the quality of services. This transition has serious implications for poverty, inequality, and productivity.
Despite stable weather and strong external factors, macroeconomic variables like GDP and its components have shown greater volatility in the post-reform era. Financial sector liberalisation and openness have increased economic uncertainty.
Neither fiscal nor monetary policy stabilizes the business cycle, making India more vulnerable than mature economies during slowdowns.
The rate of industrial growth post-reforms has been slower than in the pre-reform period. Three reasons stand out:
Registered manufacturing failed to exceed value-added growth seen during the first three Five-Year Plans. The industrial base has become shallower and labour intensity has declined, even in labour-intensive sectors.
Labour productivity rose from 1990-91 to 1995-96 but stagnated afterward. Capital productivity has declined since 1995-96.
World Bank reports highlight that while sectors like machinery and oil and gas have shrunk, labour-intensive industries like apparel have expanded. This shift indicates India is becoming a producer of resource-intensive goods, not hi-tech or capital-intensive goods.
This has led to a sustained decline in the share of high-tech and capital goods in manufacturing value, employment, and output — an undesirable trend.
The NEP overlooked the “dynamics of exclusion”. Even with rapid GDP growth, there has been deceleration in poverty reduction and limited improvement in human development.
Poverty declined by only 0.74% per year post-reforms. Gains in literacy, infant and maternal mortality, child nutrition have been smaller than in the decade before liberalisation.
Juvenile sex ratio and employment quality have worsened. The labour market has become more informal with poor employment quality.
Growth has not generated sufficient productive jobs. Much of the new employment benefits the educated class, worsening inequality. The poor and less-educated have been left behind.
Agriculture remains the primary employer for over half the population, with only marginal gains in manufacturing employment over two decades.
The shift from agriculture has mainly gone towards services, not manufacturing, which is unusual at low per capita income levels. As China defines, such jobless growth indicates “economic stagnation”.
There has been deterioration in two major areas: (i) environmental resources, which have degraded and depleted, and (ii) inequalities of income and growth across regions, socio-economic groups, and gender.
The Eleventh Five Year Plan highlighted these issues with data. The ratio of output per worker in non-agricultural sectors to agriculture rose from about 2:1 in the 1950s to nearly 4:1. Similarly, the urban-rural consumption ratio increased from about 1.28 in the mid-1970s to 1.47 by 1999-2000.
While corporate profits have grown in GDP, the share of wages has declined, further reinforcing inequality.
One major consequence of neoliberal policies is the financial crunch of the government. This has led to reduced or inadequate spending in social sectors and rising costs of public services for the poor.
The Public-Private Partnership (PPP) model in basic services and privatisation of essential public goods risk deepening the crisis in human development. The shrinking role of government harms the excluded population.
Although there has been quantitative expansion in education, healthcare, water supply, and connectivity, the rural population remains dependent on deteriorating public services.
Private provisioning—better equipped but costlier—has grown, mostly in urban areas, widening disparities in costs, access, and quality.
This reinforces the rural sentiment of being excluded from the benefits of rapid economic growth in terms of income, jobs, and quality of life.
As Multi-national Corporations (MNCs) expand and dominate markets, their financial power and influence grow, potentially weakening the State’s ability to pursue social welfare goals.
Economic logic dictated that India should have dereserved industries before globalising them. Instead, globalisation came first, under pressure from industrialised nations seeking market access.
This disrupted the Small Scale Industries (SSI) sector, making the transition to the WTO regime more painful than necessary.
In worst-case scenarios, high-cost economies lead to industrial and services migration. Companies today—like Dell and Boeing—source globally, and uncompetitive conditions drive capital and talent exodus.
India’s advantage in low-wage, human-intensive sectors like IT is eroding. Rising real estate costs and interest rates worsen the situation, turning India into a high-cost economy.
The government’s ability to manage internal or external shocks is diminished due to loss of policy tools under the NEP. This occurs even as the economy becomes more complex and vulnerable to external influences.
With new technologies, investors, and markets, come new forms of fraud. Asset-based firms face physical asset theft, while knowledge economy firms confront intellectual property theft.
Corporate fraud risks now vary by sector, complicating governance in a globalised business landscape.
A recent study scored India’s economic reform process at 38 out of 100. There is a visible weakening of links between economic growth and poverty reduction, employment, and human well-being.
India performs poorly on human development indicators, even when compared to countries with lower per capita GDP like Ethiopia, Burundi, and Chad. Comparisons with China further highlight the performance gap.
Neoliberal growth models must be modified to become inclusive. This requires macro-level structural reforms, not just temporary, pro-poor programmes. Real change will come only when the growth process is restructured to strengthen its links with human development.
Entities facing commodity cycles and global competition are vulnerable, especially if the rupee strengthens or tariff protections fall. Those with short-term funding or currency mismatches face even higher financial stress.
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