Architect Of Economic Liberalisation: How Dr Manmohan Singh Pulled India Out Of Grave Crisis – News18

Last Updated:December 27, 2024, 00:03 IST

The economic liberalisation in India refers to the series of policy changes aimed at opening up the country’s economy to the world. It is one of the key things that has shaped India’s economy into what it is today

Beginning his career as an academician, Dr Mannmohan Singh rose to political prominence as India’s finance minister in 1991, taking over as the country was plunging into bankruptcy.

His unexpected appointment capped a long and illustrious career as an educationist and civil servant. He served as an economic adviser to the government and became the governor of RBI, India’s central bank.

In 1991, India’s fiscal deficit was close to 8.5 per cent of the gross domestic product, the balance of payments deficit was huge, and the current account deficit was close to 3.5 per cent of India’s GDP. It was facing an economic crisis, and Dr Manmohan Singh was the union finance minister at the time in PV Narasimha Rao’s government.

In his maiden speech as finance minister, Dr Singh famously quoted Victor Hugo, saying that “no power on Earth can stop an idea whose time has come”.

That served as a launchpad for an ambitious and unprecedented economic reform programme.

The economic liberalisation in India refers to the series of policy changes aimed at opening up the country’s economy to the world. It is one of the key things that has shaped India’s economy into what it is today.

Devaluation of the rupee: The government, along with the Reserve Bank of India (RBI), undertook a two-step devaluation of the rupee, which was first devalued against major currencies by around 9 per cent on July 1, 1991, followed by another devaluation of 11 per cent two days later. This was done with the aim of making Indian exports more competitive.

Pledging gold holdings to shore up forex reserves: The central bank pledged India’s gold holdings with the Bank of England in four tranches from July 4-18, 1991, raising around $400 million through this route. Prior to this, in the midst of national elections, the State Bank of India sold 20 tonnes of gold on May 16 to the Union Bank of Switzerland, or UBS, to raise around $200 million. The government had also got emergency loans from the International Monetary Fund in two tranches totalling around $2 billion earlier in the year.

Trade policy: As part of its efforts to boost exports, the Indian government announced a new trade policy that sought to bring a change in the licensing process. It also linked non-essential imports to exports to discourage such imports. Taking into account the boost to exports from the massive devaluation of the rupee, the government did away with export subsidies. It introduced the concept of tradeable EXIM scrips, granting these to exporters for their use or for sale. Such scrips were calculated based on the value of exports. The policy also did away with the need for routing imports through state-owned firms. The private sector was allowed to make its own imports.

New industrial policy: The game-changing new industrial policy was unveiled on the eve of Budget 1991. It proposed some massive changes in the way India treated its industries and foreign investment by moving away from a licence raj regime. The policy relaxed some of the provisions in the Monopolies and Restrictive Trade Practices Act to facilitate easier entry and restructuring of businesses by facilitating mergers and amalgamations. The policy ended the public sector monopoly in many sectors and announced a policy of automatic approval for foreign direct investment up to 51 per cent as against the earlier cap of 40 per cent for foreign equity investments.

Public sector monopoly was restricted to only a few sectors important from the point of view of national security. It also abolished industrial licensing for all industries barring 18 irrespective of levels of investment.

All these changes made it easier to do business in India and saw a deluge of foreign goods and investments flooding the Indian market in the subsequent years.

Budget 1991-92: Presented by Dr Manmohan Singh on July 24, the budget was a continuation of the reform measures undertaken by the Indian government over the last few weeks. There were some difficult measures taken. Faced with a rising fiscal deficit, the budget increased corporate tax rates by 5 percentage points to 45 per cent and introduced the concept of tax deducted at source for some financial transactions like bank deposits.

It also increased the prices of cooking gas cylinders, fertilisers and petrol and removed the subsidy on sugar.

It opened up mutual funds to the private sector and relaxed rules for investment by non-residents.

A scheme for people to declare unaccounted wealth was also announced. People were given immunity from prosecution and from the levy of interest and penalty.

Reform push continued after budget: Over the next eight months, the government announced many steps to continue the reforms momentum and pull India out of the crisis. These included a second trade policy package to boost exports and a package for developing small firms.

The government also announced a committee under former RBI governor M Narasimham for proposing financial sector reforms. This was followed by the constitution of another committee for recommending tax reforms under well-known public finance economist Raja Chelliah.