On July 24, 1991, Manmohan Singh, the then finance minister of India, presented a budget that changed the course of India’s history. From a country that pawned gold to deal with a grim fiscal crisis to the world’s fastest growing economy, India has firmly established its position in the elite league of the world’s richest nations. The doubts have been left behind by a generation born after 1991 for whom the fruits of economic liberalisation are available in the nearest mall, in vastly expanded career options and in greater spending ability. Singh famously paraphrased Victor Hugo: “No power on Earth can stop an idea whose time has come” while commending his budget proposals in 1991. Twenty-five years later, Singh, who was the Prime Minister between 2004 to 2014, spoke to HT about the politics and economics of India’s reforms programme. Excerpts from the interview:
The sequencing was right. The biggest problem that we then faced was managing the balance of payments crisis. Our foreign exchange reserves had literally disappeared, with no more than two weeks of import payment capability. We had loans to repay and foreign lenders were not showing any inclination to lend us more. The biggest problem was to deal with this crisis of confidence. Within the first ten days we devalued the rupee in two stages. We implemented trade policy reforms soon after the devaluation. The commerce ministry came up with a roadmap for abolishing the export subsidy and finding new methods of providing incentives to exports. We also worked out a programme to control the fiscal deficit which helped us to control inflation in the medium term.
We tackled both the balance of payments problem and the fiscal problem simultaneously. Food and fertiliser subsidies were big concerns. We dealt with both of them. If I remember correctly, food and petroleum subsidies were cut and fertiliser prices were raised on July 24, 1991 by 40 per cent. People got a message that here was a government which meant business.
On July 24, 1991, we announced the new industrial policy which launched the country on a sustainable process of internal and external liberalisation to make the economy more attractive for both domestic and foreign investment. The results are visible. Since 1991, the average growth rate of the economy has been as high as 6.5 per cent.
We also recognised that the Indian banking system was facing problems. We opened up the banking sector to participation by the private sector. However, we made it clear that 51 per cent of bank shares will continue to be held by the government in public sector banks.
To tackle the problem of public sector enterprises, we began the process of disinvestment. What is more important is that we converted SEBI into a statutory body and also abolished the office of Controller of Capital Issues. That opened up the path of greater involvement and interest of investors in the Indian capital markets.
I announced in the very first budget that we need to look at the tax system de novo. I announced the appointment of a committee under Raja Chellaiah. I also involved Nic Stern from the London School of Economics. He and Raja Chellaiah both came up with a roadmap of moving towards a VAT-type of a tax system. We also began the levy of service tax. But coverage and tax rates were kept moderate to avoid any serious opposition from the business community. It was a fiscal reform, which tackled the fiscal malaise. Our objective was to make the tax system more broad-based while keeping the tax rates as moderate as possible.
One could always do better. We need to sustain a growth rate of 8-10 per cent in order to deal with the problems of poverty, ignorance and disease, which afflict millions of people. In 1991 we could not pay adequate attention to reforming the education system, the healthcare system and strengthening the anti-poverty programmes. We gradually tried to do that in 1994 and 1995, but more had to be done. We attended to these problems when we came back to power in 2004. But a lot more needs to be done to deal with problems of providing basic social services to our people. This is the unfinished agenda for reform.
As Adviser to Prime Minister Chandra Shekhar after my return from Geneva in November, 1990, I had applied myself to dealing with the economic crisis, which was building up at that time. However, I had no idea that I would have to deal with the crisis as Finance Minister. When the offer came on behalf of Prime Minister Shri Narasimha Rao, I talked to my family and some close friends. When I talked to my family they said I had just undergone a bypass surgery in London, and that the finance minister’s job is a killing job. Politicians will never allow you to do the right thing and you will become the scapegoat.
They said: “The (previous) Chandra Shekhar government fell because it was not able to grapple with the economic situation. The Congress government is a minority government. There is no reason to believe that it will do better.” I said that it is true that I have had a bypass surgery, but that should not be a concern that should stop me from making an effort to deal with the severe economic crisis India faced.
I had only a few hours to think through because when Narasimha Rao ji was elected as the leader of the Congress Legislative Party (CLP), he sent Dr PC Alexander to talk to me to explore the possibility of I being offered the post of the Finance Minister in the Cabinet. I didn’t take him seriously. I went to bed as usual. Next morning I went to the University Grants Commission (UGC), where I was the chairman, and here was Narasimha Rao ji looking for me on the telephone. He traced me to the UGC and said: “Where are you? What are you doing? Hasn’t Alexander told you about my intentions to use your services?”
I said: “He did mention it to me sir, but I didn’t believe him.”
