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On the 20th anniversary of economic reforms, Priya Ranjan Dash, who reported the events as they unfolded and continues to do so, maps the progress of the country over the two decades

July 24, 1991 marks the launch of economic reforms in India. On that day, a minority Congress government, led by Narasimha Rao, which had assumed office on June 21, 1991, presented the budget for 1991-92 and the industrial policy in Parliament, unshackling the economy from rigid state controls and licence-permit raj and ushered in liberalisation and globalisation.

At 5 pm, as it was customary from the colonial days up to 2000 to time India’s budget to the opening of the London Stock Exchange, finance minister Manmohan Singh got up to present the Union budget. Singh, an internationally-known technocrat and economic policy adviser, had been handpicked by Rao for the job to boost confidence of multilateral aid agencies and investors in a crisis-ridden economy. The air was thick with expectations of major policy reforms. His words dismantled several pillars of economic policy edifice, especially in foreign investment, capital market, banking, taxation and spending on subsidies and public sector. That budget went down as a landmark in the country’s transformation from a slow-moving shortage-prone Nehruvian centrally-planned socialist economy to the world’s fastest-growing free market.

Hours before the budget, the Rao government also tabled in Parliament an industrial policy statement that turned on their heads socialist excesses such as the Industrial Policy Resolution of 1956 and the Industries (Regulation and Development) Act, 1951, with regard to licensing, role of public sector and monopoly houses.

The setting

These were dramatic and sweeping policy changes. The weeks preceding July 24, 1991 were no less dramatic – they too had witnessed major reforms involving foreign exchange management and trade. But at that time those actions were mistaken by most observers as fire-fighting, aimed at averting external payment default. No one thought then that India had decisively changed course.

Not until Singh ended his long budget speech more than two hours later. Quoting Victor Hugo -- “No power on earth can stop an idea whose time has come” – he said: “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. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

The most dramatic and bold reforms were undertaken within the first fortnight of the Rao government. Rao found that the government was confronted with an unprecedented external payments crisis, much deeper than could be imagined from outside. The situation was so grave that he asked Singh to take charge of the finance ministry and start working even before the portfolio allocation of the cabinet had been officially announced. Eventually, when the portfolios were distributed, Rao preferred to keep the second most important economic ministry, industry, with himself and got Harvard-educated lawyer P Chidambaram, who had served in Rajiv Gandhi government as internal security minister, to take charge of the commerce ministry, but as a minister of state (independent charge).

On July 12, 1991, India’s foreign exchange reserves touched a nadir at $250 million (today reserves are about $314 billion). The reserves were barely enough to fund oil imports for two weeks. There was no money for other urgent and essential overseas payments. The proceeds from mortgaging 47 tonnes out of India’s gold reserves to the Bank of England and 20 tonnes to the Union Bank of Switzerland, by physically moving the gold through Bombay airport on May 21, 1991 -- the day Rajiv Gandhi was assassinated -- had been parked with State Bank of India in New York as a part of a $600-million fund required to roll over overseas commercial credit taken for oil imports almost on a daily basis.

The first wave

Thus, the reforms earnestly began in the sultry afternoon of July 1, 1991. Singh called journalists to explain why rupee was devalued against world currencies by 10 per cent. He was candid that the government had little choice but to devalue the currency to try and encourage NRIs to keep deposits with Indian banks and bring in more. There were reports originating from the Gulf that the State Bank of India, at the vanguard of India’s proud record of having never defaulted on international payment obligations, was about to default on account of a fertiliser import deal made by the government-owned trading company, MMTC. International creditors, banks and financial institutions viewed Indian rupee to be artificially pegged too high against world currencies. The official exchange rate was at least 25 per cent overvalued compared with the illegal but widely prevailing black market and hawala rates. While the devaluation was a desperate action to assign a realistic value to the rupee, Singh projected this first step in currency management policy reforms as an action to encourage exports.

