India's Economic Liberalization and Structural Transformation
Growth, Services, Manufacturing, and the Unfinished Reform Agenda
The Economic Institute
20 January 2025
Abstract
This paper examines India's economic liberalization programme initiated in 1991 and its consequences for structural transformation, growth, and development across the subsequent three decades to 2024. Beginning from a severe balance-of-payments crisis that compelled the Narasimha Rao government and Finance Minister Manmohan Singh to dismantle the License Raj and open the economy to foreign direct investment, trade, and market forces, India's growth trajectory accelerated markedly over the following decade. We trace the trajectory of GDP per capita from US$303 in 1991 to US$2,731 in 2024, situating this expansion within a structural narrative centred on the rise of services, the emergence of a globally competitive information technology and business process outsourcing industry, fitful progress in manufacturing, and persistent challenges in agriculture and rural development. The paper draws on National Sample Survey data, Annual Survey of Industries data, Reserve Bank of India statistics, Centre for Monitoring Indian Economy microdata, and World Bank indicators to construct a comprehensive account of India's uneven transformation.
Beyond the aggregate growth story, we analyse the distributional, institutional, and governance dimensions of India's liberalization experience. The services sector's share of GDP rose from roughly 41 percent in 1991 to 59 percent by 2024, driven primarily by the IT revolution centred on Bangalore, Hyderabad, and Chennai, yet manufacturing remained stubbornly anchored at approximately 15 percent of GDP, failing to replicate the labour-absorbing industrialization that powered East Asian economic miracles. Rural distress, declining female labour force participation, and sharp interstate divergences between prosperous southern states and lagging northern ones complicate the growth narrative. We evaluate landmark institutional reforms including the Goods and Services Tax of 2017, which unified India's fragmented indirect tax system; the controversial demonetization of 2016; the Jan Dhan Yojana financial inclusion initiative; and the transformative digital public infrastructure built around Aadhaar biometric identity (with 1.3 billion enrollments) and the Unified Payments Interface, which processed over two trillion US dollars in transactions in 2023. Our analysis identifies the unfinished reform agenda and the structural challenges, including the demographic dividend, infrastructure gaps, and climate vulnerability, that will shape India's economic prospects through the middle of the 21st century.
1. Introduction
In the summer of 1991, India stood at an economic precipice. Foreign exchange reserves had fallen to a level sufficient to cover barely two weeks of imports, the rupee was under intense speculative pressure, and the government was compelled to airlift 67 tonnes of gold to the Bank of England and the Union Bank of Switzerland as collateral for emergency loans. The country's fiscal deficit exceeded 8 percent of GDP, inflation was running near double digits, and the elaborate system of industrial licensing, import controls, and public-sector dominance known as the License Raj had strangled private initiative for four decades. India's share of world merchandise exports had declined from 2.2 percent in 1950 to barely 0.5 percent by 1990, and per-capita income at US$303 placed it among the world's lower-income economies.
The transformation wrought over the subsequent three decades is remarkable, if incomplete. By 2024, India had emerged as the world's fifth-largest economy by nominal GDP, overtaking the United Kingdom in 2022, and its GDP per capita had risen nearly ninefold to US$2,731. The economy had grown at an average rate exceeding 6 percent annually across the post-reform period, making India one of the world's fastest-growing major economies. The information technology sector, virtually nonexistent as an export industry in 1991, had by 2024 generated revenues of US$254 billion and employed over 5.4 million workers, representing the single most dramatic structural success of the liberalization era. A burgeoning middle class of several hundred million consumers had transformed domestic markets, and India's digital public infrastructure, anchored in Aadhaar identity and the UPI payments system, was recognized globally as an innovative model of state-enabled financial inclusion.
Yet the Indian growth story is contested and uneven in ways that simple aggregate statistics obscure. Manufacturing's share of GDP has barely moved, h