Manmohan Singh as a Finance Minister And 1990-91 Crisis

In 2018, Manmohan Singh said in an interview-"I went to the office as usual. Narasimha Rao traced me to the UGC and said where are you. I said I'm in the UGC. He said hasn't  Dr. Alexandra mentioned to you what we have for you. I said I didn't take him very seriously. And Narasimha Rao Ji said: No, you go and dressed up and come for the swearing-in ceremony. So that's how I became finance minister. So people say I'm an accidental Prime Minister. I'm also accidental finance minister."

Before his tenure as The Finance Minister of India- Dr. Manmohan Singh started his administrative journey while working at United Nations. Lalit N. Mishra, Deputy finance minister in 1966-67 and also performed duties and services as Minister Of Railways, hired him as an advisor in the Ministry of Commerce and Industry. Manmohan Singh was also the Chief Economic Advisor, Governor of RBI, and lead Planning Commission.

Dr. Manmohan Singh and Economic Crisis in the 1990s

In 1990-91, because of the gulf war, there was an intense increase in oil prices which led to the depletion of foreign exchange reserves. As a finance minister, he had to bring reforms to avert the crisis and he did bring many reforms which shaped the Indian economy back in the 90s. 

Happenings of events in 1990-91:- 

-India's fiscal deficit was around 8%-9% of the GDP.

-Currency overvaluation was the major cause of the crisis.

-Accumulation of foreign debt.

-Huge balance of payment deficit.

-Current Account deficit was near 3%-4%.

-Foreign reserves of India were $1.2 Billion(in January 1991) which got sapped by half by June (insufficient to be continued for three weeks of imports).

-Increase in oil prices because of the Gulf War  1990-91.

-Reduction in remittance from the Indian workers.

-Devaluation of the rupee

-Preparations to mortgage gold reserves to the Bank of England to get cash reserves.

-Collapse of Soviet Bloc

-The government was financially backed by IMF.

- The World Bank stopped its assistance and IMF suspended its loan program to India.

-Investors started taking money out of the market.

Reforms and Strategies- 

In 1999, India was standing up against a painful predicament, and Dr. Manmohan Singh was placed in the office of Finance Minister. Confronting the economic crisis, Singh brought several policies and reforms to bring India toward liberalization and make India debt free. 

J. Bradford Delong mentioned in an article- "In the absence of the second wave of reforms in the 1990s it is unlikely that the rapid growth of the second half of 1980s could be sustained"

•Deregulation-  

The party when opposed the step of deregulation, Singh explained to the party that if the step is not taken the economy will surely collapse. Narasimha Rao allowed the Finance Minister to take the steps for deregulation. It initiated a new FDI policy for automatic approval and ended public sector monopoly in many sectors.

In sectors like telecommunications, deregulation has increased the competition and decreased the prices too. 

The new industrial policy suggested the abolition of the MRTP act which prohibited competition in the market and the approach suggested that the pre-entry scrutiny of investment decisions by MRTP companies is no longer required. The current Competition Act 2002, promotes healthy and fair competition rather than prohibiting competition in the economy.

Price controls on cement and aluminum were abolished. Relaxation and decontrol in cement also did away with the black market. Expansion in production brought prices down to controlled levels. 

Deregulation helps to remove the entry barriers which in turn helps new businesses to enter markets.

•Liberalization-

The July 1991 liberalization package opened the door for foreign direct investment to make the country's economy more market-oriented and service-driven. It replaced the positive list approach of listing license-free items on the OGL list with a negative list approach. Singh took the Indian economy towards liberalization by abolishing the license raj, devaluation of the Indian rupee, relaxation of industrial controls, etc.

•Ending License Raj- 

 Rao and Singh implemented policies to change India's socialist economy to a capitalistic one. It abolished the license raj by removing licensing restrictions for all industries except for 18.

•Devaluation- 

"The crisis was caused by currency overvaluation and current account deficit." India during the mid-eighties started having a balance of payments problems. Large fiscal imbalances created a predicament for India and had a spillover effect on the trade deficit. In 1980, India borrowed huge amounts from international lenders as a result it was unable to service its debt, and foreign exchange reserves come to an end. The government allowed the decision to devalue the Indian rupee. The devaluation of the rupee took place in two phases within three days. The Indian rupee was devalued by 9% against major currencies and then by 11%  within two days to create exports more competitive. So Singh devalued the Indian rupee by 20%  which boosted the exports. Mr. Rao's speech which stated the importance of such reforms and as reported by the New York Times-" Mr. Rao who was sworn in as the Prime Minister last week, has already sent a signal to the nation and the I.M.F. that India faced no "soft options" and must open the door to foreign direct investment." The endeavor of strong depreciation of the currency rupee corrected the overvaluation of the exchange rate.

•Pledging Gold- 

It became very difficult to borrow money from foreign after the downgraded bond ratings by Moody. The government was unable to pass the budget in February 1991. World Bank and IMF stopped their assistance and loan program to India. The Indian government was forced to take steps that included pledging gold to maintain foreign exchange reserves. Singh made RBI pledge gold with the Bank Of England (raised $400 Million) and Union Bank of Switzerland as collateral. This action helped to raise foreign exchange, meet debt obligations and get financial assistance. SBI sold 20 tonnes of gold to the Union Bank of Switzerland and raised $200 Million. Because of Singh's guidance, India took an emergency loan from IMF which amounted to $2 Billion in total.

•Decline in Imports-

The share of canalized imports in total imports started declining from 67 to 27%. This increased the imports of machinery and raw material. "Canalization is the monopoly right of the government for the import of certain items." 

•New Telecom Policy-

The New Telecom Policy was one of the sources of liberalization. The prompt shifts in technology led to the adoption of the New Technology Policy in 1999 which encouraged the development of telecom in rural areas. The policy made rural communication mandatory for all fixed service providers and provided reliable transmission media in all rural areas.

•IRDAI-

The Insurance Regulatory Development Authority of India was founded in 1999 for the speedy settlement of claims and opened the door to private entry.

•Relaxing Import Controls-

The government expanded the Open General Licensing list which relaxed the controls.

•The government also introduced tax deducted at source for bank deposits, etc. 

•The tax rate for corporates was increased from 5 to 45%.

•Mutual funds were opened for the private sector.

•Introduced a new trade policy and the abolition of export subsidies had a significant impact on the economy. 

•Reduced the import duty from 300 plus to 50%.

In 1991, Manmohan Singh presented the budget with the speech- "No power on earth can stop an idea whose time has come. 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."

This was the story of the remarkable growth of India and how Dr. Manmohan Singh played a role in averting the crisis.

Many reforms and strategies even after the 1991 crisis were implemented to pull India out of the situation. The government notified a committee for financial sector reforms and tax reforms.