How Manmohan Singh saved India from an economic crisis in 1991
Today (September 26) marks the 91st birthday of India's former Prime Minister, Manmohan Singh. Widely regarded as one of the world's foremost economic thinkers, Singh boasts a long list of career accomplishments.
Born in the village of Gah, Punjab (now in Pakistan) on September 26, 1932, Singh had a modest upbringing. His family migrated to India shortly after partition. In his early days, access to piped drinking water was a luxury he did not enjoy. Nonetheless, through sheer dedication, the former PM managed to earn a doctorate in economics from Oxford University and subsequently worked for the United Nations from 1966 to 1969.
His illustrious career included roles such as Reserve Bank Governor (1982-1985), Chief Economic Advisor (1972-1976), Planning Commission Head (1985-1987), and Prime Minister of India (2004-2014). However, his most remarkable contribution to India's economy came in 1991 when he played a pivotal role in rescuing the nation from an impending economic crisis. At the time, Narasimha Rao was the Prime Minister and he appointed Dr. Singh as the Finance Minister.
The duo faced a dire situation, and it was Dr. Singh's calculated risks that ultimately paid off, salvaging India's reputation on the global stage.
Here's a brief overview of the events that transpired:
A struggling Indian economy
Upon assuming the role of Finance Minister, Dr. Singh inherited a troubled Indian economy. It was operating under the Nehruvian-Socialist economic agenda, with external debt at 23% of the Gross Domestic Product (GDP) and internal debt at 55% of GDP.
The fiscal deficit stood at 8% of GDP, and the current account deficit was at 2.5%. Wholesale price inflation had surged by 13%, with retail inflation following suit at 17%.
India's foreign exchange reserves had plummeted to a mere Rs 2,500 crore, a staggering 75% drop from the previous year. In short, the economy was in dire need of urgent reforms.
Currency devaluation
The first major decision Singh took as Finance Minister was to devalue the Indian currency. This involved a two-step devaluation program, coordinated with the Reserve Bank of India (RBI).
The currency was initially devalued by 9% against major currencies, followed by an additional 11% devaluation two days later. This move bolstered trade and international market transactions.
Gold reserves
The next crucial step involved securing RBI's cooperation to pledge India's gold reserves with the Bank of England in four installments, thereby gaining access to much-needed financial assistance.
This move was reminiscent of the State Bank of India's earlier action, wherein they sold 20 tonnes of gold to the Union Bank of Switzerland, yielding approximately $200 million.
New industrial policy
The introduction of a new industrial policy in the 1990s proved to be a game-changer. This policy eased certain provisions of the Monopolies and Restrictive Trade Practices Act, making it simpler for businesses to enter the market and undergo restructuring through mergers and amalgamations.
The policy dismantled public sector monopolies in numerous sectors and introduced a policy permitting automatic approval of foreign direct investment up to 51%, as opposed to the previous cap of 40% for foreign equity investments.
Furthermore, it abolished licensing requirements for all industries except 18, regardless of their investment levels.
The 1991 budget
Singh presented the 1991 budget as a continuation of the government's reform measures in recent weeks. This budget raised corporate tax rates by 5% to 45%, introduced tax deducted at source for specific financial transactions, opened mutual funds to private investors, and relaxed rules for investments by non-residents.
Seeking aid from the IMF
He also reached out to the International Monetary Fund (IMF) by applying for an emergency loan of $220 million, which proved crucial for India's economic recovery.
Resurgence of the Indian economy
Over the next eight months, the government implemented numerous measures to sustain the reforms and lift India out of its economic crisis. While progress was gradual, it was consistent, offering renewed hope to the country's private sector.
The Indian economy was back on track, and Manmohan Singh rightfully earned the credit for this turnaround. July 1991 marked a significant turning point for India, with Prime Minister Narasimha Rao's political acumen and Singh's economic expertise rescuing the nation from the brink of collapse.