The 1991 reforms: The right people at a tight time

For those of us older than 50, India has been transformed beyond belief. From 1991, the Indian economy ascended from its long period of 3-3.5% annual real growth to a new normal of 6-6.5% over the next 25 years. The economy is now about five times the size it was in 1991. And poverty has fallen from an estimated 45% to not more than 15% (pre-Covid-19). However, India is still a low middle-income emerging economy and has miles to go before poverty is eliminated.

Since the 1991 economic reforms were a clear break from India’s earlier economic direction ever since Independence, how did they happen?

There was no ideological break as exemplified by the ascendance of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States (US), which led to the spread of market fundamentalism globally in the 1980s. In India, it was the same Congress party, which had presided over the central planning-dominated, import-substituting licence-permit raj earlier, which ushered in the new India in 1991.

That such a significant redirection in economic policy could take place in India was a result of various concatenating circumstances (HT Graphics)

Moreover, the progenitors of the 1991 reforms were a trio of self-effacing leaders, not noted ex-ante for bold policy action. But Prime Minister (PM) PV Narasimha Rao provided political leadership with great sagacity; finance minister Manmohan Singh brought in intellectual and technocratic heft, backed up by his long experience in all the highest organs of economic policymaking; and principal secretary AN Varma was the suave indispensable bureaucratic enforcer, again with long experience in economic ministries.

First, the impetus for reforms came from the unfolding of a full-fledged economic, fiscal and balance of payments crisis.

Second, the crisis necessitated resort to seeking rescue from the Washington twins, the International Monetary Fund and the World Bank, with the associated policy conditionality. There is nothing like a crisis and policy conditionality that focuses the political and bureaucratic mind.

Third, there was an emerging technocratic consensus on the direction, if not details, of reforms, over the preceding decade, even though there wasn’t such a political consensus. What distinguished that period from the present was that there was a band of technocratically inclined reformist civil servants embedded in key administrative and economic positions across the government and the Reserve Bank of India (RBI). This pattern, which continued in the 1990s and 2000s, enabled the formulation, implementation, consistency and continuity of reforms across six governments. This set included both reform-minded experienced Indian Administrative Service (IAS) officers and government-embedded economists, with the domain knowledge and skill to steer the reform process once political direction was given.

By the early 1980s, there was an increasing perception of industrial and economic stagnation, and the need for a new direction, particularly in view of the remarkable economic success of neighbours in Asia. A succession of committees was set up and headed by noted technocrat-civil servants such as LK Jha, M Narasimham, Abid Hussain and Arjun Sengupta on areas such as deregulation, trade reform and public enterprise reform. Their reports pointed towards some hesitant liberalisation, though in homoeopathic doses.

Similarly, the Bureau of Industrial Costs and Prices (BICP), which hitherto acted as the czar of a whole range of administered-industrial prices, began to change tack in the 1980s, recommending some cautious price deregulation under the successive leadership of another set of modernising civil servant-technocrats: Lovraj Kumar, Yoginder Alagh and Vijay Kelkar. So, by the early 1990s, reform was in the bureaucratic air of the bhavans, if not in the prevailing political dispensation.

In the political sphere, when the VP Singh government came to power in December 1989, this new non-Congress formation wanted to differentiate itself from the Congress history of licence-permit raj. Ajit Singh was appointed the new industry minister. A graduate of Indian Institute of Technology (IIT) and the Illinois Institute of Technology, he had worked in IBM in the US, and was instinctively critical of the stifling industrial control system. This was just the signal we needed, and we prepared A New Industrial Policy of 1990 with alacrity under the then leadership of industry secretary, AN Varma, despite a less-than-enthusiastic response from the then finance ministry under Madhu Dandavate. After Cabinet approval, Ajit Singh announced a relatively comprehensive industry policy statement in Parliament on May 31, 1990, but this was stillborn as the government fell in 1990.

But this was the precursor to the eventual more radical 1991 industrial policy reform. During the same period, Montek Singh Ahluwalia had prepared a wider economic policy document (since dubbed the “M” document) within VP Singh’s Prime Minister’s Office. The contours of needed economic reforms were, therefore, already available in late 1990.

PM Chandra Shekhar then took over. In late 1990, on return from the South Commission in Geneva, Manmohan Singh was appointed as his Cabinet-rank economic adviser. As Singh began to grapple with the economic crisis, he had already started thinking of structural reforms. He, therefore, asked me for the existing 1990 industrial policy document, which I had developed further. So, Singh knew that a framework on industrial policy reforms was in place, prior to his joining the new government in 1991.

Rao chose to take the industry portfolio himself; he appointed Singh as finance minister and fortuitously appointed Varma as his principal secretary, both of whom had full knowledge and ownership of the proposed industrial policy reform. That the PM chose to retain the industry portfolio helped, and industrial policy reform could be formulated without new negotiations with an industry minister. Thus, the troika of industry policy reformers was fully in place.

Despite lukewarm support from the ruling party, the prior technocratic preparation enabled the announcement of a reformist budget and a radical new industrial policy within five weeks of the new government coming into power on June 21, 1991.

That such a significant redirection in economic policy could take place in India was, therefore, a result of various concatenating circumstances — the objective existence of a severe economic crisis; the availability of bureaucratic and technocratic talent and experience; and the fortuitous placing of key personnel at the ministerial, bureaucratic and technocratic levels: The right people in the right places at a tight time.

Rakesh Mohan was the economic adviser to the Government of India in the industry ministry in 1991. He has also served as chief economic adviser, secretary, economic affairs and deputy governor, RBI. He is currently president of the Centre for Social and Economic Progress This is the first of a two-part article

The views expressed are personal