On December 26, 2024, India’s former Prime Minister Manmohan Singh, who guided the country through transformative economic reforms and played a key role in its rise as a global economic powerhouse, passed away.
Historical Background of Economic Crisis of 1991
- Hindu Growth Rate: The term “Hindu growth rate,” coined by economist Raj Krishna in 1978, referred to the slow economic growth in India from the 1950s to the 1980s, averaging just 3.5% while per capita income averaged around 1.3%
- It highlighted the stagnation under socialist policies in the early decades of independence. Following economic liberalization in 1991, India experienced a surge in growth, marking a shift to a faster, more dynamic economy.
- Why the Term ‘Hindu’: It is derived from the concept in Hindu philosophy of accepting life’s circumstances as fate or karma, suggesting a resigned acceptance of low growth rather than striving for higher economic progress.
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- Collapse of the Soviet Union:
- India had traded with the USSR in rupees and exchanged raw materials, which meant it didn’t need large reserves of US dollars.
- After the Soviet collapse, India’s trading patterns changed, and it became increasingly reliant on the dollar for international transactions.
- This shift created a major challenge, as India did not have sufficient dollar reserves.
- Gulf War Oil Price Shock:
- The Gulf War, triggered by Saddam Hussein’s invasion of Kuwait, led to a sharp increase in global oil prices.
- The price of oil, which had been around $15 per barrel, surged to $32 per barrel.
- For oil-importing countries like India, this meant a significant rise in the cost of oil imports, which further drained India’s foreign exchange reserves.
- Rising Fiscal Deficit: India’s fiscal deficit in 1991 was a staggering 8.4%.
- Soaring Inflation:
- Inflation had reached a severe 17%, further hurting the Indian economy.
- Rising prices of goods and services added to the economic instability, straining the purchasing power of the average Indian.
- Political Instability:
- During the early 1990s, India experienced political instability with two successive governments in just two years.
- This lack of political continuity created an atmosphere of uncertainty, which made international investors hesitant to invest in India.
- As a result, there was a restriction in the inflow of dollars, further deepening the crisis.
- Foreign Exchange Reserves: India’s foreign exchange reserves had dwindled to just $1.2 billion, which was barely enough to cover three months of essential imports.
| In contrast, as of December 1, India’s foreign exchange reserves had grown to over $604 billion. |
Role Played by Dr. Manmohan Singh
- Gold Pledging for Balance of Payments: The Indian government pledged 67 tonnes of gold as collateral to secure a $2.2 billion emergency loan from the International Monetary Fund (IMF).
- To obtain a $405 million portion of this loan, 47 tonnes of gold were airlifted to the Bank of England in May 1991, while the remaining 20 tonnes were sent to the Union Bank of Switzerland.
- Dr. Manmohan Singh’s Speech: Dr. Manmohan Singh, during his Budget Speech of 1991, famously declared, “No power on earth can stop an idea whose time has come… the emergence of India as a major economic power in the world happens to be one such idea.”
- This marked the beginning of a series of economic reforms that would reshape India’s economic landscape.
- Devaluation of the Rupee: To make Indian exports more competitive and curb the trade deficit, the rupee was devalued.
- Liberalization: Prior to 1991, the Indian economy was heavily regulated by the “License Raj,” a system where businesses required government approval (licenses) to operate in most sectors.
- Post-1991, the government moved to eliminate most licensing requirements, reducing bureaucratic control over the economy. Only 18 industries now required a license
- Privatization: State-run enterprises, which had been responsible for key industries like automobiles, steel, and consumer goods, were often inefficient and operating at heavy losses.
- In the post-reform period, the government began to reduce its control over these sectors and allowed the private sector to enter industries that were previously monopolized by state-owned enterprises.
- Globalization: Before 1991, India focused on import substitution to reduce reliance on foreign goods.
- The 1991 reforms shifted the economy towards globalization, attracting foreign investment, technology, and modern business practices, which spurred economic growth and created employment opportunities.
- Abolition of MRTP Act: The Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 was introduced to curb monopolies and ensure fair competition in the market.
- The MRTP Act was abolished as part of the broader liberalization reforms, which helped expand businesses and allowed for mergers and acquisitions.
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India’s Rise to the Third Largest Economy
- Decline in Poverty: The decline in poverty has been a key outcome of these reforms. With more people moving out of poverty, there has been a broader tax base, which in turn has led to higher tax collections.
- Increase in Wealth: This increase in revenue has enabled the government to invest in welfare schemes, infrastructure, and other development projects aimed at improving the lives of ordinary citizens.
- Criticism faced by Dr. Singh: Despite the long-term benefits of the 1991 reforms, Dr. Manmohan Singh faced intense criticism and opposition at the time. Many opponents of the reforms blamed Dr. Singh for implementing economic decisions under the pressure of international financial institutions like the IMF and World Bank.
Conclusion
Despite the initial criticisms, the reforms introduced by Dr. Singh have proven to be transformative for India. His vision and leadership have contributed immensely to the nation’s progress.
December 27, 2024
