The year 1991 is seen as the key point of transition of the Indian economy from its earlier preference for the public sector to the promotion of private sectors.  A popular identification of the source of change is the removal of industrial licensing act in 1991. There is a widespread belief that this delicensing accelerated growth. How correct is this belief?

The shift from the pubic 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 percent to 24 percent in 1991-92 because of some early liberalisation moves. The decline in the share of the public sector in manufacturing investment since then went even further to 8 percent 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 when the private sector was promoted as supplier of electricity, constructors of roads and for managing airports and seaports. Because of this there was a decline in the share of public sector investment in infrastructure from around 69 percent in 1991-92 to 44 percent in 2023-24.

Didi 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), in current prices rose from about 12 percent in 1950-51 to about 18 -19 percent by the mid-nineties, fluctuated a little and stayed at that level till 2010-11 and has since then declined steadily to 14 percent by 2024-25. The share of manufacturing in total investment has also fallen from 41 percent in 2011-12 to 32 percent in 2023-24. The percentage share of manufacturing in employment remains around 10-11 percent. Only three Indian companies figure in the list of top 100 non-US market cap companies. Frankly the delicensing done in 1991 has not accelerated the contribution of manufacturing to growth.

The delicensing decision has had some impact on the advance of newcomers.  However, it has also facilitated a major expansion of conglomerates. The four major conglomerates, Tata, Reliance, Aditya Birla and Adani, have expanded very rapidly with their market cap going up massively, the big increases being a 1000-fold increase in the market capitalisation of Reliance and the massive emergence of a new entry, Adani. They have diversified their investment into a variety of mostly low-medium technology areas including retailing. They also 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 which have done well in the global economy 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 nineties the difference between India and China in the share of manufacturing was marginal. But it has now reached a level when their manufacturing output is about ten times ours and includes high technology items significantly. China has 17companies in the list top 100 non-US market companies and many of them were new starters. The big difference between China and India is our much weaker performance of new technologically advanced starters.

Compared to delicensing of the industrial sector the opening of the financial system to the private sector has had a greater impact on the development of the private sector.  The private sector banks have increased their share of bank advances from 17 percent in 2004-05 to 39 percent in 2024-25 with an increase in their share of bank employees from 10 percent to 43 percent over this 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 Rs 87 trillion of assets. These two developments along with a substantial simplification of trading in shares and stocks has led to a transformed financial system and with market capitalization rising to close to 120 percent of nominal GDP.

Apart from private finance and mutual funds the most substantive post 1991 change has been the extraordinary boom in the export of software services.  In 1991-92 India's software exports were about $400 million, which is less than 2 percent of our exports in that year.  They have risen 600 times to $240 billion in 2025-26, and account for about 28 percent of our exports in that year and employ about 6 million persons.  This is the biggest transformation in our economy that we have experienced in the past three-and-a-half decades. However, do note that the software boom that drove our growth in exports and employment is now facing a substantial global challenge with the AI boom

A crucial basis for this software services boom is in a 1981 landmark report by a committee headed by Prof V Rajaraman that proposed concessions for the import of computers in order to facilitate software exports. This proposal was accepted in 1983 and was an effective reversal of an earlier policy that focussed on protecting mainly public sector companies for the production of electronic goods. This import liberalisation also facilitated computerisation in banking, air and rail reservations and other areas.  But the big economic impact came with the rise in software exports, particularly after the special role that Indian enterprises had in coping with the software changes required to cope with the millennial change at the end of the century.

There were several reports for liberalisation in the pre-ninety 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. This report criticised the industrial licensing system as something that had ceased to serve national planning goals, suggested that the government should transition from physical output quotas to fiscal and financial instruments, recommended the dissolution of the Controller of Capital Issues (CCI) and criticised the subsidies on food and fertilisers. However, the report was shelved following the rise of a new Government after the 1980 election and some of its recommendations emerged as action by the Government only after 1991.

The drive for liberalisation and strengthening of growth prospects goes back to the eighties while the substantive implementation came after 1991.  However, the average GDP growth rate since 1991 is not significantly larger than in the eighties. We must also recognise that in two crucial areas, agriculture and manufacturing, we have not been sufficiently successful and need to do more in redesigning our policy approach. We must also recognise that the post 1991 policy supportive of the private sector has not done what is needed to make life better for lower income people and to improve and increase jobs. Hence rethink the type of policy change that we now require because the transition of the nineties is not enough.