But the 10 per cent devaluation was not enough to earn international confidence in India’s currency policy. Even without the nudge from the IMF delegation visiting Delhi, the Rao government realised that more drastic policy reforms were needed to stabilise the external sector of the economy. So, on July 3, just two days after the first devaluation, the rupee was again devalued by 10 per cent even as a group of officials, including Singh, Chidambaram, commerce secretary Montek Singh Ahluwalia, a World Bank economist who had served in Rajiv Gandhi’s PMO, and MIT-educated Jairam Ramesh, who had been drafted into Rao’s PMO from the planning commission, went into a huddle.

There was an IMF policy paper before the group. One problem with the paper was that it was exactly the opposite of the trade policy priorities of the new government that Chidambaram had enunciated at a news conference on June 29, 1991. While he had talked about the government increasing incentives for exports, the proposals before the team were for the abolition of all export subsidies, starting with the biggest incentive called “cash compensatory support”. The problem was that the extremely unpopular move for exporters would make Chidambaram’s task of leading an export drive difficult. It didn’t make sense for a country desperate for foreign exchange. But IMF knew better.

For the international lending agency, the crucial issue was the government’s borrowings, which it wanted to be cut. It was the key condition for IMF loans to countries facing balance of payments crisis. IMF calculated that elimination of export subsidies could help the Indian government shave off almost half a percentage point from the 8 per cent deficit (as a proportion of GDP that was Rs 5,15,000 crore in 1991-92). IMF also saw the value of rupee, which had been artificially pegged high, as a disincentive for exports and was of the view that devaluation would boost exports. After some deliberations, the group agreed that it was time for India to overturn its trade policy. They decided to take the proposals to the prime minister.

A press conference was called at 11 am the next day in Udyog Bhavan, which housed the commerce ministry. The reporters had no clue of what was coming next, after the government had done a two-stage devaluation in three days. Almost two hours passed but neither the minister nor the secretary was anywhere to be seen. The delay increased the suspense. As the clock struck 1 pm, there was a buzz that Chidambaram and Ahluwalia, accompanied by Ramesh, had just arrived from PMO, where an IMF team had been stationed, and the press statement was being redone to accommodate last-minute changes agreed with the IMF team. It was not before another hour that Chidambaram and team were ready to face reporters. That was how the first of the new policies of liberalisation and globalisation -- trade policy reforms -- was born.

Was it the crisis that forced those early reforms? Was it the terms set by IMF? Or was it the government on its own volition? To this, the most probable answer is: All of the above. The question has been repeatedly put in the past 20 years and would perhaps continue to be asked without reaching a definite conclusion. Twenty years on, the fact remains that in 1991 India turned a fresh chapter in its long history.

Foreign hand

The countdown to the July 24 policy announcements began when an IMF delegation landed in New Delhi at the end of June in response to India’s SOS for a bailout from the deep foreign exchange crisis. Soon after taking charge, the Rao government had sounded IMF about the urgent need for a larger loan than the one known in IMF parlance as ‘contingency fund facility’, which the previous short-lived Chandrashekhar government, propped up by Congress from outside, had availed. India wanted the ‘extended fund facility’. Singh, who had dealt with IMF in his previous capacities, including RBI governor, was aware that the international lender of last resort dictated big ‘conditions’ to governments that took big loans. Many others in government were not aware of what it involved.

Rao, a linguist and a scholar of philosophical literature and an astute politician who had served as Andhra Pradesh chief minister and Union HRD and external affairs minister, had been catapulted from semi-retirement to lead the Congress government following the assassination of the party’s leader and former prime minister Rajiv Gandhi in the middle of the general election on May 21, 1991. Rao did not care for the finer intricacies of high finance or economics, but knew enough to understand that tumultuous changes were sweeping the world -- the socialist block led by the Soviet Union had collapsed, China had embraced capitalism, and liberalisation and globalisation were the order of the day. Rao also sensed a certain preparedness in Congress under Rajiv for “taking India to the 21st century” as the slogan went. The party was not yet ready to openly embrace market reforms of the kind IMF recommended, but Rao was willing to play on the sentiment for economic change built since Indira Gandhi’s return to power in 1980 and during Rajiv’s prime ministership between 1984-1989 towards industrial modernisation, technology upgradation and consumer demand. In any case, Rao had no option but the back his economist finance minister to steer the country out of the crisis.

