When Manmohan Singh Scrapped 'Licence Raj' And Saved India From An Economic Crisis With His 'L P G Reforms'
In 1991, India faced an economic crisis. Manmohan Singh was appointed Finance Minister and implemented reforms known as "LPG" (Liberalisation, Privatisation, Globalisation) to pull out of a disaster.
Manmohan Singh's legacy will live on for generations to come. While his research, statesmanship, and academic brilliance are sworn by the world, he would perhaps be remembered most as the Finance Minister who saved India from plunging into a major economic crisis in 1991. Dr Manmohan Singh breathed his last at AIIMS, Delhi, at 9.51 PM on Thursday, December 26.
The Political, Social, And Religious Crises In India In 1991
PV Narasimha Rao couldn't have taken charge as the Prime Minister of India at a worse time. In 1991, India was dealing with an acute political crisis with two back-to-back elections and the country having seen four Prime Ministers since 1989 — Rajiv Gandhi, VP Singh, Chandra Shekhar, and finally, PV Narasimha Rao.
Moreover, the Congress, still reeling from the impact of the Bofors scandal and VP Singh's rebellion, was also dealing with coalition blues as it withdrew support to Chandra Shekhar.
At the same, the social fabric was also fraying in India as Hindus and Muslims eyed each other with distrust — thanks to the Babri Masjid vs Ram Janmabhoomi conflict. The country was boiling as the BJP's Lal Krishna Advani started the Ayodhya Rath Yatra which was stopped in Samastipur in October 1990. The conflict eventually led to the demolition of the Babri Masjid in 1992.
On the other hand, caste politics was also at an all-time high. The Mandal Commission report had just recommended 27% reservation for OBCs in jobs. As VP Singh sought to implement the recommendation, it led to widespread protests by the community of Jat, a non-OBC caste.
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Road To Crisis: How India Arrived At The 1991 Economic Ruin
In 1991, India faced one of its most severe economic crises, teetering on the brink of default. The combination of high fiscal deficits, excessive reliance on imports, and external shocks led to a dramatic depletion of foreign exchange reserves. Prime Minister PV Narasimha Rao realised the dangerous situation India was in and entrusted Manmohan Singh, who was Chandra Sekhar's economic advisor, with the Finance Ministry to deliver India from the crisis.
By the late 1980s, India was grappling with significant economic challenges. The fiscal deficit soared to over 9% and the forex reserve was in a free fall. At the end of the 1989-91 fiscal year, India's forex reserve was at $5.8 billion, which provided an import over of just two weeks.
The country was heavily reliant on imports, which were financed through commercial borrowings and external loans, creating a precarious balance of payments situation.
According to an IMF study, India's external debt nearly doubled from $35 billion at the end of 1984-85 to $69 billion by the end of 1990-91. India’s balance of payments in 1990-91 also suffered due to dwindling investor confidence.
The Gulf War in 1991 exacerbated these issues by causing oil prices to spike, further straining India’s already fragile external finances.
How Manmohan Singh And PV Narasimha Rao Prevented An Economic Collapse
Realising the urgent need for economic reforms, PV Narasimha Rao appointed Dr. Manmohan Singh as Finance Minister in June 1991. Together, they undertook a four-pronged strategy aimed at stabilising the economy known as the 'L P G (Liberalisation, Privatisation, Globalisation) Reforms
Industrial Policy Reforms
Abolition Of Licence Raj: The first step that MMS took was to scrap India's complex licensing system, better known as 'licence raj' that had stifled industrial growth.
Encouragement Of Investments: MMS and PVN Rao introduced measures to ease domestic supply bottlenecks and attract both domestic and foreign investments.
Trade Policy Reforms
Devaluation Of The Rupee: Tough times called for tougher measures. Manmohan Singh took the risk of evaluating the Rupee by nearly 20% in June and July 1991 to boost export competitiveness. This two-step devaluation was carefully staged to limit any backlash from various stakeholders. This was only the third time (after 1949 and 1966) since Independence that the Rupee had to be devalued.
Public Sector Reforms
Liberalisation Of Foreign Direct Investment (FDI): A term casually thrown around today for political gains, FDI was India's saviour in 1991. The Manmohan Singh-led Finance Ministry removed the 40% cap on foreign equity investment to help companies grow. It gave the Reserve Bank of India to allow ‘automatic approval’ for foreign investment of up to 51% in 34 industries.
Fiscal Corrections
Reduction in Subsidies: Manmohan Singh scrapped export subsidies in several industries to correct fiscal imbalances and promote a more sustainable economic model.
Pledging Gold Reserves: To address the crisis, PVN Rao and MMS took some drastic steps. Among them was the pledging of India's gold reserves as collateral for loans from international financial institutions like the IMF, securing an emergency loan of $2.2 billion.
Austerity Measures: Manmohan Singh also employed austerity measures for the government to reduce fiscal deficits and stabilise the economy.
Manmohan Singh's Legacy Of Economic Reforms
The reforms initiated by Rao and Singh not only averted an impending disaster but also laid the groundwork for India's transformation into one of the world's fastest-growing economies over the following decades. Their approach demonstrated that with decisive action and strategic planning, it was possible to turn a crisis into an opportunity for growth.
In retrospect, the events of 1991 were not merely about economic survival; they marked a significant shift in India's economic policy towards liberalisation and globalisation. This period is often credited with ushering in an era of unprecedented growth and development in India.
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