Reliving the landmark 1991 economic reforms

Vinay K Srivastava | Updated on July 26, 2021

30 years hence, the Narasimha Rao-Manmohan Singh duo must be credited for laying the foundation for a new era of development

This July marks the 30th anniversary of the historic economic reforms in India. Since July 1, experts across the country have been speaking and writing about the 1991 economic reform story.

The year 1991 is a milestone in the history of independent India. It was a year in which, in the words of Congress leader Jairam Ramesh, action, drama and outcome were everything.

In this drama, according to the then chief economic advisor Deepak Nayyar, there were many actors in leading or supporting roles. The leading role was played by the former prime minister PV Narasimha Rao and the then finance minister, Manmohan Singh.

The country was facing an acute economic crisis, which was triggered by an increase in world crude oil prices following Saddam Hussein’s onslaught of Kuwait in August 1990.

The balance of payments (BoP) situation became unmanageable. There was a sharp reduction in the forex reserve due to a sharp decline in capital inflows. It was a serious threat to the sustainability of the growth process. India was close to default.

The gravity of the situation can be understood from a conversation between Nayyar and the Managing Director of IMF. Nayyar, who went to the IMF for financial support, told Michel Camdessus, ‘If the Fund cannot extend a lifeline, we will bring the shutters down.’

Minority government

At that time, there was a minority government at the Centre under the leadership of Chandra Shekhar. Although the government was making all efforts to come out of the crisis, it could not deal with the economic challenges.

A strong government was needed at the Centre to deal with and address the economic problems. Therefore, the general election of the 10th Lok Sabha was announced and the Congress party emerged as the single largest. The party formed the government under the leadership of PV Narasimha Rao, who appointed Manmohan Singh as Finance Minister.

To counter the liquidity problem, the government ushered in policy reforms aimed at speeding up the pace of economic growth. The reforms began with the devaluation of the rupee on July 1, 1991, followed by a second round of transfer of a total of 46.91 tonnes of gold from the reserve assets of the RBI in Mumbai to the Bank of England, which enabled India to borrow $400 million to solve its liquidity problems.

Earlier, in the first round, the Chandra Shekhar government had transferred 20 tonnes of gold to the Union Bank of Switzerland in the form of a sale with repurchase option. At that time, the gold was not from the reserves held by the RBI but those confiscated from smugglers and kept with the State Bank of India. The government managed to garner about $200 million to address the BoP problem.

July 24 was, by far, the most dramatical day, when the government took two crucial steps. First, the government announced a new industrial policy to liberalise the economy, increase employment opportunities, boost production and productivity, make Central pubic sector units more competitive, and encourage foreign investments. The policy had deregulated the industrial sector substantially.

And, second, the Union Budget presented by Manmohan Singh in the evening changed the destiny of the country.

It sought to extend the reform measures taken by the government in the previous months. The aim of the Budget was to address the balance of payments problem and the structural rigidities.

The debate on who is the real reformer — Rao, Singh or both — still goes on in some quarters. While the Left wing is of the opinion that Manmohan Singh is the architect of the reforms, the Right wing credits the reforms to Rao.

The general perception among the people is that the real architect of economic liberalisation is Manmohan Singh. However, the truth is that the reforms were a jugalbandi of the duo — with mutual understanding, Rao and Singh wrote a new chapter in the history of the country.

The economic reform initiated in 1991, followed by further measures undertaken by successive governments, have helped our country emerge as one of the fastest growing economies in the world.

The foundation for a new era of development was laid by the Rao-Singh duo, which was built upon by all successive governments.

The writer teaches at ITS Ghaziabad. He is the co-editor of ‘The Future of Indian Economy: Past Reforms and Challenges Ahead’

Published on July 26, 2021

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