Economic reforms: India needs a second wave to sustain high growth

Thirty-five years after the 1991 reforms, India needs a new reform wave focused on deregulation, stronger state capacity, judicial efficiency and faster growth

Exactly 35 years ago today, then finance minister Manmohan Singh presented his first Union Budget, arguably one of the most consequential budgets in independent India’s history. The economic reforms that followed opened up the Indian economy to both internal and external competition. Since then, all governments have broadly committed to the idea of economic reforms, though their own interpretation and style affected the pace of change. For a country that functioned under the “licence-quota raj” for decades, a larger political consensus on reforms offers hope. It means policies can always be adjusted to improve outcomes. The completion of 35 years of this journey offers an opportunity to rethink the way forward. 

To be fair, a lot has been accomplished over the past three and a half decades. India today is in a much stronger position and has become one of the largest economies in the world. Many of its sectors, including auto, communication, aviation, and financial services, have completely transformed. The country has one of the largest stock markets in the world. Some recent reforms, implemented over the past decade or so, have significantly strengthened its institutional architecture. India now has a modern monetary policy framework, which, over time, will help strengthen macroeconomic stability and enable sustainable growth. It also now has a modern bankruptcy law, though it came much later in the reform process and continues to evolve. The implementation of the goods and services tax made India a single market, and is clearly one of the biggest reforms since 1991. 

However, a lot more needs to be done. International experience suggests that India’s growth could have been higher. For instance, in 1991, the Chinese economy in current dollar terms, according to International Monetary Fund (IMF) data, was about 1.5 times bigger than the Indian economy. The gap grew to about 4.6 times in 2025. Granted, much of what China has done to achieve this cannot, and should not, be replicated in India, but outcomes could still have been better. The government has set a target of making India a developed country by the centenary of its independence in 2047. Various estimates suggest that India will need to grow at 8-9 per cent to achieve this. Clearly, this will not be easy, but India must certainly aim for it. 

 

While several economists and commentators have outlined what should be done, one critical area that needs attention is how the Indian state functions and interacts with businesses and citizens. There are many layers to this issue. However, it is well accepted that the Indian economy is still overly regulated and often micromanaged. In fact, Prime Minister Narendra Modi has himself spoken about a deregulation commission. Although high-level committees are working in this area, it is perhaps time to constitute a formal, independent deregulation commission with experts from the government and the private sector. The commission could be given a term of, say, 12 to 18 months to study the current nature of state interaction with businesses at all levels and make recommendations. It can then be given another year or so to monitor the implementation of its recommendations across different levels of government and submit a status report. The details of its functioning can be debated, but it could potentially pave the way for a wave of reforms. It may still not be enough, but will be a good start. 

The other aspect that needs attention is the level of investment the state needs to make in itself. The biggest example of this is the case backlog in Indian courts. There are over 50 million pending cases. This not only affects the ease of living but also ease of doing business. Investors require certainty and an environment where contracts can easily be enforced. Delays in legal recourse also unintentionally promote “inspector raj”. 

A time-bound investment strategy for expanding the justice system with more courts and increased use of technology will inspire confidence, both among businesses and citizens. Even the bankruptcy law is not yielding desired outcomes because of adjudication capacity constraints. Both the issues of regulation and judicial capacity can be addressed relatively quickly. But underinvestment extends to a number of areas where the state is expected to provide basic services like education, health and sanitation. 

Building state capacity will require a major reorientation in the management of government finances. In his 1991 Budget speech, Manmohan Singh talked about the high fiscal deficit and how the central government debt had reached about 55 per cent of gross domestic product (GDP). The debt level is roughly at the same level and is estimated at 55.6 per cent of GDP in the current financial year. To be fair, the debt stock increased to an extent because of the pandemic, but it needs to be brought down quickly. Higher debt and deficit leads to higher interest payments, which not only affect government spending priorities but also crowd out private investment. 

India’s general government debt, according to the IMF’s estimates, was worth over 84 per cent of GDP in 2025.  This needs to be brought down at a faster pace. Greater fiscal space will allow the government to invest in building state capacity. This will require both restructuring expenditure and boosting revenue. The most desirable way of boosting revenue is to push growth. How will growth rates increase? Clearly, India needs another wave of reforms. As witnessed last week, with the right environment, young Indians in the private space can even build rockets to launch satellites, and take India to a different league!