Twenty Five Years of Economic Reforms

A tale recounting the events that led up to the 1991 reforms.

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Jairam Ramesh, an adequately tall, slightly stout man with sideburns of a Mexican inhabitant from eighties Clint Eastwood movie, quietly walks into a room full of intellectuals (and pseudo intellectuals). Carrying a small purple notebook and an aura of experience, the man manages to silence the crowd of blabbering and cluttered individuals. He is introduced to the crowd, which is a mix of both home bred enthusiasts and foreign exchange students, as a political administrator who has lived through some of India’s darkest hours and has had the privilege of experiencing the radical changes ushered into the Indian economy in a 33 day period between the June and July of 1991, his fine lines only seem to add more veracity.

Dr Ramesh recounts the situation that the economy was in till the point of 1991 reforms. To list them:

  • The economy had inadequate foreign reserves. A healthy foreign exchange reserve is considered to be one that allows you at least 12 weeks’ worth of imports and in 1991 India was not even in a position to sustain a weeks’ worth of imports
  • In June of 1991, India’s credit rating dipped to an all-time low. As a consequence of this, all sources of credit soon went up in smoke
  • The gulf war of 1990 had led to a fall in the supply of oil and tripling of prices. Hence, the oil import bill swelled to an unprecedented amount. Export decline and drying up of credit sources led to investors pulling their money out. The economy faced a capital flight of 200 million dollars from non-resident deposits
  • When India had borrowed from international organizations the interest rates were low, but faced with the oil price crisis and poor credit rating; the interest rates shot up making it harder for borrowing
  • To add to this, Northern India was embroiled in a series of riots due to the recommendations of the Mandal Commissio. Political turmoil and economic crisis made the atmosphere very murky

 

As P V Narasimha Rao took over, the then governor of RBI, I G Patel was his first choice of Finance minister but citing health reasons, he turned it down. The second choice was Cambridge and Oxford bred (Oscar Wilde rolled over in his grave) economist, Manmohan Singh. This was a bold move as an economist hadn’t held the post of the Finance minister in as long as 45 years. Together the two, set out to achieve what had never even been talked about. However, as the tale goes, PVN Rao had instructed Dr Singh to make recommendations in black and white and he was to implement them. If they together succeeded in saving grace, the credit would be Rao’s but had they wreaked havoc (if any more was possible) the blame would all be on Dr Singh.

As Dr Ramesh so succinctly put it, a leader is one who pretends to listen to the woes of his followers but does just as he wishes. PVN Rao did just this. The duo faced widespread opposition from left leaning parties, the BJP as well as from within their own ranks. As a smart move, the reforms that were about to be ushered in were packaged and sold as a step necessary in order to save half the economy by giving up the other half. It was seen as a mandatory and continuous change rather than as change that led to a revolution or a paradigm shift. This is because a movement of upheaval faces larger opposition than a movement that is recognized as an evolutionary step. This contrivance by PVN Rao, led to the formation and implementation of 1991 reforms.

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