India may have been disappointed in Dr. Manmohan Singh as the Prime Minister but one cannot deny his role as an economist in pulling the economy out of the 1991 economic crisis. It wouldn’t be right to say that India’s policy of shutting its economic doors to the world caused the said crisis. It was a drawback, perhaps, but there were other factors and series of events which drove the economy downhill. Both domestic and foreign factors caused the economy to degrade.
In 1979, India faced its worst ever draught since independence which is credited to its loose Fiscal policy. Along with which dragged the repercussions of the Global Oil Shock caused by the Islamic revolution in Iran. It was during this time that the working class (agrarian sector specifically) experienced a political awakening. This implied that they now demanded answers and rights. This was paired with the political decay on the administrative end as a result of its inability to meet with those demands.
The policies and regulations, strict and unwelcoming to the private sector, were so tied to the objective of welfare that it (contradictorily) weighed the economy down.
MRTP Act 1969—Monopolies and Restrictive Trade Practices Act
Next is the Global Import Liberalization of 1976 which led to a rapid increase in the growth of imports of both intermediate and capital goods. The policy would have not made it to this list had the export growth kept pace with it. But, the failure of exports to balance the increasing imports resulted in the failure of the policy itself.
And the 7th Finance Commission (1979)
It is widely believed that the Current Account didn’t turn red owing to the remittance flows from workers in the Persian Gulf. By 1978, the country had more than $7 Billion which could pay off 9 months import.
However, by 1980’s, the governments total interest spending had exceeded both defense and subsidies expenditure.
As Governors of RBI, Manmohan Singh (1982-85) and R. N. Malhotra (1985-90) issued warnings to check the growth in monetary base ensuing government spending leading which would be followed by price instability, increasing external deficits and the crowding out of credit to the private sector. These warnings were not heeded to by the finance ministry which could see nothing but the urgent developmental and defense needs of the country.
It was when the IMF and World Bank were approached that the New Economic Policy was formulated based on the preconditions laid by the lenders. Its ideals were first proposed by the International Monetary Fund and the World Bank. It was then formulated by the then Prime Minister P.V. Narsimha Rao and the Ministers of Finance and Commerce—Dr. Manmohan Singh and P. Chidambaram respectively. It was Neo-liberal in nature and followed the preconditions based on which the IMF and the World Bank had agreed to lend aid. New-liberalism was a political theory of the late 1990’s which believed in a Laissez Faire economy. It favored the maximization of personal liberty by limiting government interference in the functioning of the free market.
The foundation of the NEP was Stabilization of Fiscal Weakness and Balance of Payment crisis and Structural Reforms to remove rigidities from various segments. And therefore, as immediate action, the rupee was devalued by 23%, interest rates were increased and the 1991-92 budget was revised to slash subsidies and transfers to public enterprises.
On the policy front the economy saw De-licensing which abolished the complex system of industrial and import licensing.
The New Economic Policy was held up by three pillars—Liberalization, Privatization and Globalization.
Liberalization was carried out on three major fronts—License, Price and Import and Export. The complex system of industrial and import licensing was abolished to pave the way for the growth of the private sector by liberalizing the Trade Policy. This allowed foreign companies to hold a stake of 51% in Joint Ventures increased from the previous 40%.
Privatization was aimed at shifting the focus—both financially and strategically—from public enterprises to private. For instance, the disinvestment in and transfer from public to private sector. The formation of the Board for Financial and Industrial Reconstruction (BIFR) and the replacement of the MRTP Act by the Competition Act (2002) clarified the government’s stance. Another important headway, which lead the stratagem of Privatization, was the dilution of the Governments stake in the corporations. This links to the non-interference attribute of the Neo-liberal approach.
Globalization was linked to both Liberalization in terms of easing and reducing Import and Export Duty. The Foreign exchange regulation Act of 1973 (FERA) which only allowed foreign exchange transaction only if authorized by the RBI in writing (which could be revoked at its discretion) was replaced by the Foreign Exchange Management Act (FEMA). FEMA facilitated external trade and payments and promoted Forex.
The NEP was not the first time international financial institutions had lent aid to India. In fact, the governments interest spending (which exceeded both subsidies and defense expenditure) constituted of this too. So, when the RBI expressed its concerns over the rising fiscal deficit and the need for modification, it was not the only one—the IMF and World Bank too raised concern. But since the government was not borrowing from the IMF any longer, these warnings were conveniently ignored.
Manmohan Singh, who as the RBI Governor raised concern, in 1991, was the seventh Finance Minister in six years. The entire event states one un-economic fact which cannot be ignored. The government’s super-power to ignore. It didn’t just ignore budgets every year but also the warnings of the institution which has been set up for the very purpose.
There’s a reason why a Central Bank is set up in every country despite a Finance Ministry. Not only is its independence of utmost significance but the fact that institutions like the Central Bank have academicians and professionals who have thorough knowledge in their respective fields. The denial to accept this reality and its’ importance can cost the economy its struggle so far.
The tug-o-war between the Finance Ministry and the Reserve Bank of India, from one perspective, can aid in the policy-making to benefit all classes of society especially when the disparity is as great as it is in India. However, separation of powers and a strict policy of non-interference (on the part of the government) are imperative.
We have survived consecutive governments working for themselves. But we cannot afford infiltration in institutions such as the RBI or the Judiciary. The government is preparing a trap for itself worse than the 1991 crisis. In the 1980’s it left the RBI to do its job but ignored its significance. Today, it recognizes its significance and perhaps that is why, the institution granted ‘independence’ is infiltrated by a bunch of ministry officials to overrule every economically favorable decision made by a professional to serve the Hindutva Movement.