While on the topic of why India didn't liberalize sooner, an article posted to the SM's News column points at one important factor. In his "Letter from India" column in the NYT, Akash Kapur reflects on the 20th anniversary of the fall of the Berlin Wall the impact it had on India -

Most of the media coverage has, quite understandably, focused on Europe. But the tremors from Communism's collapse were felt far beyond the immediate battlegrounds of the Cold War. The breakup of the Soviet Union had a profound impact on India. In many ways, it paved the way for a reinvention of the country

Akash Kapur

While an important socio-political milestone, Kapur notes the equally important intellectual milestone - an event Francis Fukuyama memorably christened The End of History. History in this sense didn't mean an "end to events" but rather, the (potential) end of a type of dialectical debate about political systems.

It's tough to remember now, BUT, prior to the fall of the wall, there were many serious scholars who seriously argued that not only would communist / socialist systems deliver greater equality than capitalism but also greater wealth . Their economic promise went a l'il sumthin like this - under capitalism the steel industry, for ex., might currently consist of 10 small, competing companies which are constantly hunting for cheaper labor to exploit, can't all run their plants at max efficiency b/c of inter-firm supply/demand flux, and ignore other, more important social goals.

"I remember, from my childhood, the Soviet engineers and scientists who filled the bars in Pondicherry, seeking respite from the rigors of the power plant they were building up the road. I remember the dusty bookstores that stocked cheap Russian classics and the bottles of sparkling Russian wine my father used to buy from visiting sailors."Instead, why not gather some scholars & start with a top-down, national plan for how much steel "we" need? Then, build 1 big steel factory, have some PhDs calc how to run it at maximum efficient scale, eliminate "wasteful" expenditures like marketing budgets, commissions for sales forces and particularly those evil profits & exec-bonuses. And "we" can achieve important Social Ends like hitting female/minority employment targets, insulating employees from the vagaries of the employment market, sourcing coal from underserved regions of the country and making sure no one makes more than 2x the lowest paid employee's salary. Lather, rinse, repeat for all other parts of the economy and poof! we'd all theoretically be better off.*

Of course, the fact that we (well, most of us) now get a hardy laugh out of the idea that the Soviet system could somehow lead to greater wealth is indicative of the degree to which History, in Fukuyama's dialectical sense, has ended. We instead generally accept that the troika of Liberalism, Democracy, and Capitalism (LD & C) are the right big picture features of a socio-politico-economic system and most debate is instead about comparatively fine grained variations of the theme. Simply put, workers in the first and developing worlds aren't quite circling the capitol in tractors with raised pitchforks like they did back in the day.

Meanwhile, in India, Nehru/Gandhi did OK on L+D but were pretty actively opposed to C...Kapur's piece provides some great examples - big & small - of how, despite official pronouncements of non-alignment, India truly was on the wrong side of this History -

India was never a Communist country. But it was far closer to the Soviet Union than to the United States throughout the Cold War, buying weapons on concessional terms, doing barter trade with the Eastern Bloc and receiving financial and technical aid for industrial and infrastructure projects.

I remember, from my childhood, the Soviet engineers and scientists who filled the bars in Pondicherry, seeking respite from the rigors of the power plant they were building up the road. I remember the dusty bookstores that stocked cheap Russian classics and the bottles of sparkling Russian wine my father used to buy from visiting sailors.

It Brought Down Mental Walls Too...

There were many reasons for the closeness between India and the Soviet Union, not least of which was a U.S. foreign policy that tilted decisively toward Pakistan. But the closeness was born, too, of genuine ideological affinity.

At about the same time the balance of payments crisis was prompting India's 1991 economic reforms, the Soviet Union was collapsing. While many of the reforms were arguably inevitable (the Indian state was truly running out of other people's money), the fall of the Wall provided the important intellectual "cover" for enthusiastically pursuing reforms -

It's possible that all of this would have happened anyway, with or without the dissolution of the Soviet Union...Most important, the death of Communism had a psychological and intellectual impact that paved the way for India's transformation. As the economist T.N. Srinivasan (among others) has argued, it provided an opening for would-be reformers, who had already recognized the need for some form of liberalization but who had run up against ideological resistance.

The collapse of the Soviet Union wasn't just the collapse of a political and military behemoth. It was the collapse of an idea, too, and with the discrediting of Communist ideology, Indian socialism, long the guiding philosophy of statecraft and economic policy making, confronted a crisis of confidence. Ideas that had until then been anathema to the nation's governing class -- ideas about markets, about profits, about entrepreneurship -- suddenly seemed, amidst the detritus of Communism, to be incontestable.

It's hard to remember now, after the spectacular market failures of the last few years, but policy makers in 1991 were operating at "the end of history." Capitalism wasn't just a superior model; it was the only viable one.

And so, perhaps the biggest reason India couldn't have liberalized sooner was plain old ideological inertia. Unfortunately, the cost of waiting to abandon those socialist ideas now appears to be 14M infant deaths, 260M literate individuals, and 100M folks who missed the opportunity to rise above poverty.....

*alas, the same sort of "the top-down plan = efficiency, lower costs + cut out middleman profits = we're all better off" thinking underlies many of the proposals in the US healthcare reform debate... so I suppose there's still a lot of room to debate just how closed the verdict is on History....