This week, it will be 25 years since India embarked upon the journey towards economic reforms and liberalisation. The reform programme was put in place in July 1991, by the then newly elected Congress-led government headed by Narasimha Rao, and its main architect was Finance Minister Manmohan Singh. Interestingly, Manmohan Singh was not Rao’s first choice for the Finance Minister’s post. Rao had first sounded out IG Patel, a former RBI Governor who also had wide experience in the field of policy-making and in academia. Rao perhaps believed that a technocrat like Patel, without any political or party baggage, would be best suited to put in place the far-reaching reforms programme. But Patel reportedly turned down the offer, and it then went to Manmohan Singh.
Though there was a growing consensus among economists in the 1980s that the Nehruvian ‘mixed economy’ model had run out of steam and the time had come for opening up the economy, it was only in 1991, when the country was literally brought to its knees by a severe balance of payments crisis, compounded by the first Gulf war, that the reform process was initiated.
The irony is that the momentous changes to the economy were set in motion by a minority government. The country was at a critical juncture politically in 1991. The National Front government led by VP Singh had collapsed a few months earlier, when the BJP withdrew its crutch. The Janata government led by Chandrashekhar also collapsed, a few months after Congress withdrew support, and fresh elections were called.
During the election campaign former Prime Minister Rajiv Gandhi was brutally assassinated, leaving deep scars on the country’s polity. The year 1990 was also marked by a series of ghastly communal riots as the BJP’s Rath Yatra went into top gear, led by an aggressive LK Advani, who later morphed into a more liberal and moderate face of the BJP. Militancy in Kashmir was also beginning to peak in this period.
So the reforms were set in motion at a time when the country faced some serious political challenges. But the economy was also in deep crisis — the first Gulf War had cut down remittances sharply, and forex reserves had plunged, leaving the country with reserves to cover only three weeks’ imports. Inflation was at 16-17 per cent. But, very often, a crisis also presents an opportunity to change. The licence-permit raj was dismantled as industrial licensing was done away with. Tariffs were cut down drastically and foreign investment was welcomed. The rupee was devalued and the financial sector was deregulated. Important capital market reforms were also implemented.
After the initial scepticism from various quarters, there was gradual acceptance of the need for economic reforms. What is remarkable is how a political consensus evolved around reforms and how quickly the political class adapted to the rhetoric of reform. Even after the Congress lost power in 1996, the coalition government led by the United Front and the subsequent BJP governments carried forward the reform programme.
Even the Left Front government in West Bengal warmed up to the idea of reform and invited industrial investments, from abroad too. Of course, it is a different story that the Left Front went about it in a ham-handed way, alienating the very sections of the population that had propelled it to power and sustained it for almost two-and-a-half decades.
The Congress-led UPA, which came to power in 2004, despite the tension between the reform-minded Manmohan Singh-Chidambaram-Montek Ahluwalia troika and the ‘welfare-oriented’ National Advisory Council headed by Sonia Gandhi, was instrumental in taking forward the reform agenda.
Though the world over, neo-liberal ideology seems to be losing steam — Britain exiting the EU is just one example of that — in India the faith in this ideology seems as strong as ever. Prime Minister Narendra Modi, after all, ran his election campaign two years ago on the slogan “minimum government, maximum governance”. Never before has such an openly libertarian slogan helped a politician win power in India.
Economic rhetoric has also undergone a drastic change over the years. In the 1970s and 1980s, economic debates in the country used to revolve around poverty alleviation and more ‘welfarist’ interventions by the state. Today it is all about attracting investments and the ‘ease of doing business’. The state was once an active player in bringing about economic and social change but, today, it is seen as a mere ‘facilitator’ for business and attracting investments into the country.
Faith in reform agenda
So, there have been some momentous changes in the last 25 years. This is not to say that reforms have been an unqualified success; they have not. Despite the substantial number of people pulled out of poverty in the last 25 years, there are still an unacceptably large number of people who struggle to get by.
The opening up of natural resources such as spectrum and coal resulted in massive corruption and the allocation processes were tainted by ‘crony capitalism’.
Agriculture is a sector that successive governments have ignored, despite the large number of people surviving on it.
The reforms agenda, like any other economic programme, has been good to some and bad to others. But what is remarkable is that even the relative losers seem to have enormous faith in this agenda. Now, whether the government, which has three more years left, is able to deliver on its promises, based on this agenda, is the crucial question.