The country has dismantled government controls in favour of a market-driven economy. But as wealth disparities spread, corporate collusion threatens a fast-growing economies.
Liberalisation brings India billionaires and Maoists
It was a crisis that India moulded into an opportunity. In 1991, an acute foreign exchange crunch that dragged the country close to bankruptcy goaded the country's control-minded politicians to do the unthinkable: they began dismantling key government controls in favour of an open and market-oriented economy, a radical departure from the socialist past.
The introduction over the past two decades of these neo-liberal reforms has hastened the pace of globalisation and catapulted India into the league of the world's fastest-growing economies.
Many key sectors, including telecommunications, roads, ports and insurance, opened up for foreign direct investments.
The government reversed a myriad policies that stifled growth. It reduced export subsidies and import barriers to enable free trade, scrapped the industrial licensing regime, reduced tariffs and changed to market-determined rates.
Most significantly, it unshackled private sector enterprises from India's labyrinthine bureaucracy. It did away with multiple permits and licences and the accompanying red tape that gave rise to a cumbersome system derisively referred to as the "licence raj".
Goldman Sachs says the reforms put India on a growth expressway.
"Its effects have been nothing less than revolutionary," says Rajesh Chakrabarti, an assistant professor of finance at the Indian School of Business in Hyderabad. "They did three major things: globalisation; opening up the economy to the private sector; and deregulation in terms of scaling back bureaucratic controls."
It also, most notably, led to the spread of unbridled consumerism. In the pre-liberalisation era, getting a telephone connection, which took months, sometimes years, was considered a luxury. Today, India, in the middle of a mobile phone boom, is the world's fastest growing telecoms market.
Fiat and Ambassador used to be the only two car models made in India. Today, a host of global car makers is setting up shop in India as it emerges as one of the world's fastest-growing car markets.
Until the 1990s, the national airlines Air India and Indian Airlines were the only two carriers offering services to Indian fliers. Now they compete with a glut of private carriers offering competitive prices and services.
"India has changed beyond recognition in these two decades," Prof Chakrabarti says.
But there is still a lot about India that remains unchanged. Domestic and foreign firms operating in the country feel weighed down by archaic tax systems, restrictive labour laws, derelict infrastructure and worsening instances of government corruption.
The reforms that pushed India to this level of growth seem to be losing momentum, observers say.
The entry of different telecoms companies means the sector has witnessed an explosive growth in recent years.
With 700 million-plus mobile phone subscribers, and an average of 17 million new ones being added every month, India is the world's fastest-growing mobile phone market after China.
But the sector's growth is still inhibited, observers say, by an archaic telecoms policy introduced more than a decade ago.
In November, the telecoms minister, Andimuthu Raja, was forced to resign amid allegations that he sold licences for second generation cellular frequencies (2G) at throwaway prices in 2008, resulting in an alleged revenue loss of up to US$40 billion (Dh146.92bn).
Mr Raja denied the charge and said that he issued licences according to the rules mandated by the telecoms policy introduced in 1999.
However, Rajat Kathuria, a professor of economics at the International Management Institute in New Delhi and a former consultant with the Telecom Regulatory Authority of India, says: "A new national telecoms policy is long overdue.
"Many changes have taken place since the current policy was formulated. The context of growth for the Indian market has altered significantly."
Kapil Sibal, the new telecoms minister, announced plans this month to roll out a fresh policy in the next three months but he did not disclose whether he would introduce any changes to the contentious process of granting telecoms licences.
Dr Amit Mitra, the secretary general of the Federation of the Indian Chambers of Commerce and Industry, says: "The key challenge is to bring transparency in the regulated area of policy making. Wherever minute discretion in decision-making is involved, policies become prone to misuse and corruption. They act more as roadblocks than guidelines."
Deepak Parekh, chairman of the national mortgage and banking giant HDFC, warned recently that because of excessive government control and a lack of transparency, "the big boys of business are looking overseas. It's a sorry state of affairs."
Another area of concern is India's abysmal infrastructure: choked ports, shoddy airports, roads and motorways with bone-jarring potholes which, experts say, shave off between 1 and 2 per cent from its GDP.
"India's infrastructure is seriously overstretched," said an economic survey released in 2007 by the Organisation for Economic Co-operation and Development. India's "high rate of economic growth is at risk if infrastructure development does not increase and keep pace with demand", it added.
The biggest concern among observers remains the uneven nature of India's economic growth. Economic reforms and a rapid pace of growth (it is expanding at 9 per cent in the current financial year, ending on March 31) have helped hundreds of millions of India's 1.2 billion people escape extreme poverty. But it has produced stark disparities in wealth, giving rise to social tensions and a bloody Maoist insurgency spreading rapidly across India's countryside.
In a study in 2009, the Asian Development Bank (ADB), warned about the "Latin Americanisation" of the Indian economy, a term it used to draw parallels with Mexico, where economic growth has been inhibited since the early 1980s because of large, family-run corporate concerns that unfairly influenced state policies for private gain, while the interests of the majority was ignored.
In India, the number of high net worth individuals, those with assets of at least $1 million, grew from 84,000 in 2008 to 126,700 in 2009, according to the latest edition of the Merrill Lynch-Capgemini World Wealth Report. That is the fastest growth in the number of wealthy individuals in Asia after Hong Kong.
The latest Indian edition of Forbes says the wealthiest 100 Indians are collectively worth $276bn, while their top 100 Chinese counterparts have assets of $170bn.
According to ADB's report, 80 per cent of this wealth was accumulated by companies in sectors where government control is the heaviest, primarily minerals and other natural resources. These sectors can only be tapped into through lucrative government contracts.
The rapid wealth creation exposes an unhealthy connection between family-run businesses and the state, the bank's report said.
"Politics is increasingly becoming a handmaiden of corporate interests and national assets like minerals and airwaves are being auctioned off in rigged manner," says Prof Chakrabarti.
"India has spawned millionaires and billionaires, while Maoist unrest is gripping over a third of the country as a reaction to the real or perceived rise in inequality."