25 Years of India's Economic Reforms: A Story of Triumphs and Losses

If you were born at the end of 1990s, chances are that you are used to buying all the latest fancy gadgets at the click of a mouse! The latest smartphone, the latest video games, the trendiest fashion wear, the list is too long to even bother expanding here. Also, you probably follow with passion the latest cars and bikes that keep rolling out on India's roads each festive season.

But, did you know of a time when there were no such amenities available? Definitely not at the click of a mouse! That there were only one or two car/bike brands available and that too after a long wait. All foreign goods including hand-held video games and clothes were available to kids only if they were lucky enough to have an uncle or aunt staying abroad!

License Raj

Yes, welcome to the pre-1990s India where there were strict restrictions on importing all foreign goods and not allowing foreign companies to manufacture anything on the Indian soil without complying to a strict set of laws and permissions known as the 'License Raj' regime which had prevailed since India's Independence in 1947. India was then a 'closed' economy with its government trying to manufacture most of the goods through state-run companies and a very few private companies who had the gall to approach the government for an official license to manufacture goods. The result was a monopoly of a few companies in virtually every sector of the industry and a boring monotony of goods in each segment of consumer goods whether it was a car or a scooter or even a pressure cooker.

Of foreign exchange and foreign oil

So how did we manage to get where we are today with a surplus of brands flooding the markets in every sector of the economy from soft drinks to banks, from insurance to cars? The answer lies in the economic crisis faced by the Indian government in the period of 1990-91 which changed it all forever. What forced these changes in the 1990s? Well for one, India had very few competitive companies which earned her the precious foreign exchange (forex for short) in the international markets, for instance, there was no company capable of manufacturing goods for the international markets due to the difficult-to-come-by licenses. Secondly, India relied heavily on huge imports of petroleum products from the Persian Gulf. This dual factor continued to hinder India's progress for long, but successive socialist governments since 1950s resented any changes to the official policy till 1985. The year began with a massively lopsided 'balance of payments' (BoP) for payments of foreign oil which led to a rising fiscal deficit in India's yearly budgets progressively each year.

Devaluation of the Indian Rupee

The situation worsened massively in 1990-91 due to the occupation of Kuwait by Saddam Hussain led Iraq and the resulting 'Gulf War'. The two-year war between Saddam's forces and the US-led coalition created a massive fluctuation in the prices of crude oil which rose 17 USD to a peak of 46 USD. The scenario not only worsened India's BoP but also led to withdrawal of its precious NRI bank deposits which earlier contributed handsomely to her forex reserves. The Gulf War also stopped the remittance of money by Gulf-based Indians who began flying back home in big numbers to save their lives. The situation kept worsening till the middle of 1991 when the Indian Rupee was 'devalued' by the RBI in relation to other international currencies. The RBI initially tried to stop the sliding value of the Rupee by paying from its forex reserves. However, this policy depleted the forex reserves to a mere 1.2 billion dollars in January 1991 and finally to its half in June 1991 when the Indian government was left with just enough money to purchase three weeks of oil! This is when the country had to approach the International Monetary Fund, popularly called the IMF to bail itself out of crisis. The IMF, sticking to its rules and regulations, insisted on India depositing its gold reserves with the central banks of two member countries for a mere 2.2-billion-dollar loan. Thus, the Indian government led by Chandrasekhar had to agree to the airlifting of 67 tons of Indian gold reserves, 47 tons were airlifted to the Bank of England's vaults and 20 tons were airlifted to the Union Bank of Switzerland in May 1991 under tight security.

The genesis of the crisis

The crisis shook the country's investors' confidence and its political circles buzzed with allegations that the government of the day had sold the country's family gold to foreigners in the middle of a heated election campaign in May 1991. India's politics was undergoing its own crisis with the fall of two successive coalition governments in less than sixteen months with the elections in May 1991 having many contenders. However, Rajiv Gandhi, the leader of the Congress party was killed on 21 May 1991 and his party got the highest number of seats but fell short of a majority. The sudden death of its main leader forced the Congress to select P. V. Narasimha Rao, a veteran leader on the verge of retirement to become the Prime Minister on 21 June 1991. With the huge crisis in politics coming to an end, the new Prime Minister was sworn in with great economic crisis engulfing the country.

Prime Minister P. V. Narasimha Rao was fortunately aware that the crisis was serious enough to require the services of a trained economist. Hence, he tried to shortlist the finest ones who could salvage the situation. Among many others, he chose Dr. Manmohan Singh, an Oxbridge-educated economist who had vast experience in foreign trade and had held key positions in the past including the post of RBI Governor from 1982 till 1985. Prime Minister Rao gave Dr. Singh the full liberty to take the 'politically' difficult decisions which opened India's economy as required by IMF norms despite massive protests by various opponents.

A new liberalised era

This was commendable as the government did not have a majority in the Lok Sabha, it depended on the support of few allies who had to be politically managed. Thus, the duo of Rao and Singh fire fought all hurdles to 'open the economy' to the international market investors in a systematic fashion. Though criticised in its own time, the Narasimha Rao government's policies ushered in an era of liberalisation which ended the era of 'License Raj' and helped the later governments including the current government from bringing in all the changes to import of foreign goods, their manufacture and most importantly make them available to the Indian masses. The Rao-Singh team worked as a team with the Prime Minister taking the tough political decisions and the Finance Minister dealing with the technical ways of implementing them which earned him the tag of 'technocrat' politician. Dr. Singh also took the help of a dream team of technocrats like Dr. C. Rangarajan, the then RBI Governor and Dr. Montek Singh Ahluwalia, another technocrat civil servant who helped him manoeuvre through many technical situations in the period. The team took two years till the end of 1993 for stabilising the economy. Their efforts finally bore fruit by raising the foreign direct investment from a mere 132 million USD in 1991–92 to 5.3 billion USD in 1995–96 when their government came to an end.

The government officially ended the 'License Raj' by removing major obstacles for young entrepreneurs to set up their own companies in the country. This led to numerous changes in the business circles leading to the rise of numerous IT companies, cheaper mobiles and competitively priced goods available to us today twenty-five years after the difficult period passed away. Indian economy has gone from strength to strength encouraged by similar policies from all governments since then including the current government's 'Make in India' which has been only possible due to the efforts of PM Rao and his finance minister in the difficult period of 1991-1996. Over the next few years, despite strong opposition, Dr Singh carried out several structural reforms that liberalised India's economy.