There are many memorable dates that dot the Indian history. The most defining when it comes to economic development is undoubtedly July 24, 1991. It was on this day 25 years ago that India chose to embrace economic liberalisation. A prime minister (P V Narasimha Rao) heading a Congress-led minority government and a technocrat finance minister (Manmohan Singh) with little experience in politics took India down a path that it had not traversed since its birth as a free nation. The Indian economy, subjected to massive government control till then, was opened up to market forces. The new Industrial Policy announced little after noon on July 24, 1991 abolished license raj and allowed industries to build capacity/ sell their products in quantities that the market demanded and not at the 'whims and fancies' of a bureaucrat lording over the corridors of power in New Delhi. The Monopolies and Restrictive Trade Practices (MRTP) controls were abolished and foreign investment was allowed in various industries with some restrictions. Reforming the public sector was also put on the agenda.
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Such a radical transformation of India's industrial policy was announced in a tame manner. All that the then minister of state for Industry P J Kurien did was to read out a brief statement in Lok Sabha saying he was tabling a statement on Industrial Policy. Jairam Ramesh in his book ' To the Brink and Back — India's 1991 Story'' speculates the reason for it. "Perhaps, this tepid introduction had been provoked by a fear of protests from sections of Indian Industry. In fact, I have reasons to believe that lobbying by some prominent figures of industry — nervous about foreign direct investment — had delayed the approval of the new industrial policy," he wrote in the book.
Four hours after the tepid introduction of the new Industrial Policy, Finance Minister Manmohan Singh rose to present his first Union Budget. He cut import duties (which to a large extent protected the Indian industry) across the board, raised prices of petrol, diesel, kerosene, LPG and fertilisers. This was done to cut the subsidy bill and rein in the runaway fiscal deficit. He concluded his speech quoting Victor Hugo "No power on earth can stop an idea whose time has come," adding "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."
His budget announcement created a furore, both within his party and outside, especially the increase in price of fertilisers. The opposition accused the government of selling the country to the International Monetary Fund. The protests died after small farmers were exempted from the fertiliser price hike.
The path-breaking reforms that were unleashed that day saw India's GDP growth escape the then 'Hindu rate of growth' of three to four percent and accelerate to even touch double figures. The country is yet to see a repeat of such far reaching reforms. In a recent interview to Forbes India, former Finance Minister P Chidambaram attributed the lack of consistency in the country's reform process to fractured polity. Lok Sabha elections repeatedly threw up coalition governments which, trying to satisfy the conflicting interests of its partners, could at best manage incremental reforms. While the present Narendra Modi government has an absolute majority in the Lok Sabha (for the first time in two and a half decades), lack of numbers in the Rajya Sabha (Upper House of the Parliament) is proving to be frustrating.
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The fact that India was at the brink of an economic disaster helped Narasimha Rao government to push through the massive reforms in 1991. Foreign exchange reserves were as low as $ 1 billion — good enough to cover just a few weeks of imports. The country was on verge of defaulting its repayment of short term foreign debt. India which had already suffered the ignominy of pledging its gold reserves to boost its foreign currency reserves had other problems as well. Though the economy was growing at 5 percent, inflation was galloping at high double digits, fiscal deficit was 8 percent of GDP and rupee, pegged to Rs 14 a dollar, was leaving exports uncompetitive.
The Congress government which came to power in June that year had very little choice. It had to take drastic measures to save the tottering economy. It did. One of its first acts was to devalue the currency. It then revamped the trade policy followed by the Industrial Policy and the historic Budget. Opposition parties protested but they had to accept the far reaching changes as they too understood that the options before the government were limited.
Since the reforms of July 1991, the country's GDP has grown from $ 250 billion then to over $ 2 trillion now. Private sector has flourished. Tata group, for instance, has grown in size from $ 8 billion then to over $ 100 billion now. Forex reserves today are well over $ 275 billion. The country has a well regulated banking sector and equity markets. Indian companies have not only managed to fight the entry of multinational companies into India (something they feared about then) but have also taken the fight to other parts of the world having acquired many global entities.
It will not be an exaggeration to say that the seeds of India's growth into an economic super power were sown two and a half decades ago on July 24, 1991.