This Day In 1991, India Brought Economic Reforms. Who Was Behind Them?

India had three weeks of money left.

That's not a metaphor. By June 1991, foreign exchange reserves had fallen to around Rs 2,400 crore -- barely enough to cover three weeks of imports. Inflation was running above 13 per cent. Oil prices had spiked after Iraq invaded Kuwait in August 1990. Remittances from Indian workers in the Gulf, a major source of foreign currency, dried up. Credit rating agencies downgraded India's sovereign debt, which shut the door on fresh commercial borrowing just when the country needed it most. To make matters worse, the country saw three prime ministers in under two years -- V.P. Singh, Chandra Shekhar, and finally PV Narasimha Rao - leaving little room for stable decision-making.

And then, the then-government did something it had never done before. It flew its gold out of the country and pledged it as collateral for a loan.

It happened in two separate operations, not one. In May 1991, under Chandra Shekhar's caretaker government, the State Bank of India shipped 20 tonnes of gold to the Union Bank of Switzerland in a sale-with-repurchase arrangement, raising close to $200 million. It was done quietly, without public disclosure, because the government feared the news alone could trigger panic in the markets. Then in July, after Rao took charge, the Reserve Bank of India pledged close to 47 more tonnes to the Bank of England and the Bank of Japan, raising roughly $400 million. Put together, the two operations moved about 67 tonnes of gold and raised close to $600 million -- enough to keep the country from defaulting on its external payments.

When the airlift became public, it triggered a political storm. Opposition leaders accused the government of "pawning the nation's gold," a phrase that stuck for years given how deeply gold is tied to household security and pride in India. 

Photo Credit: PTI Archive

On July 24, 1991, Finance Minister Manmohan Singh rose in Parliament with the Union Budget and reshaped the Indian economy in one sitting. 

The rupee was devalued in two steps that week -- about 9 per cent on July 1 and another 11 per cent two days later -- a deliberate two-stage move meant to soften the political shock of a nearly 20 per cent currency depreciation in a single week. The New Industrial Policy, also announced on July 24, scrapped licensing requirements for all industries except 18 -- a list later trimmed further to just six -- effectively ending what had been known for decades as the License Raj. The maximum import tariff, which had crossed 300 per cent in some cases, was set on a path down to roughly 30 per cent by the end of the decade. Foreign Investment Promotion Board was created to fast-track clearances. 

Architects Behind The 1991 LPG Reforms

As a result, Indian economy transformed (not overnight but steadily). However, 35 years on, one question still lingers. Did India choose this? Or did the IMF force it?

For most people, the answer depends on which side of the political aisle they sit.

The evidence for "compelled" is strong. The rescue funding came with strings attached -- the standard terms that accompany any IMF program: cut the fiscal deficit, devalue the currency, open up trade. India didn't get to pick and choose the fine print. It signed on because there was no other option left on the table.

But here's the twist. Some of the biggest ideas behind the reforms were already sitting on Indian desks years before the crisis hit. Rajiv Gandhi's government had begun loosening industrial controls back in the mid-1980s, well before any foreign exchange emergency forced the issue. Manmohan Singh, Montek Singh Ahluwalia and Rao himself had, as accounts from the period suggest, been quietly shaping a reform blueprint long before the gold ever left the vaults. The crisis didn't hand India a foreign script. It handed Indian reformers the opening they had been waiting for.

So, maybe the real answer isn't either-or. The crisis lit the fuse. The IMF loan set the deadline. But the direction, the actual ideas belonged to India. "The 1991 reforms cannot simply be framed within the context of externally driven changes or domestic ideologies. Instead, they are best understood as a confluence of unique crisis conditions that called forth the implementation of already proposed structural changes. The timing of the reforms was compelled by the nature of the crisis, while the reforms' direction was determined by the beliefs of the reformers," said Siddharth Maurya, economic expert and Managing Director of Vibhavangal Anukulkara.

To give a short answer to a 35-year-old debate: compulsion determined the timing; conviction chose the path.