Economy
Economic Planning and NITI Aayog
Economic Reforms of 1991
The 1991 BoP crisis and LPG reforms for CGPSC: New Industrial Policy, devaluation, sectoral committees, first and second generation reforms, and BALCO in Chhattisgarh.
Prerequisites
- The Five Year Plans (1951–2017): the licence-raj economy the reforms dismantled
- External Sector and International Economic Bodies: balance of payments, the IMF and the World Bank
The Hook: Gold on a Plane to London
Connect
In July 1991, the Reserve Bank of India quietly flew 47 tonnes of gold to the Bank of England in London, as security for a loan. Two months earlier, 20 tonnes had gone to the Union Bank of Switzerland. India’s foreign-exchange reserves had shrunk to roughly three weeks of imports, and the country was close to defaulting on its foreign debt for the first time.
Within weeks, the new government devalued the rupee, scrapped most industrial licensing and opened the door to foreign investment. Ten years later, in 2001, the Union government sold a controlling stake in BALCO at Korba to a private company, one of the most debated disinvestments in the country. How did a gold airlift lead to a privatised aluminium plant in Chhattisgarh?
Why it matters: Prelims asks the dates, the committees and the “LPG” measures. Mains asks you to explain the causes of the 1991 crisis and evaluate 35 years of reform, often with a state angle.
The 1991 Crisis: Causes
| Cause | Detail |
|---|---|
| Fiscal deficits | Large and rising government deficits through the 1980s, financed partly by borrowing |
| Current-account deficit | Imports grew faster than exports; foreign commercial borrowing and NRI deposits filled the gap |
| Gulf War (1990–91) | Oil prices spiked, and remittances from Indian workers in the Gulf fell as they were evacuated |
| Political instability | Three governments between late 1989 and mid-1991; loss of investor confidence |
| Loss of credit | Rating downgrades; NRI deposits flowed out; commercial lenders stopped rolling over loans |
| Inflation | Double-digit inflation in 1990–91 |
| Collapse of the USSR | India’s major trading partner (rupee trade) was breaking up |
The low point: foreign-exchange reserves of about USD 1.2 billion in January 1991 fell by roughly half by June, enough for only about three weeks of essential imports. Gold was pledged (about 67 tonnes in all: 20 tonnes to UBS in May, 47 tonnes to the Bank of England in July) to raise roughly USD 600 million, and India turned to the IMF for support. IMF and World Bank lending came with structural-reform conditions.
The Response: Stabilisation and Structural Reform
| Who | Role |
|---|---|
| P.V. Narasimha Rao | Prime Minister from 21 June 1991 |
| Dr Manmohan Singh | Finance Minister; presented the reform Budget on 24 July 1991 |
Two kinds of reform
- Stabilisation (short term, demand side): cut the fiscal deficit, control inflation, correct the exchange rate. Associated with the IMF.
- Structural adjustment (long term, supply side): change the rules of the economy so that markets work: industrial, trade, financial and tax reform. Associated with the World Bank.
Timeline
timeline
title The reform summer of 1991 and after
May 1991 : 20 tonnes of gold pledged with UBS
21 June 1991 : P.V. Narasimha Rao sworn in as PM
1 and 3 July 1991 : Rupee devalued in two steps
July 1991 : 47 tonnes of gold pledged with Bank of England
24 July 1991 : New Industrial Policy and Union Budget
August 1991 : Narasimham Committee on the financial system set up
1992 : SEBI given statutory powers
1993 : Unified market-determined exchange rate
1994 : Current-account convertibility
1 January 1995 : India a founding member of the WTOLPG: What Actually Changed
Liberalisation (उदारीकरण)
| Measure | Detail |
|---|---|
| Industrial licensing abolished | Licensing kept only for 18 industries in 1991 (strategic, environmental, hazardous); the list has since shrunk to a handful (alcoholic drinks, tobacco products, defence and aerospace electronics, industrial explosives, specified hazardous chemicals) |
| Public sector’s reserved list cut | From 17 industries (1956 resolution) to 8 in 1991; later only atomic energy and railway operations remained reserved |
| MRTP restrictions removed | Large firms no longer needed approval to expand; the MRTP Act was later replaced by the Competition Act, 2002 |
| Foreign investment | Automatic approval for FDI up to 51% in a list of high-priority industries; a Foreign Investment Promotion Board to clear other proposals |
| Foreign exchange law | FERA (1973) diluted and later replaced by FEMA (1999) |
| Interest rates and prices | Gradual freeing of interest rates and many administered prices |
Atomic energy after 2025
The SHANTI Act, 2025 (passed by Parliament in December 2025) replaced the Atomic Energy Act, 1962 and opened parts of the nuclear-power sector to private participation. Read any “reserved for the public sector” list as dated, and check the current position before writing.
