Today we see Indian economy progressing rapidly. India is the 5th largest economy with a GDP of $3.737 Trillion. Year 1991 will always be remembered as the year which transformed the Indian economy into what we see today as “Shining India”. From its independence till 1991, the Indian government had a strong control over the economy , it used to standardize and regulate each and every item i.e.
- Permissions for installation of factory or production facilities were granted by the government itself.
- Rather than letting the market decide the prices of commodities through supply-demand principle, the Indian governments used to decide the prices of each and every commodity i.e. (rates of pulses, rice, wheat, flour, cement, cycle, radio, television, airplane tickets etc.)
- Rather than providing equal investment opportunities to local investors as well as foreign investors to make investments in India, the primary objective was to protect the local business community.
Anti
profiteering actions were taken by the Indian governments to control inflation.
As many Indian politicians believed that controlling the inflation would make
the citizens happy and satisfied with the government which will ultimately
allow them to stay in power for a longer period of time.
1991 and Economic Distress
In January
1991, India had foreign reserves of $1.2B which were sufficient to
import oil for 2-3 weeks only. India had no reserves left for further
imports. 1st February is observed as the budget day of India
but on 1st February 1991, budget was not presented before the
parliament as the government had no money to spend. At the same time another factor which
deteriorated the situation of the Indian economy was the first Gulf war which
increased the oil prices. To meet its consumption needs, that same amount of
oil which India use to purchase for $5B had to be purchased for $12B
due to the increase in prices.
In March 1991, Indian officials started negotiating with the IMF for a bailout package but the terms and conditions from IMF were very clear and strict that India would not get a bailout package from the IMF unless until the Indian government fully comply with the conditions of the IMF.
IMF Conditions
Some of the conditions from IMF were:
- Liberalise the economy.
- Abolish License Raj.
- Provide investment opportunities to foreign companies in India.
- Let the market decide the prices of products (goods and services) through supply-demand functions.
Conditions from IMF were logical, constructive and beneficial for India in the long run but politician were fearing that complying with these conditions would give rise to inflation which will affect the popularity of the government among the general masses. In March 1991, during the negotiations with IMF, Indian Parliament was dissolved and fresh elections were announced in May 1991.
Indian National Congress party came into power as a result of these elections and P.V. Narasimha Rao was sworn in as the 9th Prime Minister of India. During his address to the nation, he pledged that his administration will take all the possible steps to bring the Indian economy back on track. Dr Manmohan Singh served as the Finance Minister in the Narasimha Rao administration. Dr Manmohan Singh initiated comprehensive economic reforms agenda in India by abolishing License Raj, initiating Public and Financial Sector Reforms, Tax Reforms, Industrial Policy, Trade and Exchange Rate Policy, and Foreign Investments.
IMPACT OF ECONOMIC REFORMS INITIATED
The economic reforms of 1991 changed the overall structure of the Indian economy. Some of the major impacts these economic reforms had on the overall macro economy of India were:
- Reduction in inflation from 17% to 8.5% within 2.5 years.
- From the period of 1991 to 1994 the overall exports of India nearly doubled.
- Companies started adopting latest technology and started investing in R&D.
- Private share in the economy increased significantly.
- Indian companies had to face competition from within the internal market competitors as well as from multi national companies.
- Foreign Exchange Reserves jumped from $1.2B in June 1991 to almost $15B in 1995.
India is the 5th largest and one of the fastest growing economies in the world with a massive potential to excel. Prioritizing economic and national interest should be the fundamental concern of every leader for his country . In my view, Indian leaders must be praised for their actions which they took to revive, improve and transform the Indian economy.
Very informative
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