Political management is absolutely necessary and Narasimha Rao ji provided superb guidance. His management of the politics of reforms was extremely credible without which, frankly, I could have done nothing.
When I was appointed the Finance Minister he asked me to address a group of opposition leaders. I told this meeting that India was in an unusual economic crisis. We were on the verge of default. Short of telling them that I am going to devalue the rupee, I literally told them everything else that was being considered. They were all very shocked and surprised. When I looked at the Prime Minister and said that I have told the opposition leaders the truth, he smiled and said ‘Go ahead. I have picked you for this job’.
I sent him (the PM) my letter of resignation. Although the (Parliamentary) committee had not found fault with anything that I did, the opposition’s attempt was to pin the blame on me. The committee did not find anything wrong in my conduct, though they (committee members) said I should have acted early. The committee felt that I could have been more proactive. They picked on a remark I had made in a Parliamentary debate. I had remarked in Parliament that every time the stock market sneezes, I cannot lose my sleep.
But I felt that since the committee had found some fault in me, I should resign and I sent my letter of resignation to Narasimha Rao ji. He kept it for five-six days. He must have looked at the politics of it — whether it was politically advantageous for him to let me go or to keep me. The media came superbly in support of what I did. I think the overall impression Narasimha Rao ji got was that the country was not expecting me to resign and that public opinion in the country was on my side. So, after seven days he wrote a very nice letter to me saying “you have to go back to your job and finish the unfinished task”.
The opposition leaders wanted the government to be on tenterhooks. But, at the same time, they all felt that the country could not afford to have fresh elections. Therefore, while picking holes in the reforms programme, none of them at that stage were keen to bring about a dissolution of the government. I interacted quite regularly with important opposition leaders to seek their support. In private they were all very supportive. In Parliament they were all very critical. They said the budgets for 1991-92 and 1992-93 had been made in Washington under the influence of IMF.
The reforms process and the economic management of the country require a broad-based political consensus in our country. Every effort should be made to bring about that consensus. Time is not on our side. The two years that this government has had, they could have been used much more purposefully to push the reforms process further. For various reasons this has not happened. Whether it is the GST (goods and services tax), whether it is the land-acquisition bill, whatever the differences among political parties, it is the responsibility of the government of the day to find ways and means to bring about a broad-based consensus.
In 1991, Narasimha Rao ji made serious efforts to that end. For example, when I had raised fertiliser prices by 40 per cent, farmers were up in revolt, Congress members of Parliament protested, opposition leaders revolted. Political leaders were called for a discussion by Narasimha Rao ji. I had anticipated this. I had kept some scope to reduce the increase, if the opposition to the programme was really intense, to 30 per cent from 40 per cent. So, overall by making small compromises, by appealing to the good sense of opposition leaders, we managed to sail through in the first year of reforms even though we did not have a majority.
We inherited the anti-Babri Masjid crusade that Advani ji launched and on December 6, 1992 the mosque had been demolished. Riots broke out in various parts of the country. So, we didn’t have too much time to push through all the reforms programmes that had a cohesive mix of both economic and social content. Obviously, social peace is a very important pre-requisite for any meaningful reforms that will not only push up the country’s growth rate, but also promote social harmony.
I don’t think the GDP figures are fudged. However, the methodology has changed. If the monsoon rains are normal, we should be able to grow at the rate of 7 to 7.5 per cent this year.
Now the country is on a growth of 7-7.5 per cent. So, there are opportunities for bringing about a good mixture of economic and social change. It is an opportunity for a country, where a government for the first time after Rajiv ji’s victory in 1984, has a huge majority in Parliament. They should use this opportunity to bring about a broad-base consensus on reforms. That means, apart from economic policy measures in the traditional sense of the term, there should be every effort to deal with the social content of economic reforms. Social peace and commercial harmony are essential for any credible reform programme.
They invited us (in November 2015). They said they will come back to us when Sonia ji mentioned the three points that were worrying us. But instead of coming back to us, they went and talked to other members of the opposition parties trying to convince them that it was not necessary to go along with the Congress party. I sincerely hope that the government will make sincere efforts to bring the principal opposition party on board on this important matter.
There is a way out. It is the duty of the government to get the principal opposition party on board. That’s a process which simply requires a different mindset from a mindset that says that the Government’s mandate is to build a Congress-mukt India. If your mission is to destroy the Congress party, you can’t expect the Congress party, howsoever well-intentioned you are, to co-operate in that process.
Elections are behind us, we have a government for five years and it is very necessary that both the government and opposition must work together to get this country moving forward at a pace needed to get rid of mass poverty, ignorance and disease, which still afflict millions of people in our country.