India Had Reserves for a Fortnight of Imports in July 1991, So It Pledged 46.91 Tonnes of Gold, Devalued the Rupee Twice and Scrapped Industrial Licensing for All but 18 Industries

On 24 July 1991 India’s finance minister told Parliament that the country’s foreign exchange reserves, in the range of Rs 2,500 crore (25 billion rupees), “would suffice to finance imports for a mere fortnight.” The same day the government published a new industrial policy that abolished licensing for every industry except 18 named ones. Those two documents are what most people mean by the 1991 reforms.

What follows takes the documents in order and keeps the finance ministry’s claims of the time apart from what independent economists have measured since. Where economists disagree, each side is named.

How the reserves got down to a fortnight

Finance Minister Manmohan Singh’s budget speech was blunt about the cause. “We have been at the edge of a precipice since December 1990 and more so since April 1991,” he said. The central government’s fiscal deficit, he told the House, was more than 8 per cent of GDP in 1990-91, against 4 per cent in the mid-1970s, and inflation for the year to March 1991 was 12.1 per cent on the wholesale index and 13.6 per cent on the consumer index.

Valerie Cerra of the IMF and Sweta Chaman Saxena of the University of Pittsburgh filled in the outside picture in a 2002 paper. India’s external debt nearly doubled from about $35 billion at the end of 1984/85 to $69 billion by the end of 1990/91. The Gulf crisis of 1990 pushed the oil import bill up by $2 billion to $5.7 billion and cut workers’ remittances. Export markets weakened, the V. P. Singh government fell, a caretaker government took over, and Rajiv Gandhi was assassinated on 21 May 1991 during the election campaign. Rating agencies downgraded India, commercial bank financing dried up, creditors balked at rolling over short-term loans, and deposits from non-resident Indians began to flow out.

The Reserve Bank spent reserves to slow the rupee’s slide. According to Cerra and Saxena, the rupee was devalued “sharply on July 1 and July 3” only once those reserves were nearly gone.

The government that inherited all this took office in June 1991. Singh described it in 1994 as a minority government under Prime Minister P. V. Narasimha Rao.

Singh gave the level of reserves twice, in different years. In 1992 he told Parliament they were “barely enough for two weeks of imports” when his government took over. In his 1994 budget speech he said foreign currency reserves had been “a little over $1 billion in June, 1991” and were by then close to $13 billion. The 1991 speech also recorded that India had already borrowed heavily from the IMF in July 1990 and January 1991.

Gold, pledged in two rounds

Two separate gold operations took place that year, with different banks. Business Today reports that in May 1991 about 20 tonnes of government-owned gold was used in a transaction involving the State Bank of India and the Union Bank of Switzerland, raising roughly $200 million to $215 million.

The larger one came in July. The Quint, citing a reply in the Rajya Sabha by Minister of State Pankaj Chaudhary, reports that the Reserve Bank pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan in July 1991 to raise a loan of $405 million. The Reserve Bank’s annual report for 1991-92, as the Quint reads it, says the gold was redeemed by repaying the loan between September and November 1991. Business Today puts the two operations together at about 67 tonnes and about $600 million.

Who decided what is on the record in Singh’s 1992 budget speech. He said the previous government had already decided to use part of the Reserve Bank’s gold to raise money abroad, that the new government did not think it prudent to reverse that decision, and that it had promised to redeem the gold and had kept its word. In 1994 he told the House that the gold, which “earlier had been pledged abroad”, was back in India’s possession.

The rupee, cut on 1 and 3 July

Both devaluations fell in the first week of July. Panagariya, in his 2004 IMF working paper, puts the 1991 devaluation at 22 per cent against the dollar, from Rs 21.2 to Rs 25.8. Singh’s speech named the adjustments of 1 and 3 July, together with a wider replenishment licensing system, as the two major initial steps in trade policy reform. Export subsidies were abolished on 3 July.

A dual exchange rate followed in February 1992. Exporters could sell 60 per cent of their foreign exchange at the market price and 40 per cent to the government at the lower official price, and importers could buy at the market price. According to Panagariya, the official rate was merged with the market rate within a year.

Singh also answered the charge that the programme was dictated from Washington. In 1992 he told Parliament that India was a founder member of the IMF and the World Bank and entitled to borrow from them, and that “the conditions we have accepted reflect no more than the implementation of the reform programme” in his letters of intent. He added that the bulk of the programme was based on his party’s election manifesto.

The budget and the industrial policy, same day

The budget asked for cuts. The interim budget of March 1991 had put the fiscal deficit at Rs 38,475 crore, and Singh said that without correction it could well exceed Rs 52,000 crore. He told the House there “can be no adjustment without pain”, and also that the government was committed to “adjustment with a human face.” Prices rose that evening: petrol, domestic LPG and aviation fuel by 20 per cent, and fertilisers other than a few freed from controls by an average of 40 per cent. Kerosene for non-industrial use was cut by 10 per cent. Import duties above 150 per cent were capped at 150 per cent, with alcoholic drinks and passenger baggage excepted; some duties had stood above 300 per cent.

The Statement on Industrial Policy did the structural work. Its central sentence reads: “industrial licensing will henceforth be abolished for all industries, except those specified, irrespective of levels of investment.” Eighteen industries stayed on the compulsory list, including coal, sugar, alcohol, cigarettes, motor cars, drugs and pharmaceuticals, and white goods such as refrigerators and air conditioners. The small-scale sector kept its reserved items.

