July 24th marked the silver jubilee of an event that changed the economic landscape of our nation. This day, 25 years ago, anOxbridge trained economist-turned -administrator presented independent India’s 56th Budget (interim & final included). Though he had served as the Deputy Chairman of the Planning Commission and RBI governor earlier, Dr. Manmohan Singh was apolitical and hence considered an outsider for the Finance Minister’s job in the new Narasimha Rao ministry. Shri. Pranab Mukherjee who served as India’s Finance Minister between 1982 and 84 was widely tipped to be appointed FM. However, it was not to be and Dr. Singh who was then the Secretary General of the South Commission took over. The dire nature of the economic circumstances that loomed over the country was unprecedented in India’s economic history and was scarcely indicative of any epoch-making possibilities.
1991 status
Our economy had run into a crisis of confidence both in the external and the internal sectors. The 1990 Gulf War and the domestic political instability after the 1989 Parliament elections were proximate causes for the troubles that our nation faced. Subsequent to the Gulf War there was a substantial inflow of gulf migrants returning home and oil prices were also shooting through the roof. They rose by more than 110% in a span of 6 months in the latter half of 1990. In a bid to shore up the external account our country had borrowed twice from the IMF-once in July 1990 and then in January 1991. This however, had not helped boost confidence in our economy and we were bleeding precious forex reserves. Inflow of NRI deposits- which were one of the mainstays of our reserves started declining. Access to external commercial borrowings for financing our imports became increasingly difficult. Our forex reserves in July 1991 fell to a low of $1 billion (` 2500 crores) sufficient to finance only two weeks of imports.
Economic Rationale
Does it mean that we faced trouble only in the external front and could sit pretty with domestic economic policies? The short answer is no. Apart from the well-known fact that we depend heavily on imports to finance our oil requirements these external shocks also impact our domestic economy. For one, this leads to increased general level of prices or in other words inflation. The inflation of 1990-91, to the tune of 12.1% in WPI and 13.6% in CPI was concentrated in essential commodities. The rise in prices was in evidence,inspiteof 3-consecutive years of favourable monsoons. Secondly, the fall in international reserves also impact the investible resources that are available in the domestic economy. A deficit in the current account (excess of imports over exports), which increased to 3.2% of GDP in 1990-91 (which had remained at 2% of GDP for a long time) had to be financed from the government budget or from borrowings from abroad. The government budget was in deficit and was reaching record levels. Fiscal deficit, measured as the excess of total expenditure over revenue receipts exceeded 8% of GDP in 1990-91. These figures were historic highs as the corresponding levels were only 6% in 1980s and 4% in the 1970s. With such high levels of government deficit, the only source of financing the current account deficit was external borrowings. With difficulties experienced in inflows of the latter there was a pincer movement killing availability of investible resources, reducing growth opportunities and with it development.The GDP growth for 1991-92 was estimated at 0.8% per annum. In other words the economy was in a rut and in the absence of unprecedented reforms it would be impossible to climb out of it.
Intellectual Origins
The reforms were inspired by the conditionalities imposed by the IMF. Stabilization and structural reforms were the straitjackets imposed by the IMF. However, from the beginning of the 1980s there was widespread consensus among economists of varying hues that urgent reforms were required in both the exchange rate policies and the stifling internal controls that hampered productivity growth in the economy. We can trace the intellectual origins further back to Dr. Singh’s PhD thesis in 1962 (under Ian Little), "India's export performance, 1951–1960, Export Prospects and Policy Implications."The budget of 1991 was a crisis-led response, but had widespread intellectual support and Dr. Singh had the good fortune to usher them into the world. He went on to liberalise the controls that prevented easy setting up of industries and an overemphasis on public sector enterprises, reduced tariffs on imports, deregulated the setting up of interest rates- in short the very foundations that India’s planned economy depended on till then. Reforms were also proposed in taxation, subsidies as well as the overall architecture of Government Finances. This was intended to free up resources to invest in social expenditure required for an economy that had more than 40% below the poverty line. In other words the 1991 budget was comprehensive in a manner that few budgets were before it and since.
The impact of the reforms was felt almost immediately. GDP growth rebounded to 5% in 1992-93 and going on to touch 6% by 1994-95, by which time forex reserves also had climbed to $21 billion. Inflation remained stubborn at around 10% but was estimated to fall to 7.5% per annum.
Reform Successors
India’s economy has gone in the general direction shown by the 1991 budget. Successive finance ministers from P Chidambaram to Yashwant Sinha to Jaswant Singh to ArunJaitley have all stuck to the tone and tenor of the 1991 Budget.Talks of second Generation and third generation reforms have been in relation to the 1991 Budget. If the intellectual foundation for the first forty years of India’s economic development was laid down by the First Five Year Plan the foundation for the next 25 years of our country’s economic development was laid down by the 1991 reforms.
It would be incomplete if we do not look at the trajectory the economy took during the prime minister ship of Dr. Manmohan Singh. It is ironic that the very person who brought in economic reforms also presided over the country when there was widespread pessimism of capitalist development models. If dirigisme had hold over our economy in 1991 in the latter 2000s cronyism did. This silver jubilee is therefore an opportune time to deepen, strengthen and widen the scope of reforms in our economy to bring in development of a sustainable nature and growth of an equitable kind.
(The author is an IAS Officer of Nagaland cadre and can be reached at vyasan_r@yahoo.com. The views expressed above are personal.)
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