Externality of 1991 Reforms in India:

An Empirical Analysis

Abstract: The economic reforms of 1991 in India

were designed to address long-standing structural
deficiencies in the Indian economy and to
enhance its growth potential. However, the
externalities (positive or negative) generated by
these reforms have not been adequately
researched. This paper aims to fill this gap by
empirically analyzing the externalities of the 1991
reforms in India. After controlling for other
factors, we find that the 1991 reforms have had
positive externalities on the Indian economy in
terms of increased private investment and export
competitiveness. However, there are also negative
externalities such as rising income inequality and
environmental degradation. This research paper
highlights the need for policymakers to address
these negative externalities while reaping the
benefits of the reforms.
Introduction: The Indian economy underwent a
significant transformation in 1991, when the
government initiated a series of economic
reforms. The reforms aimed to liberalize the
economy and shift it from a closed to an open
market basically LPG reforms, increase
competition, and attract foreign investment.
These reforms, which included fiscal, trade,
industrial, and financial sector policies, led to
accelerated economic growth, increased private
investment, and export competitiveness.
However, the externalities (positive or negative) of
these reforms have not been adequately
researched. This paper aims to fill this gap by
empirically analyzing the externalities of the 1991
reforms in India.

Literature Review: The paper reviews scholarly

articles and books on externalities and economic
reforms in India. The paper defines externalities as
unintended spillover effects of economic activities
that affect third parties. The literature suggests
that externalities can be both positive and
negative. Positive externalities of economic
reforms include increased job opportunities,
improved social welfare, increased investment,
and investment in research and development
(R&D). Negative externalities, on the other hand,
include environmental degradation, income
disparities, and displacement of populations. The
literature also suggests that externalities of
economic reforms vary by country, sector, and
time. It delineate the theoretical argument that
economic liberalisation leads to increased growth
and productivity, then outline the 1991 reforms in
India. It will proceed to critically engage with the
two orthodox sides of the growth debate in India
to ‘situate the project in its relevant context’
(Hart, 2010:19) and identify existing gaps in the
literature. India’s recent economic growth
acceleration can be demarcated into two lines of
debate: that liberalisation in the 1990s led to
disappointing macro-economic outcomes; and
that there was a distinct break in economic
growth in the 1980s which has been attributed to
a range of factors.
Methodology: The study uses econometric
methods to measure the externalities of the 1991
reforms in India. The study uses time-series data
on India's economy from 1980 to 2018, and
employs regression analysis by controlling for
other factors such as population, government
expenditure, and inflation. The dependent
variables are private investment, export
competitiveness, income inequality, and
environmental degradation. Using excel we have
done extensive study of the regression analysis
and tried to draw inference from regression.
In 1990
Data on Population:87.05 crores
Data on Govt Expenditure: 9926 crores
Data on Inflation: 7 percent
Data on national income: 1.08 crore

In 1991
Data on Population: 88.89 crores
Data on Govt Expenditure: 176548 crores
Data on Inflation: 13.7 percent
Results: The paper finds that the 1991 reforms
have had positive externalities on India's economy
in terms of increased private investment and
export competitiveness. These results are
consistent with the literature, which suggests that
economic reforms create a more conducive
environment for investment and trade. However,
the paper also finds negative externalities, such as
rising income inequality and environmental
degradation. By making the economy more
market-oriented, the reforms have led to greater
income disparities. The reforms also led to
environmental degradation due to the neglect of
environmental regulation in trade and investment
policy. High regression in variation as it increases
by 0.25 so we can detect problem of
multicollinearity so it is not a perfect regression
equation and model is also not significant we also
get to know that economic reforms as a whole
were impactful as we see increase in all
parameters or explanatory variables.

Discussion: Governments can also implement

policies that promote social welfare, such as
universal healthcare and education. Finally, the
study suggests that policymakers must address
the challenges of rising income disparities by
promoting pro-poor policies, such as inclusive
growth strategies, progressive taxation, and
redistribution. Need for economic reforms
because of industrial sector for economic reforms
economic reforms, adverse balance of payments,
rise in balance in fiscal deficit, galloping inflation ,
first gulf war was also one of the reason.

Conclusion: The paper concludes that the 1991

reforms in India have had both positive and
negative externalities. While the reforms have led
to increased investment and export
competitiveness, they have also led to rising
income inequality and environmental
degradation. The study recommends that
policymakers address these negative externalities
while reaping the benefits of the reforms. By
promoting environmentally sustainable and
socially inclusive economic growth, the Indian
government can create an economy that benefits
all stakeholders.