Economic Reforms of 1991:  The unforgettable laurel of former PM and FM Dr. Manmohan Singh

Dr Manmohan Singh, an Economist, was the key architect of India’s Economic Liberalisation. Dr. Singh assumed the position of Economic Advisor at the Ministry of Commerce within the Government of India in 1971.

Subsequently, he was appointed as Chief Economic Advisor in the Ministry of Finance in 1972 and Secretary of the Department of Economic Affairs from November 1976 to April 1980. 

He also served as Member Secretary of the Planning Commission between April 1980 and September 1982.

Dr Singh also had a stint as Governor, Reserve Bank of India, from 16 September 1982 to 14 January 1985 and subsequently held the position of Deputy Chairman, Union Planning Commission, from 1985 to 1987.

He also was Advisor to the Prime Minister of India on economic affairs and became the University Grants Commission (UGC) chief in March 1991.

India’s then Prime Minister, P.V. Narasimha Rao, chose Dr Manmohan Singh as his Finance Minister in June 1991.

Speaking to BBC’s Mark Tully in 2005, Dr Singh had said:  

“On the day he was formulating his cabinet, he sent his Principal Secretary to me saying, “The PM would like you to become the Minister of Finance”. I didn’t take it seriously. He eventually tracked me down the next morning, rather angry, and demanded that I get dressed up and come to Rashtrapati Bhavan [the presidential palace] for the swearing-in. So that’s how I started in politics.”

Dr Singh also recalled his oath day in a book titled “Strictly Personal: Manmohan & Gursharan”, authored by his daughter Daman Singh, which quotes him saying:

“Everybody was surprised to see me as a member of the new team lined up to take the oath of office. My portfolio was allotted later, but I was told straight away by Narasimha Raoji that I was going to be finance minister”.

Dr Manmohan Singh’s tenure as Finance Minister marked a historic shift in India’s economic policies, as it was a turning point in the economic history of India.

1991 Economic Crisis – Background

In 1991, the Indian economy was facing a severe crisis – large fiscal deficit[1] (8.4% in 1990-91), high inflation, depleting foreign exchange reserves, and a balance of payment crisis.

The Foreign exchange reserves had declined to $ 1 billion, only to cover two weeks’ worth of imports. India was on the verge of defaulting on debt obligations.

As FM, he stated in his budget speech about the inflation of the economy as follows:

“The price situation, which is of immediate concern to the vast mass of our people, poses a serious problem, as inflation has reached a double digit level. During the fiscal year ending 31 March 1991, the wholesale price index registered an increase of 12.1 per cent, while the consumer price index registered an increase of 13.6 per cent. The major worrisome feature of the inflation in 1990-91 was that it was concentrated in essential commodities.”

The 1991 Economic Reforms: Key Measures

For our better understanding, the 1991 Economic reforms are classified into three phases.

1. Liberalization:

The liberalisation phase happened from 1991-2000. The main objective of the liberalisation was to reduce government intervention and open up the economy. This meant removing the licence raj, decreasing tariffs, encouragement of Foreign Direct Investment and easing regulations.

As a result, there was industrial growth, a boost in global trade and an increase in foreign investments.

2. Privatization:

The 1991 Economic reforms marked the beginning of a new era of privatization, with the government selling interests in public sector companies (PSEs) to private investors.

Disinvestment of Government stakes in Public Sector Undertakings (PSUs) started with the objective of not only raising funds but also improving the efficiency of government-owned enterprises. The disinvestment policy contributed to revenue growth and enhanced PSE’s corporate governance.

3. Globalization:

The era of globalisation began in 1991, to integrate the Indian economy with the global market. The government began to reduce trade barriers that had been among the highest in the world.

This encouraged foreign trade, increased foreign investments and loosened the currency exchange system. Globalisation helped to improve India’s exports, led to economic diversification and brought in advanced technologies.

Other than these, to reduce the unsustainable fiscal deficit, which was around 8-9% of GDP in the 1990s, the fiscal deficit target was budgeted at 6.2%. Due to reforms, the fiscal deficit was reduced to 5.9% in 1992.

Conclusion

Dr. Manmohan Singh’s term as Finance Minister during the 1991 economic crisis was a defining moment in India’s economic history.

The government’s decisions not only aimed at fixing the BOP crisis, but also brought major changes to India.

Over time, the government began to view private enterprises with slightly less scepticism, and private enterprises gained importance in the economy. The new economic policy became more welcoming to foreign investors and there was an increase in foreign direct investment.

Many people who were in poverty exited from it. Many lives transformed significantly, though the extent of these changes varies among individuals.

These achievements are unique in India’s historical context and would not have been feasible without the economic reforms began in 1991 — something even economists with straightforward, unbiased perspectives acknowledge.

(The author of this article is Madhusudhanan S, an Economist and former consultant with the Government of India in New Delhi. He has 16 years’ experience in Economics Policy and was associated with CMIE, Government of Tamil Nadu, Union Planning Commission, and Union Ministry of Finance). 

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References:

1. Mark Tully. “Architect of the New India”. Cambridge Alumni Magazine. Michaelmas 2005. Retrieved on 28 February 2013. Archived 1 July 2013 at the Wayback Machine
2. https://www.orfonline.org/expert-speak/looking-back-on-the-1991-reforms-in-2021 – Puja Mehra, ORF, Jul 24, 2021.

[1]https://www.indiabudget.gov.in/budget_archive/es1992-93/2%20Public%20Finance.pdf