Privatisation (निजीकरण)
- Disinvestment of government equity in public-sector enterprises began in 1991–92 with minority-stake sales.
- Rangarajan Committee (1993) on disinvestment; Disinvestment Commission (1996); a separate Department / Ministry of Disinvestment around 1999–2001 for strategic sales (transfer of management control).
- Strategic sales of the early 2000s include BALCO (2001), Hindustan Zinc, VSNL and Maruti (in stages).
Globalisation (वैश्वीकरण)
- Rupee devalued in two steps on 1 and 3 July 1991 (roughly 18–19% in all).
- LERMS (1992): a dual exchange rate; unified market-determined rate from March 1993.
- Current-account convertibility in August 1994 (India accepted IMF Article VIII obligations).
- Customs duties cut sharply from very high levels; quantitative restrictions on imports phased out.
- WTO membership from 1 January 1995.
Sectoral Reform Committees
| Committee | Year | Area | Main outcome |
|---|---|---|---|
| M. Narasimham Committee I | 1991 | Banking / financial system | Cut SLR and CRR, prudential norms for income recognition and NPAs, entry of new private banks (1993), interest-rate freedom |
| Raja J. Chelliah Committee | 1991 | Tax reform | Lower and fewer direct-tax rates, wider base, simpler indirect taxes, groundwork for VAT |
| R.N. Malhotra Committee | 1993 | Insurance | Opening insurance to private players; led to the IRDA Act, 1999 |
| C. Rangarajan Committee | 1993 | Disinvestment of PSUs | Levels of government equity to retain |
| M. Narasimham Committee II | 1998 | Banking sector reforms | Stronger capital adequacy, NPA reduction, bank mergers |
Capital markets: SEBI (set up 1988) got statutory powers through the SEBI Act, 1992; the National Stock Exchange was set up in 1992 and began screen-based trading in 1994. See Money, Banking and Inflation.
First and Second Generation Reforms
| First generation (1991 to late 1990s) | Second generation (late 1990s onward) | |
|---|---|---|
| Focus | Product markets: licensing, trade, exchange rate, FDI | Factor markets and institutions: labour, land, capital, governance |
| Nature | Mostly executive decisions by the Centre | Need legislation and state cooperation |
| Examples | Delicensing, devaluation, tariff cuts, SEBI, bank reforms | FRBM Act (2003), Insolvency and Bankruptcy Code (2016), GST (2017), the four Labour Codes (2019–20), power and mining reforms, direct benefit transfer |
Evaluation (for Mains)
| Gains | Concerns |
|---|---|
| Faster growth: India became one of the fastest-growing large economies from the 2000s | Jobless growth: employment, especially in manufacturing, grew slowly |
| Foreign-exchange reserves rebuilt; no repeat of a 1991-type default | Agriculture lagged; rural distress and farm incomes |
| Services and IT boom; telecom and aviation revolutions | Inequality widened between regions and income groups |
| Large fall in poverty | Regional imbalance: coastal and urban states gained more than mineral-rich tribal states |
| Consumer choice, competition, better products | Displacement and environmental costs in mining and industrial zones |
Chhattisgarh angle for Mains
- A post-reform state. Chhattisgarh was formed on 1 November 2000, after the first wave of reforms. Its growth has leaned on minerals, steel, power and cement, sectors opened to private investment after 1991 (for example, private steel and power plants around Raigarh and Korba, alongside the public-sector Bhilai Steel Plant).
- BALCO, Korba. In 2001, the Union government sold 51% of Bharat Aluminium Company (BALCO) to Sterlite Industries, a strategic sale that transferred management control. It was opposed by workers and by the then state government, but the Supreme Court upheld the disinvestment (2001), holding that it was an economic policy decision for the government. It remains the textbook example of strategic disinvestment.
- The other side. Faster mining and industrial growth has meant land acquisition and displacement in tribal districts and forest areas, a recurring Mains theme. See Chhattisgarh: Minerals, Energy and Industries.
