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Across the aisle- Economic reforms: Act I, Scene I

It is wrong to think that economic reforms consist of announcements or a few deft strokes of the pen making changes in some policy or other.

Written by P Chidambaram |
Updated: June 26, 2016 1:52:29 am
Economic reforms, 1991 elections, congress, 1991 elections congress, 1991 Economic reforms, foreign exchange reserves, india news, indian express columns Eyebrows were raised on the choice of the Finance Minister — Dr Manmohan Singh, an economist and bureaucrat, who had held various key offices in government without making waves.

Twenty five years ago, the mood of the people of India was one of fear and despair. The nation was in the middle of an election. 221 constituencies had voted, the remaining had yet to vote. Rajiv Gandhi was killed in a bomb blast on May 21, 1991, and elections in the remaining constituencies were postponed. When those elections took place in June, the mood of the people swung in favour of the Congress. In the end, the Congress got 226 seats, but was without a majority or a leader.

Meanwhile, the economy was sputtering. By end-March 1991, foreign exchange reserves had plunged to an all-time low of USD 5.8 billion and were falling by the day. Fear of the unknown was written everywhere.

Unexpected choices

The Congress seized the opportunity as only a responsible and experienced political party could. In a remarkable display of unity and maturity, the Congress held an election to choose the leader, P V Narasimha Rao easily beat Mr Sharad Pawar, and a new government was sworn in on June 21, 1991.

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It was a typical Congress government, a mix of the old and the young, and balancing caste and region. It was different only because the Prime Minister was a quiet, self-effacing person, unglamorous, and largely ‘unknown’ to the people of India. Eyebrows were raised on the choice of the Finance Minister — Dr Manmohan Singh, an economist and bureaucrat, who had held various key offices in government without making waves.


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The first week of the new government was unusually quiet. The Congress was happy that it was returned to power, but there were no celebrations. I was amused by Narasimha Rao’s question to the Cabinet Secretary at the first meeting of the Council of Ministers: “Have you arranged ghoda/ghadi for everyone?!” Nothing remarkable was expected of the government, and certainly no one expected that a revolution would be ignited in a few days.

My sense is that external events unfolded so rapidly and relentlessly that the government was forced to act. It was a remarkable stroke of luck that three able men were in key positions: Dr Singh as Finance Minister, the extraordinarily intelligent Mr S Venkitaramanan as Governor, RBI, and the extraordinarily capable Dr C Rangarajan as Deputy Governor.

Courageous, but no celebration

As foreign exchange reserves plummeted, the government had no choice but to “correct” the official exchange rate — an euphemism for devaluation. In a clever move, the RBI decided to do it in two steps, the first on July 1, 1991 (to test the waters) and the second on July 3. The public reaction to the first ‘correction’ was muted, but the ‘establishment’ developed cold feet. Narasimha Rao wanted the second step scrapped, but the wily Dr Rangarajan made himself ‘unavailable’ to telephone calls from Delhi (there were no mobile phones), most probably with the concurrence of Dr Manmohan Singh! Thus began, with a bang, what is universally acknowledged as a new era in the economic history of India.

The 25 years that have rolled by have changed the face of India and the fortunes of millions of people who have been lifted out of poverty. I was lucky to have had a part in the various Acts of the drama that continues to play even today — the script was more or less the same, only the key actors changed from time to time.

The other difference — actually the BIG difference — is that while dramatic changes were being made to the economic policy, the government maintained a low profile and avoided any drama or hype. There were no choreographed ‘events’; even full-page advertisements were avoided. The first major exposition of the new policies was on July 4, at a seminar in Delhi. In September, Dr Manmohan Singh and I traveled to Singapore to address an India-specific conference that attracted investors and bankers from around the world.

Looking back, the milestones that we crossed in the first year (1991-92) were truly amazing:

July 1: First step devaluation

July 3: Second step devaluation

July 4: Initial changes in Trade Policy

July 4-18: Pledged gold transferred to the Bank of England

July 24: 11 am — New Industrial Policy Resolution; 5 pm — Budget for 1991-92

August 13: Major changes in Trade Policy

February 28: Budget for 1992-93 March 31: New Import-Export Policy

The philosophical context

It is wrong to think that economic reforms consist of announcements or a few deft strokes of the pen making changes in some policy or other. Changes have to be in the context of an overarching economic and social philosophy. It was never stated explicitly, but I can say with confidence that the key players in 1991, beginning with Narasimha Rao, believed in the following:

* Getting government out of gratuitous interventions in the markets;

* Getting government into addressing the notable market failures through regulation (Capital Market, Banking, Anti-competition etc);

* Building capacity in government to do the things it must do (Taxation, Delivery of Public Goods and Services etc);

* Expanding freedoms for the people (Economic, Social, Religious etc).

My assessment of what has been achieved in the 25 years is that while we have done reasonably well on the first two points, we have failed on point three and we are struggling to find our way — may be lost our way — on point four. That is a sobering thought on the 25th anniversary.


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