The former Prime Minister of India, Manmohan Singh, recently voiced concerns over the country’s macro-economic stability on the 30th anniversary of the economic liberalisation reforms. Singh believes that the economic crisis resulting from the Covid-19 pandemic presents a more significant challenge than the 1991 economic turmoil. He emphasised that India needs to re-evaluate its priorities to ensure a decent living for all its citizens.
Understanding the 1991 Crisis and Subsequent Reforms
In the years leading up to 1991, India grappled with a critical Balance of Payments (BOP) crisis. It was a period where the nation’s foreign exchange reserves were hardly sufficient to finance 15 days of imports. This precarious situation resulted from a multitude of factors.
One major contributor was the fiscal deficit, which stood at about 8.4% of the GDP during 1990-91. The Gulf War further intensified the problem as oil prices soared following Iraq’s invasion of Kuwait. Inflation also escalated from 6.7% to 16.7% due to a rapid surge in money supply. These elements combined, worsened the country’s economic position.
To combat this crisis, India introduced a New Economic Policy in 1991, marking the beginning of the liberalisation era. Manmohan Singh, then Finance Minister, was the primary architect of these groundbreaking reforms, based on a model of Liberalisation, Privatisation, and Globalisation (LPG).
Nature and Scope of 1991 Reforms
These changes aimed to reinvigorate India’s economy and included liberalising the industrial policy, starting privatisation, and encouraging globalisation. Policies such as abolishing the industrial license permit raj, reducing import tariffs, deregulating markets, and making banking reforms were some of the significant steps taken. The LPG model is credited with driving high economic growth from 1991 to 2011 and considerably reducing poverty between 2005-2015.
The 2021 Economic Crisis
According to the World Economic Outlook Report 2021, the Indian economy is expected to grow by 12.5% in 2021 and 6.9% in 2022. However, the pandemic has instigated massive unemployment in the informal sector, leading to rising poverty after decades of decline. The social sectors, like health and education, have not been able to keep pace with our economic progress. Lives and livelihoods have been lost unnecessarily during the pandemic due to shortfalls in management and preparedness.
There are also concerns that India may be reverting to archaic policies. For example, the Inspector Raj seems to be re-emerging through e-commerce policies. Furthermore, India has been increasingly reliant on borrowing or channeling money from the RBI to finance the fiscal deficit. The migrant labour crisis has highlighted gaps in the country’s growth model, and India’s foreign trade policy is under scrutiny for its skepticism towards liberalisation.
Looking Towards the Future
The groundbreaking reforms initiated in 1991 proved instrumental in mitigating an economic crisis and fostering economic growth. Given the current circumstances, it is essential to outline a new reform agenda. This plan must not only restore the GDP to pre-crisis levels but also guarantee higher growth rates than those prevailing before the pandemic. Amid these challenging times, a revisitation of the spirit of 1991 may well be the need of the hour.