THE BALANCE OF PAYMENT CRISIS BEFORE 1991 REFORMS
1970-71 reserves, in the range of ₹2,500 crore, would suffice to finance imports for a mere fortnight,” Manmohan Singh said in his Budget speech.
This particular statistic went on to become the biggest artefact associated with the pre-reform economic crisis in 1991. Because India does not have monthly trade and foreign exchange figures before 1990, it is difficult to ascertain whether the foreign exchange crisis in 1991 was the most severe the country ever faced. However, monthly average calculations based on annual import and foreign exchange reserve numbers since 1970-71 do show that the pre-reform crisis was indeed the most severe. Arguments over the roots of this crisis triggered a sharp debate among various economists back then, and the basic tenets of this continue to be relevant today.
1990-91
2003-04
‘An idea whose time has come’: The 1991 Budget’s case for economic liberalisation
The Indian economy had its share of fiscal, inflationary and balance of payments crisis even before 1991. Where the 1991 Budget differed was in its firmness to unleash wholesale policy reform. The speech articulated this unequivocally.
“Macroeconomic stabilisation and fiscal adjustment alone cannot suffice. They must be supported by essential reforms in economic policy and economic management, as an integral part of the adjustment process, reforms which would help to eliminate waste and inefficiency and impart a new element of dynamism to growth processes in our economy. The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production to utilise for this purpose foreign invest
2019-20 ment and foreign technology to a much greater degree than we have done in the past, to increase the productivity of investment, to ensure that India’s financial sector is rapidly modernised, and to improve the performance of the public sector, so that key sectors of our economy are enabled to attain an adequate technological and competitive edge in a fast changing global economy.”
The real liberalisation push came not in the Budget but via drastic changes in industrial and export-import policy which were announced with the Budget. In his essay The Road to the 1991 Industrial Policy Reforms and Beyond published in the collection India Transformed: 25 Years of Economic Reforms, former Reserve Bank of India deputy governor Rakesh Mohan (who was then working in the industry ministry) provides an account of Singh’s firm resolve to push the reform process.
“Within a few days of his appointment (as finance minister), Manmohan Singh called a meeting of all the secretaries of the major economic ministries and the chief economic adviser... Manmohan Singh outlined the full economic reform programme that was to be followed over the next five years — and more importantly, over the next six weeks. The latter included immediate action to be taken on industry policy. He said quite clearly that he had the full mandate of the Prime Minister to do whatever had to be done to solve the crisis... Since he knew that some of the mandarins present were not on board with the kind of liberalising economic reforms envisaged, he added: “If any of you have any difficulty with the proposed reform programme, we can find other things for you to do!” This was perhaps the most firm and forceful that I ever saw Dr Manmohan Singh.”
The unfulfilled promise of 1991 industrial policy reform and continuing quest for a new industrial policy
The 1991 Industrial Policy document looked at five major areas: industrial licensing, foreign investment, foreign technology agreements, public sector and
The Monopoly and Restrictive
Trade Practices (MRTP) Act of
1969. In all these areas, the policy thrust was towards removing restrictions on entry of capital, both foreign and domestic. Industrial licensing was abolished in all sectors except 18 industries where it was preserved on account of security and strategic concerns. The policy also said that the “portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, hightech and essential infrastructure”. This was the first signal of withdrawal of government from business — a policy that would gain further momentum with the disinvestment of public sector enterprises, a process which continues to unfold even today.
While private industry has made significant achievements in India in the three decades of economic reforms, the cherished goals of the 1991 industrial policy are still unrealised to a large extent, especially when they are seen from a macroeconomic lens. The share of manufacturing in GDP has not increased much. It was 14.5% in 1991-92, and stood at just 17.1% in 2019-20, the year before the pandemic disrupted economic activity. The stagnant share of manufacturing even after three decades of reforms is the biggest proof that there are other structural impediments to an industrial revolution in India.
That India has not been able to realise the objective of increasing the efficiency and international competitiveness of its industrial production can be seen from the composition of its exports. The World Integrated Trade Solution (WITS) database of the World Bank uses a 2000 paper by economist Sanjaya Lall to classify exports by their level of technological sophistication. There are five mutually exclusive categories in this classification: primary (rice, tea, petroleum, etc.), resource-based (vegetable oils, cement, etc.) low technology (textile fabrics, jewellery, etc.), medium technology (passenger vehicles, industrial machinery, etc.) and high technology (turbines, pharmaceuticals, etc.) products.
The share of high technology exports in India’s export basket has barely increased; from 2% in 1991 to 6% in 2019, the latest period for which this data is available. For China, this share increased from 9% in 1992 to 35% in 2019. (See Chart 3)
While India did enjoy some success in exporting medium technology goods, whose share increased from 11% to 21%, this has not been an unambiguous blessing. This year’s Economic Survey made this point in the most effective manner when it attributed Bangladesh’s export success to its prioritisation of labour-intensive commodities unlike India. While Bangladesh’s export basket is in keeping with its labour abundant reality — textiles, footwear and apparel constitute 90% of its exports — around 40% of India’s exports is capital or technology intensive, the survey pointed out. Using the Bangladesh export example, the survey asked the country’s exporters to learn from this and specialise in products in which India is competitive. As India continues to experiment with various kinds of policy tools to promote industry, be it the Make in India programme or the latest Production Linked Incentive (PLI) scheme, the question of an effective industrial policy is as relevant and perhaps elusive as it was in 1991.
To be sure, economic reforms did play a critical role in the rise of IT industry in India. According to NAASCOM, the industry association of India’s IT industry, the IT sector is a $194 billion industry which employs 4.47 million professionals and contributes around 8% of India’s GDP. The IT sector also generates significant export earnings for the country; $128.6 billion in 2019-20, according to data from RBI.
The rise of India’s IT industry would not have been possible if the pre-reform restrictions on imports and foreign currency use had not been lifted, which led to the absurd situations such as IT companies having to keep waiting for approvals to import computers. Writing in the collection India Transformed: 25 Years of Economic Reforms Infosys founder Narayana Murthy also talks about two critical reforms which were critical in the growth of the IT industry in India. The first was a removal of condition of multinational companies necessarily diluting equity holding in their Indian subsidiaries to 40%. This encouraged global IT giants to set up entities in India and generated significant positive spill over effects for the domestic players. The second was the abolition of the office of Controller of Capital Issues (CCI) which had a mandate to decide on the pricing of Initial Public Offerings of companies. The officer did not have the necessary skill-set to evaluate business prospects of evolving sectors such as IT. The CCI had valued Infosys shares at ₹11 in 1990. The company finally got listed in 1993 at ₹95 per share, after it could work with specialised investment bankers before listing, once the office of CCI was abolished.
The question of fiscal consolidation
One of the biggest milestones of India’s post-reform phase was the adoption of the Fiscal Responsibility and Budgetary Management (FRBM) Act in 2003. The FRBM Act gives a legal mandate to the Union government to keep its budgetary deficit under check. The original Act called for an elimination of revenue deficit and bringing down the fiscal deficit to