Other changes in the same text:

• Direct foreign investment up to 51 per cent equity was to be approved without bottlenecks in 34 high-priority industries, provided the foreign equity covered the foreign exchange needed to import capital goods.
• Foreign technology agreements in those industries were cleared automatically within set limits: a lump sum of Rs 1 crore and a 5 per cent royalty on domestic sales.
• The policy dropped the requirement that large companies under the Monopolies and Restrictive Trade Practices Act get prior central approval to expand or set up new units.
• The reserved list for the public sector was cut to eight sectors, according to Panagariya.

The statement sums up its own approach as “continuity with change.” Singh’s speech, on foreign investment, said India should “welcome, rather than fear” it.

The opening was partial. Panagariya notes that consumer goods, about 30 per cent of tariff lines, stayed under import licensing until 1 April 2001, when a WTO challenge from trading partners ended it. In 1990-91 the highest tariff rate was 355 per cent and the simple average 113 per cent. The top rate fell to 85 per cent in 1993-94, 50 per cent in 1995-96 and 25 per cent in 2003-04. The compulsory licensing list was trimmed from 18 industries to five sectors by 2004.

The finance ministry’s scorecard, 1992 to 1995

The government’s own figures arrived in budget speeches. In February 1992 Singh said the shortage of foreign exchange had forced an import squeeze that produced negative growth from May 1991. Inflation had peaked at 16.7 per cent in August 1991, and reserves, he said, had been rebuilt to about Rs 11,000 crore.

In February 1994 he reported that exports had risen 21 per cent in dollar terms in the first ten months of 1993-94, after a fall of 3 per cent in 1991-92. Foreign direct and portfolio investment, which he said was “hardly $150 million in 1991-92”, was likely to reach around $3 billion in 1993-94. He added that India would pre-pay the entire $1.4 billion due to the IMF in 1994-95, at the start of the year.

By March 1995 he put growth at under 1 per cent in 1991-92, 4.3 per cent a year over the next two years and 5.3 per cent in 1994-95. Industrial growth went from about half of 1 per cent in 1991-92 to 8.7 per cent in April to November 1994. These are the finance minister’s claims, made in Parliament, and the 1993-94 investment figure was a forecast.

What the outside data show

Measured from outside government, the direction is the same. The IMF’s series puts India’s GDP at $270 billion in 1991 and $3.92 trillion for 2025, in current US dollars. The GDP rank article covers how those dollar figures translate into league tables. World Bank data show exports of goods and services at 7.1 per cent of GDP in 1990 and 22.1 per cent in 2024. Net foreign direct investment inflows were $74 million in 1991, peaked at $64 billion in 2020 and were $27 billion in 2024.

The payment system India built later, UPI, is covered in its own article.

Did 1991 cause the growth?

Economists disagree, and the disagreement is documented. J. Bradford DeLong wrote in 2001, in a passage Panagariya quotes, that the acceleration of growth began “in the early or mid-1980s”, before the crisis. Dani Rodrik and Arvind Subramanian, in their 2004 IMF paper, date the productivity surge to around 1980, “more than a decade before serious economic reforms were initiated.” They say the trigger may have been a shift by the government in the early 1980s toward favouring existing business.

Panagariya answers that 1980s growth was fragile. In his paper he argues it rested on foreign borrowing and fiscal expansion, and ended in the June 1991 crisis. Growth averaged 7.6 per cent a year in 1988 to 1991, he writes, and he credits the 1991 package with turning that spurt into steadier growth. His averages are 5.9 per cent a year from 1992-93 to 2002-03, against 5.3 per cent for the 11 years from 1981-82 to 1991-92, or 5.7 per cent if the crisis year is left out.

Poverty and inequality

The Planning Commission’s July 2013 note, using the Tendulkar poverty line, puts the share of Indians below the line at 45.3 per cent in 1993-94, 37.2 per cent in 2004-05 and 21.9 per cent in 2011-12. The number of poor people was 403.7 million, 407.1 million and 269.3 million. The decline averaged 0.74 percentage points a year from 1993-94 to 2004-05 and 2.18 points a year after that. The note itself says several representations had called the Tendulkar line too low, and that a committee under C. Rangarajan was reviewing the method.

Angus Deaton and Jean Dreze examined the 1990s in 2002. They found poverty fell at about its earlier pace, regional gaps widened, with the south and west pulling ahead of the north and east, and inequality rose within states, especially in cities. They rejected both the claim of unprecedented improvement and the claim of widespread impoverishment as descriptions of the decade.

Jagdish Bhagwati and Arvind Panagariya argue in Why Growth Matters (2013) that growth led by markets and liberal state policies is the approach that gives the poor meaningful help. Dreze and Sen, in An Uncertain Glory (2013), hold that the growth has translated only weakly into better living conditions. In one reviewer’s summary, Bangladesh overtook India on life expectancy, child survival, fertility, immunisation and years of schooling.

A 2024 paper by Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty and Anmol Somanchi finds that inequality fell after independence until the early 1980s and then rose, sharply after the early 2000s. It puts the top 1 per cent’s share at about 22.6 per cent of income and 40.1 per cent of wealth in 2022-23, and says India’s economic data are poor enough that its estimates are probably a lower bound.