What the 1991 Policy Achieved, and What It Did Not

What it did not achieve

1. Manufacturing employment. This is the central failure and it should lead the criticism. The share of manufacturing with construction, electricity and water in gross value added rose to about 30 per cent by 2010-11 and has fallen back to about 25 per cent, computed from Table 1.4 of the Statistical Appendix. Agriculture still accounts for 42.4 per cent of employment on the Periodic Labour Force Survey for Q2 of FY26 against about 18 per cent of output. The workers who were expected to move from farms to factories largely did not, and [Structural Change in the Indian Economy] gives the six reasons.

2. Jobless, or job light, growth. Output grew much faster than employment. The sectors that grew fastest, finance, real estate, professional services and communications, employ few workers per unit of output. 55.8 per cent of employment is self employment and 18.9 per cent casual labour, so most of the employment that did grow was informal.

3. Inequality. The gains accrued disproportionately to owners of capital, to skilled and English speaking labour, and to States and districts that already had infrastructure. Inequality between persons and between States widened, which is why the devolution formula in [The Finance Commission] must weigh income distance.

4. Agriculture was largely left out. The reforms were of industry, trade and finance. Farm policy, procurement, marketing, land and tenancy changed far less, which is a large part of the explanation for the gap described in [Indian Agriculture and Its Place in the Economy].

5. The small scale sector was left in an awkward position. Reservation was preserved in 1991 and dismantled only gradually afterwards, so small units faced import competition before they were allowed to grow to a competitive size.

6. Infrastructure lagged the liberalisation. Power, roads and ports were opened later and more slowly than industry, so a delicensed factory still could not get reliable electricity or move goods to a port quickly. This is one reason manufacturing did not respond as expected.

7. Public sector reform was incomplete. The 1991 Statement directed a realistic review of the portfolio and attention to chronically sick enterprises. Disinvestment has proceeded slowly and unevenly, and several loss making undertakings survived for decades after the review was ordered.

The balance sheet

The last two rows together are the honest verdict, and they are what a good answer builds on: liberalisation raised growth and reduced poverty a great deal, while widening the gap between those who gained most and least. Both statements are true and an answer that gives only one is half an answer.

The standing debate, put fairly

The case for the reforms. The pre 1991 system had produced slow growth, chronic shortage, industries with no reason to improve, and a balance of payments crisis that left reserves covering a few weeks of imports. Growth since has been the fastest in India's history and poverty has fallen on every measure. Nobody, including the reforms' critics, proposes restoring industrial licensing.

The case against, or rather the case that they were incomplete. Liberalising the product market without reforming land, labour, credit for small firms, infrastructure and agriculture produced growth in the sectors that needed none of those and left the rest behind. On this view the failure of 1991 is not what it did but what it did not reach.

The empirical difficulty an examiner respects. Growth had already begun to accelerate in the 1980s, so how much of the post 1991 performance is attributable to the reforms themselves is genuinely contested among economists. An answer that says so, and gives the 1980 and 1985 changes described in [Industrial Policy Before 1991] as the reason, is stronger than one that asserts a clean causal break.

A worked example: two industries, thirty years on

Passenger vehicles. Before 1991, capacity was licensed, models were unchanged for decades, and a buyer waited years. After liberalisation, foreign manufacturers entered with Indian partners, models multiplied, prices fell in real terms, quality rose, and an automobile component industry grew up that now exports. This is the reform working exactly as intended, and it also generated employment, though far more in components and services than in assembly.

Handloom and small scale textiles. The same period was much harder. Reservation kept units below an efficient size while import competition and mechanised domestic mills arrived; credit remained costly; and the marketing and design capabilities needed to reach export markets were not built. Employment in the sector did not grow in the way the reforms' advocates had expected.

What the comparison shows. The reforms worked where the other conditions for competitiveness existed or could be assembled quickly, and did not where they could not. That is the whole of the incompleteness argument, and it is why [Policies for MSMEs] matters to this topic.

What beginners get wrong

"1991 was a complete success." Growth, choice, investment and poverty reduction, yes. Manufacturing employment, inequality, agriculture and infrastructure, no. Give both.

"1991 was a failure imposed by the International Monetary Fund." India borrowed from the Fund and the reforms were consistent with its conditions, but the direction had been set domestically in 1980, 1985 and 1986, and the specific measures of the 1991 Statement were drafted in India. Present the crisis as the occasion rather than as the cause of the intellectual shift.

"Liberalisation increased poverty." Poverty has fallen substantially on every measure since. What increased is inequality, which is a different quantity, and conflating the two is the commonest error in this topic.

"The public sector was sold off." Disinvestment has been slow and partial. The 1991 Statement itself directed strengthening of sound public enterprises, not their sale.

"Small scale reservation ended in 1991." It was expressly preserved and dismantled gradually over the following years.

