The journey of India’s economic reforms since 1991 has been one of an increasing conviction. This has moved in tandem with the economy and citizen well-being becoming part of politics. Over the past 30 years, the texture of economic reforms has changed from balancing constraints to delivering convictions. The U-turn of the Indian economy, from the darkness of ideological controls of the first 44 years of Independence to the light of economic freedom, was made possible because P.V. Narasimha Rao’s reforms in 1991 acted as a trigger. Having pulled it, six successive governments under five Prime Ministers across nine terms were and are able to sustain the momentum with a greater conviction—including the fact that the Indian electorate does, sometimes, vote for reforms.
The economy P.V. Narasimha Rao inherited from the last two Prime Ministers, Vishwanath Pratap Singh and Chandra Shekhar, was in a shambles. The inflation rate was 13.9 per cent, next only to 1974’s 28.6 per cent. Lending rates stood at 17.9 per cent, while real interest rates were 3.6 per cent. The annual growth rate stood at 1.1 per cent. India’s per capita income was US $303 in absolute dollars and US $1,230 on PPP basis. Almost half the population was in poverty, measured as spending US $1.90 a day in PPP terms, against 36 per cent for the world average. Life expectancy at birth was 58.3 years, compared to the world average of 65.6 years. India’s fiscal deficit had risen to a mind-boggling 9.4 per cent in 1990-91, about three percentage points higher than the average of 6.3 per cent in the first half of the 1980s.
While ideas for change were many, solutions weren’t. And where solutions were created, they weren’t implementable because of weak coalitions. Within those constraints, under Prime Minister Chandra Shekhar’s government, Finance Minister Yashwant Sinha authorised the State Bank of India to sell 20 tonnes of gold from the government’s stock to the Union Bank of Switzerland for US $200 million in April 1991, and started negotiations for pledging another 47 tonnes from gold reserves to raise another US $405 million from the Bank of England. We may cry, as several did then, that selling the family jewels to manage the economy is economic blasphemy. But given the circumstances and the political constraints, this was the right decision—it prevented India from defaulting. A small pill of hope to fix a larger and sustained economic ailment.
From the edge of this financial cliff to a position of strength as the world’s fifth-largest economy and going on to become the third-largest within this decade, the journey of India has been a story of a series of continuing economic reforms. P.V. Narasimha Rao’s trigger, therefore, was not a one-shot crisis-management big-bang; instead, it was a machine gun that’s firing away till today. It is as much a saga of shedding old politics and rotting ideology as of embracing growth and reducing poverty. Look up the data and on every parameter, India stands stronger, higher, firmer.
Change began with three streams of reforms initiated by Prime Minister P.V. Narasimha Rao. First, the Statement on Industrial Policy 1991, which ended the tyranny of license-permit-quota raj, and which abolished industrial licensing for all but a small, specified list. It enabled foreign direct investment up to 51 per cent in a specified list of industries and reduced the list of 18 industries reserved for the State to eight, while disinvesting from some public sector companies. It amended the Monopolies and Restrictive Trade Practices Act to focus on issues of competition rather than control. Second, the Union Budget of 1991, which brought in tax reforms and financial prudence by reducing fiscal deficit and cutting import duties and custom tariffs. And third, a half-hearted small scale sector policy, which was more of the same—possibly a soft democratic cushion, definitely a political distraction to the hard reforms underway. Agriculture, of course, remained untouched.
As the macroeconomics of the country stabilised and Indian businesses strengthened for scale, the Indian economy finally came on the growth track. Between 1991 and 2021, India’s GDP has jumped 10 fold, inflation rate has stabilised at around 6 per cent, total reserves have jumped 76 times. Between 2000 and 2020, the market capitalisation of India’s listed companies has grown more than 11.5-fold, container port traffic by seven times. Life expectancy at birth increased from less than 60 to more than 70. Per capita income has risen by more than six times in absolute terms and more than five times in PPP terms. On every parameter, India has seen growth. All of them, without exception, have come because of the economic reforms of 1991, conducted under constraints, but over a period of time embraced across political parties and governments with conviction.
More than Just Economic Reform
Along with these numbers depicting varied outcomes has come another reform—ideological. The povertarian framework created and perfected by Prime Minister Jawaharlal Nehru and his daughter Prime Minister Indira Gandhi continued to have a chokehold on India’s economic policies till 1991. Politically, this framework embraced wealth redistribution while shunning wealth creation; economically, it ended up redistributing little more than poverty, rent-seeking and corruption. This was an attractive framework to keep the elite elite and the poor poor.