It is a different matter that it had to unravel itself in a couple of years in 1993-94 and Rao had to slow down reforms after a combination of adverse developments -- the breaking out of the Harshad Mehta securities scam and the Congress defeat in Andhra Pradesh and Karnataka to regional parties, which made populist promises of Rs 2 a kg rice and free power to farmers.

Since 1980s, Indira and Rajiv governments had attempted to tweak economic policies for modernisation the economy, greater export competitiveness of the industry and a larger role for the private sector to free government resources for social development. From the Asian Games in 1982 and the advent of colour television, there was an Indian equivalent of a Soviet glasnost that created a clamour for quality modern products among consumers. The government of the day remained in denial mode, often terming the tendency as undesirable “conspicuous consumption”, but consumerism in the Indian market was taking strong roots.

During the decade, policies were altered here and there to give vent to this demand. That brought in assembly operations by foreign companies in several consumer goods segments. Japanese two-wheeler companies and carmaker Suzuki came in joint ventures and international consumer electronics brands were imported as CKD units and assembled here. This led to a 12 per cent manufacturing growth in the second half of 80s. India has never experienced that high a manufacturing growth in any other block of five years. In GDP too, the 1980s, by averaging 5.7 per cent growth, broke the ceiling of the notoriously termed ‘Hindu rate of growth’ of the previous decades. The second half of the 1980s also witnessed high export growth of up to 20 per cent, but the import content of these exports such as gems and jewellery was high and value addition was low. This high import-led growth of the economy was one of the reasons for the external payments crisis in the early 1990s. However, it proved that India had the business enterprise to grow fast and it possessed a vast and growing middle class consumer market to sustain high GDP growth for a long time.

So, in January 1992, when Rao went to the World Economic Forum in Davos, Switzerland, to hard sell India’s new policies, and he said India’s market was “mind boggling” it carried great conviction. Many of the best and biggest of world enterprises believed that if they didn’t enter India they would miss the bus.

Gradual approach

While the first burst of reforms, signalling a systemic shift to a more open economy with greater reliance on market forces and a larger role for private sector and foreign investment was swift and radical, they were carried on for the past 20 years in bits and pieces. It is hard to find notable reversals, but reforms have usually stalled and resumed. The delay, often a byproduct of India’s chaotic political economy, cost the country even faster growth, but also helped absorb the pain of reforms. Reforms went wrong too, like in the power sector for the first seven so called fast-track projects, including Enron. The sequencing of reforms was not always proper.

The gradual approach reduced political controversy and enabled a consensus of sorts to evolve on many reforms. It also meant that consensus at each point represented a compromise -- not the best policy but the best possible policy. The result was a process of change that was for large part opportunist and fitful. In fact, there were many shortcomings. However, it is evident that reforms have made India a growth engine the world wants to hitch on, a long way from an economy that had almost collapsed.

Trade policy

Before reforms, trade policy was characterised by high tariffs, pervasive import restrictions and export controls. Import of manufactured consumer goods was banned. For capital goods, raw materials and intermediates, imports were only possible with licences. Trade policy reforms on July 4, 1991 promised to put an end to a large number of licences that exporters were required to obtain to import machinery, components and raw materials. It expanded the scope of replenishment licences and introduced what was called value-added advance licence. These licences were later made transferable for any importer of industrial machinery, raw materials and consumables. Import licensing was abolished relatively early for capital goods and intermediates, which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime.