Quick revision

1. Achievements: higher growth (7.4 per cent real GDP in FY26 First AE, fastest growing major economy for four consecutive years); the end of shortage; competition, quality and choice; foreign investment and technology under the 51 per cent automatic route; international competitiveness in pharmaceuticals, components, engineering and software; a functioning capital market; and the doctrinal turn completed by section 66 of the Competition Act 2002.
2. Failures: manufacturing employment; job light growth, with 55.8 per cent self employment and 18.9 per cent casual labour; widening inequality; agriculture left largely untouched; the small scale sector caught between reservation and competition; infrastructure lagging; and incomplete public sector reform.
3. Manufacturing share of gross value added peaked near 30 per cent around 2010-11 and is now about 25 per cent; agriculture still employs 42.4 per cent of workers.
4. Poverty fell (Tendulkar line 21.9 per cent in 2011-12 to 4.7 per cent in 2022-23; MPI 55.3 per cent in 2005-06 to about 11.28 per cent in 2022-23) while inequality widened. Both are true.
5. The incompleteness argument: the product market was liberalised and land, labour, credit for small firms, infrastructure and agriculture were not.
6. The empirical caution: growth had begun to accelerate in the 1980s, so the size of the causal contribution of 1991 is genuinely contested.

Test yourself

1. Evaluate the achievements of the New Industrial Policy 1991. It raised the rate of growth substantially and durably, real gross domestic product growing at 7.4 per cent in FY26 on First Advance Estimates and India being the fastest growing major economy for four consecutive years, against roughly three and a half per cent in the earlier decades. It ended the chronic shortages produced by capacity licensing, because capacity could at last follow demand. It introduced competition, which forced improvements in quality, range, warranty and service in consumer goods and vehicles. It attracted foreign investment and technology through automatic approval up to fifty one per cent of equity in high priority industries and automatic approval of technology agreements. It made several sectors internationally competitive, notably pharmaceuticals, automobile components, engineering goods and software. And it made possible a financial system that allocates capital rather than rationing it, following deregulation of interest rates, statutory regulation of the securities market and the entry of private banks.

2. What did the 1991 reforms fail to achieve, and why? They failed principally to produce manufacturing employment. The share of manufacturing with construction and utilities in gross value added rose to about thirty per cent by 2010-11 and has since fallen to about twenty five per cent, while agriculture still employs 42.4 per cent of workers against about eighteen per cent of output. Growth proved job light because the fastest growing sectors, finance, real estate, professional services and communications, employ few workers per unit of output, so 55.8 per cent of employment remains self employment and 18.9 per cent casual labour. Inequality between persons and between States widened, because the gains went to owners of capital, to skilled and English speaking labour and to regions that already had infrastructure. Agriculture was largely untouched by reform. The small scale sector faced import competition while still barred by reservation from growing to a competitive size. Infrastructure was opened later and more slowly than industry. And public sector reform, though directed by the Statement itself, proceeded slowly.

3. "Liberalisation increased poverty in India." Comment. The proposition is not supported by the evidence and confuses poverty with inequality. Poverty has fallen substantially on every available measure: estimates on the Tendulkar line show a fall from 21.9 per cent in 2011-12 to 4.7 per cent in 2022-23 and 2.3 per cent in 2023-24; the Multidimensional Poverty Index measured by NITI Aayog fell from 55.3 per cent in 2005-06 to 14.96 per cent in 2019-21 and an estimated 11.28 per cent in 2022-23; and on the World Bank's revised international poverty line extreme poverty stood at 5.3 per cent in 2022-23. What did increase is inequality, since the gains from growth accrued disproportionately to capital, to skilled labour and to better placed regions. The accurate statement is that liberalisation reduced absolute poverty considerably and widened relative disparities, and those are different quantities measured in different ways.

4. Why is the size of the reforms' causal contribution contested? Because the acceleration in Indian growth did not begin abruptly in 1991. The Industrial Policy Statement of 1980 had already shifted the direction of policy towards competition, modernisation and exports, and the changes of 1985 and 1986 delicensed some industries, introduced broadbanding and raised asset thresholds, so growth in the 1980s was already above the earlier trend. Separating the effect of the 1991 measures from the continuation of that earlier shift, and from other simultaneous influences such as world demand, the fall in oil prices and the growth of software exports, is a difficult empirical exercise on which economists genuinely disagree. An answer that acknowledges this is stronger than one asserting a clean causal break at 1991.

5. What is meant by saying the reforms were incomplete rather than mistaken? It means that the reforms liberalised one part of the economy and left the complementary parts unreformed, so that their effect was confined to sectors which did not need the others. Product markets were freed, but land acquisition, labour regulation, credit for small enterprises, infrastructure and agricultural marketing were not, and manufacturing depends on all of them: a delicensed factory still needs land, reliable power, a port, a workforce it can hire and adjust, and working capital. Services that needed only educated labour and a telephone line grew without any of that, which is why growth came from services rather than manufacturing. On this view the failure lay in what the reforms did not reach rather than in what they did, and the remedy is more reform rather than less.

6. Give one industry in which the reforms plainly worked and one in which they did not, and explain the difference. Passenger vehicles is the clear success: capacity was delicensed, foreign manufacturers entered with Indian partners, models multiplied, real prices fell, quality rose and an internationally competitive component industry grew around the assemblers. Handloom and small scale textiles is the clear disappointment: units remained below efficient scale because reservation persisted, they faced import competition and competition from mechanised domestic mills, credit remained costly, and the design and marketing capabilities needed for export markets were not built. The difference is that in vehicles the complementary conditions, capital, technology, scale, supplier networks and distribution, could be assembled quickly once permission was no longer required, whereas in small scale textiles the binding constraints were credit, scale and marketing, none of which the 1991 measures addressed.