THE 1991 BUDGET, IN HINDSIGHT

On July 24, 1991, Manmohan Singh presented the first Budget of the PV Narsimha Rao government, a Budget that would change the face of the Indian economy. While the intellectual argument for reforms had been gaining momentum for a long time before 1991, it took an economic crisis and deft politics, both within and outside his party, by Rao — he was heading a minority government at the time — to actually see them through. The reforms triggered a sharp debate when they happened, but they have come to enjoy a rare bipartisan consensus in the last 30 years and survived many regimes.

At a time when the Indian economy is trying to come out of its largest ever contraction, the nature of economic challenges is very different from what they were 30 years ago. The 30th anniversary of Manmohan Singh’s first Budget is an opportune moment to look at the 1991 Budget in hindsight, retrace the journey, and, perhaps, ask the right questions.

How serious was the immediate crisis before 1991 Budget?

Manmohan Singh’s 1991 Budget speech made no attempt to hide the extent of the economic crisis prevailing then.

“The new Government, which assumed office barely a month ago, inherited an economy in deep crisis. The balance of payments situation is precarious...we have been at the edge of precipice since December 1990 and more so since April 1991...The people of India have to face double digit inflation which hurts most the poorer sections of our society. In sum, the crisis in our economy is both acute and deep. We have not experienced anything similar in the history of independent India.”

How bad was the foreign exchange and inflation situation at the time? A look at inflation and foreign exchange reserve and trade numbers suggests that the balance of payment crisis was much bigger than the inflation crisis.

We have inflation data going back to 1961-62 under the Consumer Price Index for Industrial Workers or CPI (IW) series. CPI (IW) had been in double digits from October 1990 onwards when Singh presented his Budget in July 1991. It would stay above the 10% mark until September 1992.

Annual growth in CPI (IW) was 11.2% and 13.48% in 1990-91 and 1991-92. The country had seen worse or comparable inflationary episodes before. The oilshock years of the 1970s were the worst. CPI (IW) grew at 20.59% and 26.75% in 1973-74 and 1974-75. 1966-67 and 1967-68 had seen inflation to the tune of 12.11% and 12.36%. 1980-81 and 1981-82 were also consecutive double-digit inflation years. (See Chart 1)

“The current level of foreign exchange

( See Chart 2)