In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes, which had an adverse effects on the economy. This not only increased the rate of growth but it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War also caused a spike in oil prices and major payments crisis for India, which found itself facing the prospect of defaulting on its loans. But Narasimha Rao who became the Prime Minister after Rajiv Gandhi initiated the economic liberalisation of 1991 along with the then finance minister Manmohan Singh. The reforms did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.

Since 1990 India has emerged as one of the wealthiest economies in the developing world; during this period, the economy has grown constantly. This has been accompanied by increases in life expectancy, literacy rates and food security.

While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to investment level in 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind US and China

In the last 15-year period following initiation of tax reforms in 1991, there have been drastic changes in the rates of direct and indirect taxes thereby altering their respective shares in the total tax revenue. Changes in tax rates, increase in the tax base, introduction of new taxes and simplification of laws and procedures pertaining to the already existing ones has led to an increase in direct tax revenue of the government. Share of direct and indirect taxes in gross tax revenue over the last 15 years post liberalization depicts that while at the dawn of liberalization, shares of direct taxes and indirect taxes in total tax revenue were 22.5 and 73 per cent respectively, they have almost become equal (50 per cent each) in the last fiscal 2006-07.