Thirty years ago in 1991, it was on July 24, Dr Manmohan Singh, as the then Finance Minister, presented his first budget in the Lok Sabha, changing the course of the destiny of the country while the then Prime Minister P.V. Narasimha Rao looked on nervously. Little did he know that later he would become the prime minister to continue the reform story.
“I do not minimize the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘no power on earth can stop an idea whose time has come.’ I suggest to this august house that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. The world heard it, and the reform storey continued. India is now wide awake. We shall prevail. We shall overcome.”
Have the reforms been on the right path?
Thirty years later, it is time to see how India has emerged as an aspiring regional and world power today. Was the pace satisfactory? What will be its future?
While reforms were timely, there could have been better consensus and fewer politics. Rao was nervous because he knew the difficulties of extricating India from the severe foreign exchange crisis. It was out of compulsion that the Narasimha Rao government took this historic decision.
When Rao took over on June 21, 1991, India’s economy had already been downgraded twice within six months by global rating agencies. Foreign exchange reserves were enough to cover just seven days of imports ($1.12 billion). Inflation was rising, and the government was on the edge of bankruptcy. “There was nothing more to do. You had no money. You were going to become a defaulter within two weeks. Once you become a defaulter, your entire economy, your honour, your place in the community of nations, everything goes haywire. And you have no face to show,” Rao admitted in a TV interview to NDTV in 2004.
Added to that was the the burden of retrieving 20 tons of gold pledged to the Union Bank of Switzerland and 47 tons to the Bank of England as part of a bailout deal with the International Monetary Fund (IMF).
The present Trinamool Congress leader Congress Yashwant Sinha, who later became Vajpayee’s finance minister, said: “It had been one of ‘stop and go’ as the pace has been frequently interrupted.” But it was another former finance minister, P Chidambaram, who succinctly put it: “I was lucky to have had a part in the various acts of the drama that continues to play even today. The script was more or less the same, and only the key actors changed from time to time.” Sinha recalls that the finance ministry had already prepared the budget. Even Singh admits: “What we did was not original. Some ideas were in the air. Several discussions had taken place, but the political system was not responsive to implementing the reforms.”
Rao’s immediate challenge was to find a credible international face to head the finance ministry. His first choice was the then director of the London School of Economics, IG Patel, and when he refused, the choice fell on Manmohan Singh. It was this Rao-Singh duo, which steered the liberalization process for the next five years. Making it teamwork, Rao told NDTV: “Behind him( Singh) I stood like a rock. It was teamwork. There were occasions when I encouraged him. There were many occasions I pulled him back. It was a question of managing people.”
The reform team consisted of Singh and Chidambaram. At the official level, RBI governor S Venkitaramanan, C Rangarajan (deputy governor of RBI), AN Verma (principal secretary), Montek Singh Ahluwalia (commerce secretary), Rakesh Mohan (former deputy governor of RBI), and Ashok Desai (chief consultant to the ministry of finance) helped.
Economic diplomacy also began in Indian embassies. As Ahluwalia notes, reforms in industrial and trade policy were a central focus in the early stages. The major thrust was to address the macro-economic and balance of payments crisis. With the new industrial policy, the biggest hurdles to industrial expansion disappeared. Within a month came a two-step devaluation of the rupee.
Leading a minority government with no room for manoeuvrability, Rao made reforms politically tenable when his party was out to scuttle it. There had been many stormy Congress parliamentary party meetings. Senior cabinet ministers like Arjun Singh attacked Rao and Singh for their departure from the Nehruvian model. Rao countered this by paying obeisance to the Nehru-Gandhi family in the new industrial policy and the budget.
The right-wing BJP, the main opposition party, opposed reforms for the sake of fighting them. The Communists passionately opposed the liberalization policies, terming them as “abject surrender to the IMF”.
The following two years saw a slower pace after Congress lost power in some states, including his home state, Andhra Pradesh, in 1994. Facing flak from all around, Rao had to apply a mild break, which was evident from his famous “Middle path” speech at the World Economic Forum in Davos in 1994. He presented Singh as the spearhead of reforms while he advocated a middle path. But it was his vision that Singh executed. Rao lost 1996 election amidst charges of corruption and “reforms without a human face”.
Ironically, when Singh became the prime minister, he could not push through the reform process. Unlike Rao, Congress president Sonia Gandhi did not back him fully. Vested interests, trade unions, and Left parties which supported UPA 1 from outside, combined with vote-bank politics and populism, worked to block reforms.