From verge of collapse: How Manmohan Singh introduced 1991 economic reforms

Meanwhile, Prime Minister P V Narasimha Rao, unveiled the new industrial policy, which introduced widespread structural changes to the Indian economy. Through the industrial policy, the Indian government allowed direct foreign investment of up to 51 per cent foreign equity and removed bottlenecks to facilitate foreign technology agreements in high-priority industries.

“After four decades of planning for industrialisation, we have now reached a stage of development where we should welcome, rather than fear, foreign investment… Direct foreign investment would provide access to capital, technology, and markets,” Singh reasoned in his budget speech.

The new industrial policy, which was a landmark document in accelerating India’s economic liberalisation, also abolished industrial licensing for all projects barring a select few strategic industries, allowed the government to disinvest its shareholding in the public sector, and amended the Monopolies and Restrictive Trade Practices (MRTP) Act to allow for the setting up, expansion, and merger of businesses without prior approval.

These reforms followed a sharp jump in oil prices in August 1990, leading to an unmanageable balance of payments (BoP) situation, depleted foreign exchange reserves, along with massive capital outflows, pushing India closer to the possibility of default.

In what has stayed in public memory eversince, the government devalued the rupee on 1 July 1991, and the RBI transferred over 46 tonnes of gold from its reserves to the Bank of England for borrowing foreign exchange to manage liquidity resulting from the BoP crisis.

Singh rationalised the reforms as being essential for increasing competition between firms in the domestic market to incentivise raising productivity, improving efficiency, and reducing costs. Furthermore, he envisioned the public sector as “an engine of growth rather than an absorber of national savings without adequate return.”

Singh’s first few months as Finance Minister were also defining moments in his fledgling political career. Montek Singh Ahluwalia, who was the Commerce Secretary in 1991, wrote that in the run-up to the budget speech that year, Singh deviated from the tradition of silence to tackle criticism from opposition parties questioning the government’s reform policies.

In his book Backstage: The Story Behind India’s High Growth Years, Ahluwalia wrote, “This was Manmohan Singh’s first shot as a politician, countering criticism and trying to build public opinion in favour of reforms. In his previous incarnations as a civil servant, he had spoken in much more guarded terms. He was now openly taking on the Left, although his gentle academic persona came through, more interested in converting people to his point of view than castigating them for criticising him.”

Singh was not Prime Minister Rao’s first choice for Finance Minister. After Pranab Mukherjee was ruled out and I G Patel declined, Rao reached out to Singh to offer him the position.

“A Cambridge-trained economist who had just served as the Secretary General of the South Commission in Geneva, Manmohan Singh was very much the ‘internationally credible face’ that Rao was searching for. Manmohan had also held every significant economic post within the Indian government… Rao wanted a visibly honest reformer whom the West could trust. He also needed a loyalist who could deflect domestic criticism away from the Prime Minister,” wrote Vinay Sitapati in his book Half-Lion, a biography of P V Narasimha Rao.