Memory Tricks
The '91 numbers: 18 – 8 – 51
- 18 industries kept under licensing
- 8 industries kept for the public sector (down from 17)
- 51% automatic FDI approval in priority industries
“18 licences, 8 reserved, 51 foreign.”
Committee by subject: 'Banks Need Narasimham, Taxes Need Chelliah, Insurance Needs Malhotra'
Banking → Narasimham (1991, 1998) · Tax → Chelliah (1991) · Insurance → Malhotra (1993) · Disinvestment → Rangarajan (1993).
Don’t Confuse
| This | vs | That |
|---|---|---|
| Narasimham I (1991): financial system | vs | Narasimham II (1998): banking sector reforms |
| Chelliah (1991): tax reform | vs | Malhotra (1993): insurance |
| Stabilisation: short-term, demand side (IMF) | vs | Structural adjustment: long-term, supply side (World Bank) |
| Current-account convertibility (1994): achieved | vs | Full capital-account convertibility: not adopted; only partial |
| Minority disinvestment: government keeps control | vs | Strategic sale: management control transferred (BALCO 2001) |
| Devaluation of June 1966 | vs | Devaluation of July 1991 |
Common Mistakes
MCQ traps
- “The 1991 reforms were launched by the Chandra Shekhar government.” The gold pledge to UBS began under it in May 1991, but the reform package (devaluation, New Industrial Policy, Budget) came from the Narasimha Rao government.
- “Industrial licensing was abolished for all industries in 1991.” False. 18 industries kept licensing.
- “India adopted full capital-account convertibility in 1994.” False. Current-account convertibility came in August 1994.
- “The Narasimham Committee dealt with tax reform.” False. Tax reform was the Chelliah Committee.
- “BALCO is in Bhilai.” False. BALCO is at Korba; Bhilai is the SAIL steel plant.
Practice
All questions below are original practice questions written in CGPSC style. They are not previous-year questions.
Level 1: Foundation
- The New Industrial Policy was announced on ______ 1991.
- LPG stands for liberalisation, privatisation and ______.
- In 2001, the Union government sold 51% of ______ at Korba to Sterlite Industries.
Answers
- 24 July.
- globalisation.
- BALCO (Bharat Aluminium Company).
Level 2: Prelims MCQs
Q1. Consider the following statements about the New Industrial Policy, 1991:
- Compulsory industrial licensing was retained for a limited list of 18 industries.
- The number of industries reserved for the public sector was raised.
- Automatic approval was given to foreign direct investment up to 51% in specified high-priority industries.
Which of the statements given above is/are correct?
- (a) 1 and 3 only
- (b) 2 only
- (c) 1 and 2 only
- (d) 1, 2 and 3
Answer and explanation
(a) 1 and 3 only. Statement 2 is the reverse of what happened: the public sector’s reserved list was cut from 17 to 8. Statements 1 and 3 are correct: licensing was kept for 18 industries, and FDI up to 51% in priority industries got automatic approval.
Q2. Match List I (Committee) with List II (Subject):
| List I | List II |
|---|---|
| A. Narasimham Committee (1991) | 1. Insurance sector reform |
| B. Raja Chelliah Committee (1991) | 2. Disinvestment of public-sector enterprises |
| C. Malhotra Committee (1993) | 3. Financial system and banking |
| D. Rangarajan Committee (1993) | 4. Tax reform |
- (a) A-3, B-1, C-4, D-2
- (b) A-3, B-4, C-1, D-2
- (c) A-4, B-3, C-1, D-2
- (d) A-3, B-4, C-2, D-1
Answer and explanation
(b) A-3, B-4, C-1, D-2. Narasimham: financial system and banks. Chelliah: tax reform. Malhotra: insurance (leading to the IRDA Act, 1999). Rangarajan (1993): disinvestment.
Q3. Which one of the following was not an immediate cause of India’s 1991 balance-of-payments crisis?
- (a) The rise in oil prices due to the Gulf War
- (b) A fall in remittances from Indian workers in West Asia
- (c) The outflow of non-resident Indian deposits
- (d) India’s withdrawal from the World Trade Organization
Answer and explanation
(d). The WTO did not exist until 1 January 1995, and India was a founding member. Options (a), (b) and (c) were all real pressures in 1990–91, along with high fiscal deficits and political instability.
