India has come a long way from being annexed by the British for 200 long years to becoming one of the fastest-growing economies in the world. A report suggested that India is soon expected to leave behind its pre-independence rulers to become the fifth-largest economy in the world. But India’s rapid economic transformation after the 1990s–from a tattered, socialist economy to an emerging, liberal global leader–would not have been possible without the contribution of one man – Manmohan Singh. Singh helped shatter economic barriers and steered India into a new era of free markets, a development popularly termed as India’s economic liberalization.
In 1990-91, India was on the brink of a financial collapse. The country was reeling under extreme economic pressure with just enough foreign exchange reserves left to sustain imports for no more than two weeks. Suffocating License Raj, complex company laws and a mixture of socialist reforms had withered the country’s economy, which was further stressed by the Gulf War (1990-1991). India’s imports kept swelling, resulting in a major trade deficit and low reserves, which led to a sharp depreciation of the rupee. Fiscal imbalances that had been rising in India since the 1980s, economists say, could have crippled the country’s economic growth permanently by 1991 if revolutionary reforms were not rolled out swiftly.
And, that is exactly what India got under the PV Narasimha Rao government when Manmohan Singh took charge as India’s finance minister in 1991. While two-time finance minister Yashwant Sinha’s quick thinking helped India initially stand guard against the Balance of Payments (BoP) crisis in 1990-91, it was Manmohan Singh who fixed the economy and ushered in a new era of economic development. BoP is a statement of all transactions between entities in one country and the rest of the world over a period of time. India’s BoP crisis dates back to 1985 but a massive swell in Indian imports by 1990 left the country in twin deficit, leading to a sharp slowdown in growth
When Manmohan Singh took over as finance minister in 1991, he faced two major challenges: Growing debt crisis and rising internal public debt. Singh had limited room in a minority Congress-led government and so, he had to take strict decisions that were essential for liberating the Indian economy. To add to Singh’s woes, India’s fiscal deficit at the time reached an alarming rate while inflation was at its peak. The challenges were unending.
One of the first steps Manmohan Singh took was to unveil a fresh industrial policy, one that allowed selected sectors to seek foreign investments. Provisions were also added and eliminated to put an end to the ‘License Raj’ era, thus ending market monopoly. The budget announced by Manmohan Singh for the year 1991-92 remains one of the most reformative budgets the country has ever witnessed.
Manmohan Singh presented the budget on July 24, 1991, and announced some tough measures to free up fiscal space, the first step to liberalizing India’s economy.
Increased prices for cooking gas, fertilisers, and fuel, and scrapping of certain subsidies were some of the tough decisions taken by Manmohan Singh as short-term measures to control India’s spiralling debt. However, Singh knew that stabilisation and fiscal adjustment would not be enough to support India’s liberalisation.
Manmohan Singh then proposed foreign investment and use of foreign technology to increase productivity and ensure rapid modernisation of India’s financial and public sectors. Singh also introduced various structural reforms, shattering barriers that limited industrial growth. A key change in export/import policy, aimed at reducing import licensing, vigorous export promotion and optimal import compression, was also introduced.