As India’s Finance Minister Nirmala Sitharaman presented Union Budget 2024 on July 23, Firstpost reflects on another July Budget, which is known for its transformative effect on the country’s economy.
Presented on July 24, 1991, by Manmohan Singh, who went on to become India’s prime minister for 10 years, the Budget set India on a new economic trajectory, fundamentally altering the nation’s economic landscape.
While Singh prepared the Budget, he later credited then-Prime Minister PV Narasimha Rao for showing the political courage required for this scale of economic reforms in India that had largely followed a socialist economic governance for over over four decades.
Recalling the historic Budget presentation of 1991
Thirty-three years ago, on 24 July 1991, Manmohan Singh, then the finance minister of India, presented a budget that heralded a new era for the Indian economy. After decades of growing at a modest 3.5 per cent annually, India took the critical decision of liberalising its economy.
The measures that India took back then transformed the economic growth trajectory of the nation and the lives of its citizens forever. Singh’s speech, imbued with a sense of urgency and optimism, set the tone for the country’s ambitious journey ahead.
“I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘No power on earth can stop an idea whose time has come’,” said Singh.
“I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome,” proclaimed Singh in his budget speech.
The preceding decade and the economic crisis
Reforms had already begun in the preceding decade, particularly after 1985, but the Indian economy remained weak and fragile. The situation came to a head with the balance-of-payment crisis.
Arvind Panagariya, who was the first vice-chairman of the Narendra Modi government’s think tank Niti Aayog, has noted in his IMF Working Paper — “India in the 1980s and 1990s: A Triumph of Reforms — that the “growth during the 1980s was also propelled by fiscal expansion financed by borrowing abroad and at home. But this was unsustainable and led to the crisis of June 1991.”
“The fragile but faster growth during the 1980s took place in the context of significant reforms throughout the decade but especially starting in 1985. While this liberalisation was ad hoc and implemented quietly (‘reforms by stealth’ is the term often used to describe them), it made inroads into virtually all areas of industry and laid the foundation of the more extensive reforms in July 1991 and beyond. The liberalisation pushed industrial growth to a hefty 9.2 percent during the crucial high growth period of 1988–91,” Panagariya elaborated.
Narasimha Rao: The architect behind the reforms
The transition, commonly referred to as liberalisation, was orchestrated by Rao, who almost abandoned his political career to lead a monastic order. Rao’s political history did not suggest he would become a liberaliser, as detailed by Political Science professor Vinay Sitapati in his biography of Rao, “Half Lion”.
Manmohan Singh, who was the driving force behind these reforms as Rao’s finance minister, admitted to Sitapati, “I had no inkling that Rao was in favour of liberalisation based on his past record.”
Rao, a socialist at heart and a protectionist until 1991, underwent a rapid transformation. Senior Congress leader and former Union minister Jairam Ramesh, who was an Officer on Special Duty in Rao’s PMO during the transformative months of 1991, has recounted his initial interactions with the then prime minister in his book, titled, “To The Brink and Back: India’s 1991 Story”.
Ramesh writes, “He [Rao] told me that he was not an expert on economic issues and that I should coordinate meetings with Pranab Mukherjee and keep briefing him on these subjects.”
A stark realisation that needed a drastic response
Rao’s understanding of the economic crisis deepened rapidly. On 19 June, just two days before he was sworn in as Prime Minister, Rao was briefed by cabinet secretary Naresh Chandra on the dire economic situation. Sitapati noted, “It took just a few hours for Rao to change his mind and become an economic liberaliser.”
Ramesh recalled Rao’s reaction to Chandra’s briefing in his book, saying, “When he saw the note, Narasimha Rao’s first response was: ‘Is the economic situation that bad?’ To this, Chandra’s response was, ‘No, sir, it’s worse’.”
Reforms begin to set India’s economy free
Chandra’s note, which included core reforms such as devaluation, trade liberalisation, and de-licensing, formed the blueprint for the economic policies Rao and Singh implemented. Rao’s political acumen recognised the necessity of these reforms, and he strategically appointed Manmohan Singh as the finance minister. Singh’s economic expertise was crucial in persuading both domestic sceptics and international observers.
Ramesh says the pairing of Rao and Singh was unlikely yet transformative. “Both Rao and Manmohan were pillars of the ancient régime, stalwarts of the very system they set out to replace,” Ramesh writes in his book.
Incidentally, the two leaders who opened India’s economy to the world were known as introverts, and as leaders who didn’t carry much weight within the Congress system. Yet, together, they managed to steer India towards a new economic path.
Fight against scepticism and political challenges
The reforms were not without their challenges. For instance, Rao was initially horrified by the prospect of devaluing the rupee, a move he associated with the political and economic debacle of 1966. Nevertheless, the first devaluation occurred on 1 July 1991, followed by a second on 3 July. Rao’s initial resistance gave way to acceptance, mostly due to Singh’s persistence and his influence over the then prime minister.
Singh is said to have even offered to resign when Rao hesitated. “Let the responsibility lie with me,” Singh reportedly told Rao, who, however, recognising the necessity of his finance minister’s role, supported him through the tumultuous period.
Singh later explained Rao’s initial scepticism towards liberalisation to his writer daughter Daman Singh, who has documented the same in her book, “Strictly Personal: Manmohan and Gursharan”. Gursharan Kaur is the wife of Manmohan Singh.
Daman Singh quotes Manmohan Singh as saying, “I had to persuade him [Rao]. I think he was a sceptic to begin with, but later on he was convinced that what we were doing was the right thing to do, that there was no other way out. But he wanted to sanctify the middle path—that we should undertake liberalisation but also take care of the marginalised sections, the poor.”
A long-term vision
The Union Budget of July 24, 1991, remains a seminal moment in India’s economic history. It marked the beginning of liberalisation and set India on a path towards becoming a major global economic power.
The successive governments including the present Modi government have continued to take economic reforms horizontally in sector after sector as per the changing realities of the global economy. The idea whose time had come indeed proved unstoppable.
When India opened the gates of its economy, a new post-Cold War world was taking shape. And now when Sitharaman prepares to present her record seventh consecutive Union Budget, the post-Cold War realities point to another bipolar world, with China challenging the US-led bloc on every front.
India is now being viewed as the premier balancing force. It has also emerged as a strong votary of a multipolar world believing in multilateralism — another idea that India is advocating for a new post-Cold War world.
Link to article –
A July Budget that showed India the ‘idea whose time has come’