Q4. “Current-account convertibility” of the rupee, introduced in 1994, means that:
- (a) Foreigners can freely buy Indian land and shares
- (b) Rupees can be freely converted into foreign currency for trade in goods and services and for remittances
- (c) Indian residents can invest any amount abroad without limit
- (d) The RBI no longer intervenes in the foreign-exchange market
Answer and explanation
(b). Current-account convertibility covers transactions in goods, services, income and transfers. Free movement of investment capital, as in options (a) and (c), would be capital-account convertibility, which India has adopted only partially. The RBI still intervenes to smooth volatility, so (d) is wrong.
Level 3: Mains Answer Writing
Q1. (60 words) Distinguish between first and second generation economic reforms.
Model answer outline
- First generation (1991 onward): product-market reforms by the Centre: delicensing, devaluation, trade and FDI liberalisation, bank and capital-market reform.
- Second generation: factor-market and institutional reforms needing legislation and state cooperation: FRBM (2003), IBC (2016), GST (2017), Labour Codes, land and power reforms.
- One line: the second needs cooperative federalism more than the first.
Q2. (150–200 words) Explain the causes of the 1991 economic crisis and critically evaluate the impact of the LPG reforms, with reference to Chhattisgarh.
Model answer outline
- Intro: In mid-1991 reserves covered only about three weeks of imports; gold was pledged; the Rao–Manmohan Singh government launched reforms.
- Causes: fiscal deficits; current-account deficit; Gulf War oil shock and lost remittances; political instability; NRI outflows and downgrades; inflation.
- Measures: devaluation (July 1991); New Industrial Policy (24 July 1991): licensing for only 18 industries, public-sector list cut to 8, 51% automatic FDI; trade and tariff reform; Narasimham, Chelliah, Malhotra committees; disinvestment.
- Impact, positive: higher growth, strong reserves, services boom, poverty reduction.
- Impact, negative: jobless growth, agrarian distress, inequality, regional imbalance.
- Chhattisgarh angle: a post-reform state whose growth rests on mining, steel and power; BALCO’s strategic sale (2001), upheld by the Supreme Court; displacement and environmental costs in tribal districts.
- Conclusion: the reforms rescued the economy and raised growth; making growth inclusive is the unfinished agenda.
Quick Revision Table
| Fact | Detail |
|---|---|
| Reserves, mid-1991 | About three weeks of imports |
| Gold pledged | 20 t to UBS (May) + 47 t to Bank of England (July) = about 67 t |
| PM / FM | P.V. Narasimha Rao (from 21 June 1991) / Manmohan Singh |
| Devaluation | 1 and 3 July 1991 (roughly 18–19% in all) |
| New Industrial Policy | 24 July 1991 (same day as Budget) |
| Licensing | Retained for 18 industries (now a handful) |
| Public-sector reserved | 17 → 8 (later atomic energy and railway operations) |
| FDI | Automatic approval up to 51% in priority industries; FIPB |
| Exchange rate | LERMS 1992; unified 1993; current-account convertibility Aug 1994 |
| Committees | Narasimham I (1991) banks; Chelliah (1991) tax; Malhotra (1993) insurance; Rangarajan (1993) disinvestment; Narasimham II (1998) |
| WTO | 1 January 1995 |
| BALCO, Korba | 51% to Sterlite, 2001; upheld by the Supreme Court |
Key Takeaways
Key Takeaways
- 1991 was a balance-of-payments crisis rooted in fiscal and current-account deficits, triggered by the Gulf War and political instability.
- The Rao–Manmohan Singh government responded with stabilisation plus structural reform: devaluation and the New Industrial Policy (24 July 1991).
- 18 licences, 8 reserved, 51% FDI: the core numbers of the 1991 policy.
- Sector committees: Narasimham (banks), Chelliah (tax), Malhotra (insurance), Rangarajan (disinvestment).
- For Chhattisgarh, the reform era means mineral-led growth, BALCO (2001), and debates on displacement and inclusion.
What’s Next
- Industrial Policy and MSMEs: industrial policies from 1948 to Make in India
- External Sector and International Economic Bodies: balance of payments, IMF, World Bank, WTO
- Public Finance, Budget and Taxation: FRBM and GST, the second-generation reforms
- Economic Planning and NITI Aayog: Quick Revision
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