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No Prime Minister—neither Lal Bahadur Shastri (June 1964 to January 1966), nor Morarji Desai (March 1977 to July 1979), nor Charan Singh (July 1979 to January 1980), nor Rajiv Gandhi (October 1984 to December 1989), nor Vishwanath Pratap Singh (December 1989 to November 1990), nor Chandra Shekhar (November 1990 to June 1991)—could eschew the seductive embrace of this petty politics. This ideology and the accompanying politics had captured the minds of leaders, policymakers and alleged intellectuals for 44 years, through 11 governments. It took Prime Minister P.V. Narasimha Rao to finally confront this falsehood and regressive economics and lead the nation towards prosperity.
Before the Statement on Industrial Policy 1991, there were eight major policies around industry—the Bombay Plan 1944 by Indian industrialists; the Statement of Industrial Policy 1945 by the transitional government; Resolution 1948 by Prime Minister Jawaharlal Nehru; Industrial Policy Resolution 1956 by Prime Minister Jawaharlal Nehru; Industrial Policy 1973 by Prime Minister Indira Gandhi; Industrial Policy 1977 by Prime Minister Morarji Desai; Statement on Industrial Policy 1980 by Indira Gandhi; and the Industrial Policy Statement 1990 by Vishwanath Pratap Singh. Prime Minister P.V. Narasimha Rao’s is the ninth and the longest-serving industrial policy.
While the 1991 policy changed not only the economics of India but its politics as well, despite the conviction of the former, the latter continued to slow the reforms process. Not all Prime Ministers succeeded in reforms delivery. The cases of H.D. Deve Gowda (June 1996 to April 1997), Inder Kumar Gujral (April 1997 to March 1998), or even the statistically insignificant 16-day first term of Atal Bihari Vajpayee (March 1996 to June 1996) are cases in point. In other words, and as part of India’s rich and deep democratic discourse, political stability remained an important constituent for leaders to take on reforms. It still does.
Managing the noise and narratives of vested interests is not easy when a Parliamentary majority, as a party or as a coalition, remains elusive. Of course, the P.V. Narasimha Rao government was part of a coalition too. But it was a stable coalition. Those of Gowda, Gujral or Vajpayee weren’t. Prime Minister Manmohan Singh’s government remained stable through two terms, despite being vulnerable to the Left having an overarching and undeserved influence. Incumbent Prime Minister Narendra Modi’s second-term government, like his first, remains stable.
It is because of this political stability that Atal Bihari Vajpayee was able to push through the Foreign Exchange Management Act in 1999 or the Fiscal Responsibility and Budget Management Act in 2003. That’s what gave conviction to Prime Minister Manmohan Singh, such that he was able to put his foot down on the India-US nuclear deal—against all opposition from Left parties—or enact the Mahatma Gandhi National Rural Employment Guarantee Act, both in 2005 during his first term; and ease foreign direct investment in retail in 2012, his second term. Somewhere, he was able to communicate that the economic well-being of the nation is a prerequisite to the political well-being of coalition partners.
Post-2014 Reforms
As Narendra Modi took charge as Prime Minister in 2014, there is a clear, visible and increasing conviction with reforms. You could say that Narendra Modi took the baton of reforms running and continues to run with it. From the Pradhan Mantri Jan Dhan Yojana in 2014 and the Insolvency and Bankruptcy Code in 2016, he has been able to take risky reforms forward—demonetisation in 2016 (against opinions that remain divided) or the Goods and Services Tax in 2017, the most complex economic legislation since Independence. In his second term, beginning May 2019, he has ushered in an economic reform that needs immense courage and conviction: the three farm laws that are a 1991 moment for agriculture. Apart from ushering in reforms through legal routes (legislations or notifications), Modi has brought moral suasion as an economic reforms tool to the table: The voluntary giving up of gas subsidy by millions of consumers, for instance.
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Going forward, the 21st century will see leaders at the Union embrace reforms with greater force and stronger conviction. Land, labour, compliances… the list is long and the journey towards a US $10 trillion economy has barely begun. Once there, the aspiration will change towards delivering a per capita income of US $20,000 by the middle of this century. The old reforms, most of which have run their course and are today the starting point, will not take India there. New thinking, new approaches and new tools will be needed and the leadership at the Union level understands this. But Constitutionally, legally and administratively, most of these reforms fall at the doorsteps of state governments. For instance, while Parliament enacts labour laws, it is the state legislatures that draft the rules. Many states are already on course: Madhya Pradesh, for instance, has eased rules for doing business.
As we celebrate 1991 and credit P.V. Narasimha Rao for his courage, we must look forward, push harder and pull prosperity out from the jaws of poverty. For which, the next level of economic reforms is essential. All the necessary conditions for the next reforms are there—scale (a GDP close to US $3 trillion), technology, politics, aspirations. Now, the sufficient condition of an even greater conviction needs to articulate itself politically and materialise itself economically.
This article was first published on ORF.
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