Removing controls on imports of machinery and intermediates was relatively easy because the number of domestic producers was small and the industry welcomed the move as it became more competitive. It was much more difficult to do so for finished consumer goods. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, in part because of a ruling by the World Trade Organisation.

In the 1991-92 budget, Singh cut peak customs tariff to 150 per cent from 300 per cent, signalling India’s intention to open its market progressively. But reduction of tariff protection for domestic producers was a slow affair. The weighted average import duty fell from 72.5 per cent in 1991-92 to 24.6 per cent in 1996-97. In the wake of the Asian currency crisis, it then rose by about 10 percentage points in the next four years. In 2002, the government cut the peak duty rate to 30 per cent.

Industrial policy

The industrial policy statement of July 24, 1991, while dismantling Nehruvian vision of commanding heights for public sector, ironically cited the goal of fast industrialisation he had set to justify reforms. At the time of the 1956 industrial policy resolution, capital was scarce and the base of entrepreneurship not strong enough. Hence, it gave primacy to the state to assume a predominant and direct responsibility for industrial development. With the objective of unleashing the entrepreneurial spirit, industrial licensing was abolished for all industries, except in 18 specified areas, irrespective of the level of investment. The specified industries were chosen for reasons related to security and strategic concerns, social reasons, problems related to safety and over-riding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. The new policy dismantled most central government controls. Barring a few reserved solely for the public sector, private sector was allowed into all other industries. The list was subsequently to be pruned drastically to just three -- defence, aircraft and warships, and atomic energy generation.

The requirement that investments by large industrial houses (then defined as one with turnover of Rs 100 crore) needed a separate clearance at every stage of doing business under the Monopolies and Restrictive Trade Practices Act was dispensed with. The Act itself was replaced by the Competition Act in 2002, providing for the competition watchdog to prevent misuse of monopoly. Since June 1, 2011, the competition commission has been empowered to scrutinise large M&A deals.

A policy of reserving manufacture of certain items for the small-scale sector was also diluted in phases. While there were about 800 items reserved for SSIs before reforms in 1991, today there is practically no restriction on any investment in plant and machinery to make those items. Earlier, investment in plant and machinery to make reserved items such as garments, shoes and toys couldn’t exceed Rs 1 crore (subsequently raised to Rs 3 crore). This meant competitiveness and scale of several Indian industries were severely restricted. SSI dereservation was one area of slow and steady reform since a radical change in policy was unacceptable. Only 14 items could be removed from the reserved list as late as 2001 and another 50 in 2002.

Though industrial policies have seen the most reforms, the process is not complete. Even the annual report of the World Bank’s private sector funding arm, IFC, still brings out the difficulties of doing business in India. Industry needs several state government and local administrative clearance. Of late, land and environment have been the two biggest areas of regulatory concern.

Foreign investment

While freeing Indian industry from official controls, opportunities to promote foreign investment in India were also significantly widened. In the first wave on July 24, 1991, direct foreign investment in high priority industries, requiring large investment and advanced technology, was allowed up to 51 per cent of equity. This group of industries were known as the ‘Appendix I industries’. These were areas in which Fera companies (foreign firms holding equity above 26 per cent) were allowed to invest on a discretionary basis. This change made approval automatic. The government also appointed a foreign investment promotion board to negotiate with large foreign firms and provide the avenues for large investments in the development of industries and technology.

India’s FDI policy now allows 100 per cent foreign ownership in a large number of industries and majority ownership in all except banks, insurance companies, telecommunications and airlines. Procedures for obtaining permission were greatly simplified by listing industries that are eligible for automatic approval. Foreign investors only need to register with the Reserve Bank of India.

In 1993, foreign institutional investors were allowed to buy shares of listed Indian companies, opening a window for portfolio investment. Now new dynamic firms have displaced older and less dynamic ones: Of the top 100 companies ranked by market capitalisation in 1991, a majority have fallen out of the group.

