It was on July 24, 1991 that Manmohan Singh made his first budget speech, which is generally taken as heralding the economic reforms. He said that he missed the handsome, smiling face of Rajiv Gandhi, who had been murdered just weeks before. According to him, international confidence in India, which was high just two years before, had waned because of political instability, fiscal imbalances and the Gulf crisis. He told Parliament that the country was at the edge of a crisis: the foreign exchange crisis made growth unsustainable, and the double-digit inflation hit the poor most. Fiscal deficit was 8 per cent of gross domestic product; a fifth of the government’s revenue went to pay interest, and a fifth of foreign exchange earnings went to pay interest on the foreign debt. Exchange reserves were enough to finance imports for a fortnight at most. The rupee had been devalued twice on July 1 and 3, but more needed to be done. After paying tribute to Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi and stressing his commitment to growth with a human face, he announced what today are termed the reforms of 1991.
Foremost amongst them was relaxation of the controls on foreign investment — it would be allowed up to 51 per cent in companies that could cover the foreign exchange cost, and a board would be set up to consider other cases. Sick government enterprises would be referred to the Board for Industrial and Financial Reconstruction, and 20 per cent of equity in profitable ones would be sold to private investors. Government banks and financial institutions (there were no private ones) would be allowed to set their own interest rates. Control of the stock market would be transferred from the finance ministry to an independent regulator. A chief commissioner for non-resident Indians would be appointed to make the system more friendly to them. The Bureau of Industrial Costs and Prices would be renamed the Tariff Commission.
Then came some heartfelt passages about how much he cared for the poor, how he hated consumerism, and how much he admired austerity. He continues to repeat these sentiments whenever he gets a chance, so they would sound familiar. After which he went back to the business of the budget. Sugar subsidy would be cut slightly, but food subsidies would go up. The prices of petrol, aviation spirit and liquefied petroleum gas would be raised by 20 per cent, the price of diesel would be raised by 10 per cent, and — remember the poor — the price of kerosene would be reduced by 10 per cent. Fertilizer prices would be raised by 40 per cent, and prices of minor fertilizers would be decontrolled. But farmers should not worry; procurement prices would be raised, and more money would be provided to write off bank loans to them.
Then came the usual increases in money for pro-poor programmes, after which the finance minister announced five new initiatives: a new commission for the welfare of backward classes, a national renewal fund meant to be a social safety net for anyone who may lose his job, a national foundation for communal harmony to help children of families affected by communal riots, a programme to fund young people going and working in other regions of India, and a programme to send 500 Indian experts to other developing countries every year. Apart from backward classes, all other promises were forgotten almost as soon as they were given.
Anyone reading this speech is likely to ask: the budget did a good job of reducing the fiscal deficit, but just what reforms did it announce? Foreign companies would be allowed to invest up to 51 per cent under restricted conditions; but would they be impressed or care? BICP would be renamed: so what? Oil prices would be raised: but they continue to be under government control to this day. Prices of some fertilizers would be decontrolled; but the major nitrogenous fertilizers continue to be under price control till today. So the finance minister of 1991 promised no substantial reforms, and delivered only a little bit of what he promised. How is it, then, that he came to be celebrated as the great reformer?
The answer lies partly in what he had done earlier in the month — devaluation of the rupee and abolition of export subsidies — but that was an obvious, unavoidable response to the payments crisis, a measure that even the most diehard, socialist minister could not have avoided. The other part of the answer lies in what two other ministers did. The first was the import-export policy of July 4, 1991 — just 13 points, the shortest import-export policy ever — followed by the policy of March 1992. With these two policy statements, P. Chidambaram abolished import licensing on raw materials, industrial inputs and capital goods. I would call that a revolution. The office of the chief commissioner of imports and exports was the most corrupt at that time; it had shops in every city in India, and the hundreds of bureaucrat shopkeepers who manned it collected cash by the bucket. Chidambaram wrote the policy himself, and published it without any inputs from the CCIE or from the directorate general of technical development, whose babus made equally good money by approving capital goods imports. They were so incensed with Chidambaram that they went across Raj Path to attack him. Luckily he was not in the office; they damaged his nameplate and left. I have had many subsequent occasions to criticize Chidambaram for his measures as finance minister; but the single act of import licence abolition is enough to atone for all his subsequent errors.
The other is the statement of industrial policy of July 24, 1991, which largely abolished industrial licensing. This was the handiwork of Rakesh Mohan; he could do it because P.V. Narasimha Rao, the then prime minister, was also industry minister; he was not in debt to industrial vested interests. It was this policy that unleashed competition in Indian industry, enabled it to face foreign competition, and eventually led it to spread out across the world.
Those were the reforms as I recall them. But lest I give the impression that the finance ministry (of which I was a minor cog) did nothing, let me stress that it did “rationalize” taxes considerably, and reduced them when Manmohan Singh felt he could afford the fiscal cost. True, he generally thought he could not; the radical reductions in customs duties and income taxes had to wait till the advent of the Bharatiya Janata Party. But the desire was always there. Those who bewail the condition of the poor may think that the prime minister talks too much about the poor and does too little; maybe some would think that he talked much about reforms and did little. But this impression is largely due to his deliberate style. He knows he is in charge of an enormous country and must not put it at risk. So he thinks long and deeply before he takes any step. But there should be no doubt that if he had a magic computer which told him exactly what effect a policy measure would have, he would be far more active.