Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

July 1991—the month that changed India

The 1991 reforms had intellectual clarity as well as internal consistency

There is no month as dramatic as July 1991 in Indian economic history. It is now exactly a quarter of a century since Indian economic policy was completely overhauled, in a blitz of inspired action by the minority government led by P.V. Narasimha Rao.

India was still battling a crisis in its external payments. The first moves were naturally on the trade front. The rupee was devalued on the afternoon of 1 July 1991, to test the waters. A bolder second devaluation was announced a mere two days later. The next day, on 4 July, commerce minister P. Chidambaram ended the perverse system of import controls, with a new trade policy that he virtually wrote on his own. He also announced that the rupee would be made convertible on the trade account within three years.

Then came 24 July. Around noon, the government tabled a new industrial policy that demolished the licence raj with a few deft strokes. Finance minister Manmohan Singh stood in Parliament just four hours later to present a landmark budget that set India on a new economic path. All this was done by a minority government led by a man who had shown no previous enthusiasm for economic liberalism.

There are three sets of initiatives that deserve appreciation. First, reformist economists within government had, for at least a decade, patiently created the intellectual climate for a new economic policy. They were involved in the tentative reforms of the previous decade, including some easing of industrial controls as well as the focus on industrial efficiency in the Seventh Five-Year Plan. Much of this fresh thinking was brought together into a famous note circulated internally by Montek Singh Ahluwalia in 1990. A calm study of economic policy debates since the late 1970s should be adequate proof against the silly claim that the 1991 reforms programme was handed on a platter by the International Monetary Fund.

Second, the political management of the reforms was exemplary. Manmohan Singh defended the devaluation in Parliament by reminding politicians that one of the important demands of the Indian national movement was against an overvalued rupee that hurt Indian industry while it benefited the colonial government. The industrial policy statement was presented as a step towards realizing the Nehruvian dream of an industrially advanced India. There were several reminders about the reformist promises made in the Congress election manifesto that Rajiv Gandhi had cleared.

Third, the prime minister became bolder as the days went by, though he also forced the reformers to backtrack when the political costs of any individual step—such as bringing down fertilizer subsidies—threatened the overall process. His early concerns about a steep devaluation, in a country which unfortunately seeks a strong exchange rate as a goal in itself, soon gave way to more confidence. Some of his parliamentary interventions in defence of the economic reforms should not be forgotten. He also reached out to the opposition leaders to explain what dire straits India was in. A lot is also owed to A.N. Varma, who used his perch in the Prime Ministers Office to push civil servants in various ministries to cooperate with the reformers.

Later, the Reserve Bank of India began to deregulate interest rates. The rupee was floated. A committee headed by M. Narasimham laid out a path for financial sector reforms. Another committee headed by Raja Chelliah did the same for tax reforms. The first negotiations on how to end the automatic monetization of fiscal deficits began.

Some of the best economic minds collaborated to design a reforms programme that had intellectual clarity as well as internal consistency. Manmohan Singh’s first budget speech is still a master class in how to think about economic policy—linking structural adjustment to industrial policy to trade policy to employment growth to poverty eradication.

And his powerful ending to the budget speech is worth repeating in full: “I do not minimize the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘No power on earth can stop an idea whose time has come.’ I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome."

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