The year 1991 is seen as a key point of transition in the Indian economy, from its earlier preference for the

public sector to the promotion of the private sector. A popular explanation for this change is the removal of the

industrial licensing Act in 1991. There is a widespread belief that this delicensing accelerated economic growth.

How correct is this belief?

The shift from the public to the private sector has certainly taken place, not just in manufacturing but also in

infrastructure. The share of the public sector in manufacturing investment had started declining from 1980-81,

when it was around 40 per cent, to 24 per cent in 1991-92, owing to some early liberalisation moves. The

decline in the public sector’s share in manufacturing investment continued thereafter, falling further to 8 per

cent in 2023-24. This is one measure of the shift from the public sector to the private sector.

The other shift came in infrastructure development, with the private sector being promoted as the supplier of

electricity, the constructor of roads, and the manager of airports and seaports. Because of this, there was a

decline in the share of public-sector investment in infrastructure from around 69 per cent in 1991-92 to 44 per

cent in 2023-24.

Did this shift from the public to the private sector accelerate manufacturing growth? The answer regrettably is

that it did not do so. The share of manufacturing in gross value added (GVA), at current prices, rose from about

12 per cent in 1950-51 to 18-19 per cent by the mid-1990s, fluctuated a little and stayed at that level till 2010-

11. It has since declined steadily to reach 14 per cent by 2024-25. The share of manufacturing in total

investment has also fallen from 41 per cent in 2011-12 to 32 per cent in 2023-24. The percentage share of

manufacturing in employment remains at 10-11 per cent. Only three Indian companies figure in the list of the

top 100 non-US companies by market capitalisation. Frankly, the delicensing done in 1991 has not accelerated

the contribution of manufacturing to growth.

Delicensing has had some impact on the advance of newcomers. It has also facilitated a major expansion of

conglomerates — Tata, Reliance, Aditya Birla and Adani have expanded rapidly, with their market cap going up

massively. The notable ones being a 1000-fold increase in the market capitalisation of Reliance and the

emergence of Adani.

They have diversified their investment into a variety of mostly low-medium technology areas, including

retailing. They do not have a substantial presence in the global economy. Some part of their expansion,

particularly in infrastructure, is a product not of delicensing but of active support from the government.

Government support for specific companies has not been eroded by delicensing.

If we look at emerging countries that have done well with exports and technology development, we find large

firms that are specialised in a few areas rather than conglomerates with widely diverse activities. China is a

remarkable example. In the early 1990s, the difference between India and China in terms of their share of

manufacturing was marginal. Today, China’s manufacturing output is nearly 10 times that of India’s and

includes a significant share of high-technology products. China has 17 companies in the list of top 100 non-US

market companies, and many of them were new starters. The big difference between China and India lies in our

much weaker performance in new technologically-led startups.

Compared to delicensing, the opening up of the financial system to the private sector has had a greater impact

on private sector development. Private-sector banks have increased their share of total bank advances from 17

per cent in 2004-05 to 39 per cent in 2024-25. Their share of total bank employees has also risen substantially,

from 10 per cent to 43 per cent over the same period.

The other big change was the liberalisation of private mutual funds, which now have shot up to a level where

they are managing ~87 trillion of assets. These two developments, along with a substantial simplification of

trading in shares, have led to a transformed financial system, with market capitalisation rising close to 120 per

cent of nominal GDP.

The most substantive post-1991 change has been the extraordinary boom in the export of software services.

India’s software exports have grown from just $400 million in 1991-92 (less than 2 per cent of total exports) to

$240 billion in 2025-26 — a 600-fold increase. They now account for 28 per cent of exports and employ around

6 million people. However, the software boom that fuelled export and employment growth now faces a major

global challenge from artificial intelligence.

The foundation for this software services boom was laid in a 1981 landmark report by a committee headed by V

Rajaraman that proposed concessions for the import of computers in order to facilitate software exports. This

proposal was accepted in 1983, reversing an earlier policy that focused on protecting mainly public-sector

companies producing electronic goods. This import liberalisation also facilitated computerisation in banking, air

and rail reservations. But the big economic impact came with the rise in software exports, particularly after the

special role that Indian enterprises had in making the software changes required to cope with the millennial

change at the end of the century.

There were several reports on liberalisation in the pre-1990 era, and some were partially implemented. One far

reaching one was the report submitted in 1979 by the Committee on Controls and Subsidies chaired by Vadilal

Dagli and commissioned by Morarji Desai. The report criticised the industrial licensing system, arguing that it

had ceased to serve the goals of national planning. It recommended a shift from physical output quotas to fiscal

and financial instruments, called for the dissolution of the Controller of Capital Issues (CCI), and criticised

subsidies on food and fertilisers. However, the report was shelved after a new government came to power

following the 1980 elections, and several of its recommendations were implemented only after 1991.

The drive for liberalisation and strengthening growth prospects goes back to the 1980s, while the substantive

implementation came after 1991. However, average GDP growth since 1991 has not been significantly higher

than in the 1980s. We must also recognise that we have fallen short in two crucial sectors — agriculture and

manufacturing — and need to rethink our policy approach to both. We must also recognise that post-1991

policies supporting the private sector have not done enough to improve the lives of lower-income groups and

generate employment. Hence, we need to rethink policies today because the reforms of the 1990s are no longer

sufficient.