Reviving the 1991 spirit: Reform lessons from then should not be ignored

Thirty-five years after the landmark 1991 Budget, India must revive the reform spirit with fresh policy changes, stronger institutions and wider reforms beyond the economy

What happened today 35 years ago was truly historic. The Indian economy had been beset by the twin challenges of fiscal indiscipline and an unprecedented balance-of-payments crisis. India’s foreign-exchange reserves had run so low that they could hardly finance a fortnight’s import, forcing the government to mortgage gold with the Bank of England and seek loans from the International Monetary Fund. The Union government’s fiscal deficit in 1990-91 had risen to 7.6 per cent of gross domestic product (GDP), with wholesale prices registering a double-digit increase. A newly elected minority government was at the helm in New Delhi. Neither its Prime Minister, P V Narasimha Rao, nor its finance minister, Manmohan Singh, had yet been elected to either House of Parliament. But those weaknesses hardly came in the way of that government’s resolve to bring about fundamental changes in India’s economic policies. 

The Union Budget, presented by Singh on July 24, 1991, charted a path for India’s economic recovery and growth in the coming years. Apart from achieving the steepest single-year reduction in the fiscal deficit and slashing import duties — a process that continued for a few more years — the Budget also laid the foundations for further reforms in taxation and financial-sector policies, an exercise undertaken with the help of recommendations from expert committees. A couple of hours before the presentation of that historic Budget, the government tabled in Parliament its new policy that abolished licensing for all industries except 18 specified sectors, scrapped the asset limit for companies governed under the Monopolies and Restrictive Trade Practices Act, and reduced the public-sector monopoly by allowing private enterprises to enter as many as 10 sectors that were hitherto out of bounds for them. Foreign investment up to 51 per cent equity was also allowed automatically in 34 industries. A few weeks earlier, cash compensatory support, a form of export subsidy, was abolished and the rupee was devalued in two phases, paving the way for a movement towards a liberalised exchange rate management system. The disinvestment of government equity in public-sector enterprises was also launched. 

 

The results of those reforms for India’s economic growth were unquestionably positive, with average annual GDP growth in the last 35 years being higher than that in a similar period before the reforms. Subsequent governments continued the process of those reforms, widening their scope and coverage, even though these were often slowpaced and faced political setbacks. Tariffs were raised starting in 2018, and industrial policy made a comeback under a different name. If India’s growth and development trajectory is to improve in the coming years, such aberrations should be corrected. It will also be important for the government to embrace the idea of economic reforms with the same zeal displayed in 1991 and revive the spirit in which the Rao-Singh duo took those decisions. Involving domain experts in driving fresh reforms is a goal that should not be abandoned. Ensuring the independence of regulatory institutions should be an article of faith that no force on earth should be allowed to undermine. Steps should be taken to encourage state governments to embrace reforms through a participative and consultative mechanism. Equally important will be the need to widen the scope of reforms to include hitherto neglected areas such as education, skilling, justice delivery systems and health care. India should not wait for another crisis before embarking on its next round of big reforms.