Synopsis
After decades of growing at a meagre 3.5% per year, India took a few decisions that forever changed the lives of Indians as the country embarked upon a new journey. On this day 31 years ago, i.e., July 24 1991, Manmohan Singh, the then finance minister of India, presented a landmark budget, ushering in a new dawn for the Indian economy.
After decades of growing at a meagre 3.5% per year, India took a few decisions that forever changed the lives of Indians as the country embarked upon a new journey. On this day 31 years ago, i.e., July 24 1991, Manmohan Singh, the then finance minister of India, presented a landmark budget, ushering in a new dawn for the Indian economy.
"I do not minimise 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. India is now wide awake. We shall prevail. We shall overcome" — Budget speech, July 24, 1991.
Reforms began in the preceding decade, especially beginning 1985, but the Indian economy was still weak and fragile. Then came the balance-of-payment crisis.
"Growth during the 1980s was also propelled by fiscal expansion financed by borrowing abroad and at home. But this was unsustainable and led to the crisis of June 1991," notes Arvind Panagariya in an IMF Working Paper titled 'India in the 1980s and 1990s: A Triumph of Reforms'.
"The fragile but faster growth during the 1980s took place in the context of significant reforms throughout the decade but especially starting in 1985. While this liberalization was ad hoc and implemented quietly (“reforms by stealth” is the term often used to describe them), it made inroads into virtually all areas of industry and laid the foundation of the more extensive reforms in July 1991 and beyond. The liberalization pushed industrial growth to a hefty 9.2 percent during the crucial high growth period of 1988–91," he wrote.
Behind this transition of the Indian economy, which most of us know as liberalisation, was a man who had almost given up his political career to head a monastic order called Siddeswari Peetham in Courtallam in Tamil Nadu.
Pamulaparti Venkata Narasimha Rao, then prime minister of India, oversaw the reforms that pulled India back after it had run out of money in 1991. There was nothing in Rao’s political past that indicated that he would be a liberaliser, according to Vinay Sitapati who has written a biography of Narasimha Rao, Half Lion.
Manmohan Singh, the brain behind the reforms as Rao’s finance minister, told Sitapati: “I had no inkling that Rao was in favour of liberalisation based on his past record.”
A socialist at heart, Rao was a protectionist until 1991. Jairam Ramesh, who was OSD in Rao’s PMO during those transformative months in 1991, recalls his meeting with Rao the day after he became Congress president.
“He told me that he was not an expert on economic issues and that I should coordinate meetings with Pranab Mukherjee and keep briefing him on these subjects,” Ramesh recounts in his book, To The Brink and Back: India’s 1991 Story.
The man who confessed that he did not understand economics realised the magnitude of the crisis in a couple of hours on June 19. That was two days before he was sworn in as PM. Sitapati says, “He read a note given to him by cabinet secretary Naresh Chandra on the economic crisis. It took just a few hours for Rao to change his mind and become an economic liberaliser.
Ramesh recalls in his book, “When he saw the note, Narasimha Rao’s first response was: ‘Is the economic situation that bad?’ To this, Chandra’s response was, ‘No, sir, it’s worse.’”
The contents of Chandra’s eight-page note were not new. Many of the reforms suggested were part of what was dubbed as the controversial ‘M document’, prepared by Montek Singh Ahluwalia for the VP Singh government.
Chandra’s note itself, Sitapati says, had been prepared by the line secretaries of the previous Chandra Shekhar government: “It contained the core reforms that Rao and Manmohan Singh would implement a few weeks later. It listed out devaluation, trade liberalisation, de-licensing, etc.”
It took Rao’s political genius to instantly recognize their importance–and implement them.
Rao shrewdly realised that he needed a finance minister with immense credibility not just to convince the detractors at home but also the doubters abroad.
Manmohan Singh, the economist with irreproachable integrity, was to be the face of the reforms. As Ramesh, who had a ringside view of the reforms being unleashed, says, there could not have been a more unlikely duo playing harbingers of this fundamental change. “Both Rao and Manmohan were pillars of the ancient régime, stalwarts of the very system they set out to replace.”
"They were also by nature introverts, without mass base, rallying power or political coteries, and together they oozed charisma that would not fill a 10 ml bottle. In a matter of few weeks, they would transform the country," Ramesh writes.
When Rao baulked, as with the devaluation of the rupee, Singh would steady him. “Right from the beginning, the prospect of devaluation horrified the prime minister. It was not surprising,” writes Ramesh. “He belonged to a generation that believed that the 6 June 1966 devaluation forced upon Indira Gandhi was a political and economic disaster. Little did he realise that almost exactly a quarter of a century later, he would be in the hot seat. Of course, numerologically, 6.6.66 couldn’t be matched .
It was a leap of faith for Rao. The first devaluation of the rupee of 7-9% against major currencies took place on July 1. The second devaluation of about 11% happened on July 3.
It must have been a listless night for Rao, for the early morning he called Singh to stall Step 2. But by 9.30 am, when Singh made the call to RBI deputy governor C Rangarajan, the devaluation had already been carried out.
Sitapati writes, “Embarrassed, Manmohan Singh offered to resign, saying, ‘Let the responsibility lie with me.’ Rao had always intended his finance minister as a scapegoat, but he did not want to sacrifice him just yet. ‘He backed me,’ says Manmohan Singh.”
It was a two-person financial tango. The devaluation decision, says Ramesh, was taken by the prime minister and the finance minister – and conveyed to the RBI.
Singh says Rao was first a little sceptical about the liberalization idea and had to be persuaded. "I had to persuade him. I think he was a sceptic to begin with, but later on he was convinced that what we were doing was the right thing to do, that there was no other way out. But he wanted to sanctify the middle path—that we should undertake liberalization but also take care of the marginalized sections, the poor," Singh is quoted as having said by his daughter Daman Singh in her book "Strictly Personal: Manmohan and Gursharan", which covers the years before he became the Prime Minister in 2004. The book is based on Daman's conversations with her parents and hours spent in libraries and archives.
"He also jokingly told me that if things worked well, we would all claim credit, and if things didn't work out well, I would be sacked," he said.
With inputs from agencies
Used here for Educational Purposes only
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