The year 1991 was a watershed moment in India’s history. With the government’s expenses outweighing the revenue with a fiscal deficit of eight per cent of the GDP, the crisis demanded a visionary leader with the conviction to call a spade a spade.
The challenges were plenty. The Soviet Union, which had been a time-tested ally to the fledgling Indian democracy since 1947, was on the brink of a collapse. To make things worse, there was a full-blown international conflict in the aftermath of the Iraqi leader Saddam Hussain’s invasion of Kuwait.
This conflict had skyrocketed the fuel prices and shrinking foreign currency reserves meant that India was fast-losing its ability to import fuel from Gulf countries. It was widely reported that India had just three days worth of fuel left to survive and the high prices of fuel was one of the factors that led to double-digit inflation – a nightmare for the economists at the helm. By February 1991, the inflation rate had soared to 13.7 per cent.
In the wake of such turbulent times for the country, the then Finance Minister Manmohan Singh stood up to do what was needed to be done and delivered a historic Budget speech on July 25, 1991 which rescued the country from the economic mess.
“International confidence in our economy was strong until November 1989 when our Party was in office. However, due to the combined impact of political instability witnessed thereafter, the accentuation of fiscal imbalances and the Gulf crisis, there was a great weakening of international confidence. There has been a sharp decline in capital inflows through commercial borrowing and non-resident deposits. As a result, despite large borrowings from the International Monetary Fund in July 1990 and January 1991, there was a sharp reduction in our foreign exchange reserves. We have been at the edge of a precipice since December 1990 and more so since April 1991,” said Singh as he began addressing the Lok Sabha.
He then went on to explain that the public sector had not been managed in a manner so as to generate large investible surpluses.
“The excessive and often indiscriminate protection provided to industry has weakened the incentive to develop a vibrant export sector. It has also accentuated disparities in income and wealth. It has worked to the disadvantage of the rural economy. The increasing difference between the income and expenditure of the Government has led to a widening of the gap between the income and expenditure of the economy as a whole,” he added.
With no attempt to mince his words, Singh stated that the crisis of the fiscal system was a cause for serious concern.
“The fiscal deficit of the Central Government, which measures the difference between revenue receipts and total expenditure, is estimated at more than 8 per cent of GDP in 1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent in the mid-1970s. This fiscal deficit had to be met by borrowing. As a result, internal public debt of the Central Government has accumulated to about 55 per cent of GDP,” he noted.
The initial portions of his speech explained the situation India was in and soon thereafter Singh talked about the imminent need to reform the economy.
“There is no time to lose. Neither the Government nor the economy can live beyond its means year after year. The room for maneuver, to live on borrowed money or time, does not exist any more. Any further postponement of macro economic adjustment, long overdue, would mean that the balance of payments situation, now exceedingly difficult, would become unmanageable and inflation, already high, would exceed limits of tolerance,” he spoke.
After talking about fiscal measures which were needed to stabilise the macro-economic status quo of the country, Singh finally said what every lawmaker across the party lines was anticipating.
“Macro-economic stabilisation and fiscal adjustment alone cannot suffice,” he remarked, hinting towards what was about to happen – an all out reform of the Indian political economy.
“They (efforts towards macro-economic stabilisation) must be supported by essential reforms in economic policy and economic management, as an integral part of the adjustment process, reforms which would help to eliminate waste and inefficiency and impart a new element of dynamism to growth processes in our economy,” he said.
“The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production, to utilise for this purpose foreign investment and foreign technology to a much greater degree than we have done in the past, to increase the productivity of investment, to ensure that India’s financial sector is rapidly modernised, and to improve the performance of the public sector, so that the key sectors of our economy are enabled to attain an adequate technological and competitive edge in a fast changing global economy,” he added.
Similar reforms were undertaken by the USSR under the leadership of Mikhail Gorbachev in 1988, albeit unsuccessfully. The reforms were famously called perestroika and glasnost – the Russian words which translate as ‘restructuring’ and ‘openness’ suggesting reform and transparency in the Soviet economy and governance. These measures, although seemingly promising, failed to rescue the Soviet Union which ultimately collapsed by the Christmas of 1991.
Meanwhile Singh, who was lampooned by his political adversaries for being a man of few words, reflected a calm confidence and the conviction of a visionary when he said: “I am confident that, after a successful implementation of stabilisation measures and the essential structural and policy reforms, our economy would return to a path of a high sustained growth with reasonable price stability and greater social equity”.
It was perhaps this never-failing conviction in life which led him to speak some of the most remembered words by a Prime Minister in India’s political history — “History will be kind to me…”