How Narasimha Rao and Manmohan Singh saved India in 1991 and made history

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New Delhi: On July 24, 1991, finance minister Manmohan Singh presented his first budget, just a month after being sworn in in the cabinet of prime minister PV Narasimha Rao. The government has also released a new game -changing industry policy change that has removed many roadblocks that prevent industries from thriving.

But for both Rao and Singh, their start in government was a test by fire. No other government faced difficult political decisions in the early weeks of assuming power like theirs.

Exactly 30 years have passed since this historic event helped India avoid a major economic crisis and put it on the high growth trajectory. ThePrint explained what led to the crisis and how India could cope with it.

Also read: If we raise roles to make India’s industry competitive, we will end close to 1991: Montek

What was the crisis in 1991?

In 1991, India faced its worst economic crisis and was on the brink of a maximum default. The Gulf War in 1990-91 led to a sharp rise in oil prices and a collapse in shipments from Indian workers working abroad. This led to a sharp depletion of India’s forex reserves – less than $ 6 billion, and it was enough to achieve nearly two weeks of the country’s imports.

The worsening situation of financial deficit and growing level of foreign debt has not helped the government. A fiscal deficit of 8 per cent of gross domestic product (GDP) and a current account deficit of 2.5 per cent of GDP added to government inconveniences. Double digit inflation numbers have also added to the burden on the average person.

Also read: $ 97 bn in 1991 to $ 82 bn in 2021 – how reforms made the destination for FDI

Immediate steps to alleviate the crisis

The immediate priority for the Rao government is to avoid a sovereign default – a shame India has managed to avoid until then. It took two immediate steps.

Getting the rupee value: The government, together with the Reserve Bank of India (RBI), undertook two measures to reduce the value of the rupee, which first depreciated against major currencies by approximately 9 per cent on 1 July 1991, followed by another decrease in value of 11 percent two days later. This was done with the aim of making exports to India more competitive.

Rao, known for his political savvy, preferred to carry out devaluation in two stages to make it more conducive to all stakeholders.

Commitment of gold holders to establish forex reserves: The central bank pledged India’s gold holders to the Bank of England in four branches from 4-18 July 1991 raising nearly $ 400 million through this route.

Prior to this, in the midst of the national election, the State Bank of India sold 20 tonnes of gold on May 16 to Union Bank of Switzerland or UBS to raise approximately $ 200 million.

The government also secured emergency loans from the International Monetary Fund on two banks totaling nearly $ 2 billion earlier in the year.

Also read: Why has India not fulfilled its economic potential? New book outlines the ‘economics of non -performance’

Structural reforms

Exchange law: As part of its efforts to boost exports, the Indian government has announced a new trade policy that seeks to bring about a change in the licensing process. It also linked non-essential imports to exports to discourage such imports.

Considering the boost in exports from the massive reduction in the value of the rupee, the government has removed export subsidies. It introduced the concept of tradable exim scrips providing such scripts to exporters for their use or for sale. Such scripts are calculated based on the export value. The policy also eliminated the need for routing imports by state-owned firms. The private sector was allowed to make its own imports.

New industry policy: The new industry policy change was revised on the eve of Budget 1991. It suggested some major changes in the way India deals with industries and foreign investment by moving away from the license raj regime.

The policy relaxes certain provisions in the Monopolies and Restrictive Trade Practices Act to facilitate easy entry and restructuring of businesses by facilitating mergers and acquisitions. The policy ended the public sector monopoly in many sectors and announced an automatic approval policy for foreign direct investment of up to 51 per cent compared to the previous cap of 40 per cent for foreign equity investments.

Public sector monopoly is restricted to only a few sectors that are important from a national security perspective. It also removed industrial licensing for all industries prohibiting 18 regardless of the level of investment.

All these changes facilitated doing business in India and saw a flood of foreign goods and investments flooding the Indian market in the following years.

Budget 1991-92: Phated by Manmohan Singh on July 24, the budget is a continuation of the reform measures taken by the Indian government over the past few weeks. There are some difficult steps to be taken.

Faced with a rising financial deficit, the budget raised corporate tax rates by 5 percentage points to 45 percent and introduced the concept of resource -deductible tax for certain financial transactions such as bank deposits.

It also increased the cooking prices of gas cylinders, fertilizer and fuel and removed sugar aid.

It opened up mutual funds to the private sector and relaxed policies for non -resident investment.

A procedure for people to declare unrecorded wealth has also been announced. People were given immunity from prosecution and from interest taxes and fines.

The push continued after the budget: Over the next eight months, the government announced several measures to continue the momentum of reforms and pull India out of the crisis. This includes a second trade policy package to boost exports and a package for the formation of small companies.

The government also announced a committee under former RBI governor M. Narasimham for the proposal of fiscal reforms. This was followed by the constitution of another committee for recommending tax reforms under prominent public finance economist Raja Chelliah.

(Edited by Amit Upadhyaya)

Also read: Smuggling gold in cyber -assisted financial crimes: How 1991 reforms changed crime in India

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