What prompted the economic liberalisation in India in 1991?

The economic liberalisation in India in 1991 was prompted by a severe balance of payments crisis and mounting fiscal deficit.

In the late 1980s, India was grappling with a severe economic crisis. The country was heavily dependent on borrowing from international lenders, and by the end of the decade, it had accumulated a significant amount of external debt. The situation was exacerbated by the Gulf War, which led to a spike in oil prices and a decrease in remittances from Indian workers in the Gulf countries. This resulted in a balance of payments crisis, with the country's foreign exchange reserves dwindling to a point where they could barely finance three weeks of imports.

Simultaneously, India was also dealing with a mounting fiscal deficit. The government's expenditure far exceeded its revenue, leading to a situation where it was borrowing heavily to meet its expenses. This was largely due to the country's socialist-oriented economic policies, which involved significant state intervention in the economy, including a large public sector, stringent regulations, and high tariffs and import licensing.

The crisis reached a head in 1991, when India was on the brink of defaulting on its international debt obligations. The country had to airlift its gold reserves to pledge as collateral for a loan from the International Monetary Fund (IMF). This was a turning point, and it became clear that drastic measures were needed to rescue the economy.

In response, the government, led by then Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh, initiated a series of economic reforms. These included devaluation of the Indian rupee to improve export competitiveness, reduction in import tariffs, abolition of import licensing, and opening up of sectors to private and foreign investment. These measures marked the beginning of economic liberalisation in India, moving away from a socialist framework towards a more market-oriented economy.

The liberalisation process was not without its critics, who argued that it would lead to increased inequality and exploitation by foreign corporations. However, it is widely acknowledged that these reforms helped pull India back from the brink of economic collapse and set the stage for the high growth rates witnessed in the subsequent decades.