India Gets Liberalisation Reforms Rolling

The ’90s was perhaps the most turbulent decade in post-Independent India, one that started with four defining events – the Gulf War (1990-91), Rajiv Gandhi’s assassination (May 1991), demolition of the Babri Masjid (Dec 1992), and the Mumbai serial blasts (March 1993).

Before that, India was hit by a surge in terrorism in Punjab and Kashmir, frequent communal riots on the Mandir-Masjid issue, the collapse of two governments in just 15 months, and a hung Parliament after the 1991 elections.

While internal security was threatened, the economy too was in a deep crisis. The Gulf War had sent oil prices skyrocketing, remittances from the Middle East fell, and India’s forex reserves fell so low that there were just enough for 2 weeks of imports!

India was on the brink of an economic meltdown and, on the political front, the 1991 elections had resulted in a Congress-led minority government with P V Narasimha Rao as Prime Minister. Rao was about to retire when Rajiv Gandhi was assassinated and he was given the top job.

On 19th June, top Finance Ministry officials briefed on the crisis the country was facing. On 24th June, he took oath as Prime Minister. Forex reserves were hovering at $1 billion; the fiscal deficit had ballooned to 8.4% of GDP, and external debt was $70 billion.

Six months earlier, the Chandrashekhar government had negotiated two loans from the IMF – $775 million and $1.02 billion. The condition was that economic reforms would be introduced in the Budget. But the government had failed to present the Budget and collapsed in March.

To avert a full-blown crisis, the caretaker govt had pledged 20 tons of gold with the Union Bank of Switzerland to raise $240 million by May. But a default on overseas payments loomed, and India’s credit rating was downgraded to the speculative category.

When Rao took over, he was told that the IMF was unhappy with India’s failure to initiate reforms, as promised by the previous government. No further loans would be forthcoming if the conditions were not met.

Rao needed a finance minister who had the expertise and credibility for the job. The mantle fell on Oxford-educated economist and former Governor of the Reserve Bank of India, Dr Manmohan Singh.

Dr Singh lost no time rolling out structural reforms. He devalued the Indian Rupee and the ‘licence raj’ was dismantled. But the government still needed foreign exchange to prevent a default on international payments.

So, 47 tons of gold were pledged to the Bank of England, to raise $400 million. This was in addition to the 20 tons leased by the Chandrashekhar government, to raise $240 million.

Some of the biggest changes introduced by Manmohan Singh were the dismantling of the licence-control raj; abolition of the Monopolies and Restrictive Trade Practices Act; and relaxation in the Foreign Direct Investment rules.

Rao and Singh faced plenty of political opposition to pushing through these ground-breaking reforms. But Rao’s unique consensus-building approach helped steady the minority government, while the reforms rolled on.

Cover Image: The Indian Wire

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