Fiscal discipline

Fiscal profligacy was the cause of the balance of payments crisis. In 1990-91, the combined borrowings of the centre and states had risen to 9.4 per cent of GDP. Fiscal correction was the most significant of the reforms Singh’s first budget introduced and the balance of payments crisis was over by 1993. The government got back the mortgaged gold and India declined to take the last instalment of the IMF loan to regain policy space. Although fiscal reforms have long-term utility, they have not progressed on a straight line, gyrating to the exigencies of India’s political economy. So, over the 20 years, at certain points of time, such as in 1997-98, the government faced precarious fiscal situation, worse than in the build-up to the 1991 crisis. The Fiscal Responsibility and Budget Management Act of 2003 aims to eliminate the centre’s revenue deficit and limit its borrowings to no more than 3 per cent of GDP -- a goal post that keeps changing.

There have also been sweeping reforms that lowered tax rates, broadened the tax base and reduced loopholes in both personal and corporate income tax. The 1997-98 budget presented by United Front government’s finance minister P Chidambaram has been a landmark in this regard. It cut the maximum marginal rate of both personal and corporate tax to 30 per cent. Of late, further direct tax reforms, including pruning the maze of exemptions and concessions, have been in the works in the form of the Direct Taxes Code.

Customs rates were cut and excise too has been lowered and is now concentrated around the Cenvat rate of 10 per cent. The scope of service tax, first levied on specified services in 1994, has expanded to cover more than 120 services. At the state level, the introduction of value-added tax (Vat) in lieu of sales tax has been a major reform. But the most significant tax reform in the form of a single unified goods and services tax (GST) has missed three deadlines and now awaits implementation from April 1, 2012.

Energy & infrastructure

India had a huge infrastructure deficit 20 years ago. Its growth potential is still constrained by the lack of basic facilities, especially power, roads, rail connectivity and efficient ports, although much progress has been made in telecommunications and aviation.

These services were provided by public sector monopolies. Save in railways, reforms opened up infrastructure to private and foreign companies. The opening up happened because large investments were needed to expand capacity and improve quality. However, the difficulty in creating an environment that would make it possible for private investors to enter on terms that would appear reasonable to consumers, while providing an adequate risk-return profile to investors, was greatly underestimated. As a result there were many false starts and disappointments.

The greatest disappointment has been in power, the first sector opened for 100 per cent private and foreign investment in generation in 1992. Private investors were expected to produce electricity for sale to state electricity boards, which would control transmission and distribution. However, SEBs were financially weak, partly because tariffs for many categories of consumers were too low or free and also because very large amounts of power were lost in transmission and distribution -- mainly due to theft with the connivance of staff. Private investors such as Enron were guaranteed purchase of electricity by state governments backed by additional guarantees from the centre. These arrangements ended up in scams and failures. A very few reached financial closure and some of those which were implemented ran into trouble.

Independent statutory regulators were established to set tariffs and power projects were put on competitive bidding. The mistake in opening up generation ahead of transmission and distribution was realised and corrected. India seemed to have got its power reforms act together with the passage of Electricity Act in 2003. But it is only now the Act is coming up for full implementation as aspects such as the freedom for consumers to access multiple distributors got stuck in political opposition from some states.


Even the controversy over the 2G spectrum scam, estimated to have caused a notional revenue loss of Rs 1,76,000 crore to the government, has not taken the shine off the telecom revolution. But telecom reform too had a false start because private investors offered excessively high licence fees that they could not sustain, which led to a protracted and controversial renegotiation of terms. Reforms have, however, brought India a long way from waiting for 8-10 years for a telephone connection to over 100 per cent teledensity in a city like Delhi and over 800 million subscribers of mobile phones in the country. It’s hard to imagine that just one in 600 people had a phone in 1991. Instead of only a government department providing telecom service, India now has 13 operators in private sector jostling for market share and consumer attention.


Civil aviation and ports are two other areas where reforms appear to have succeeded. Two private sector airlines, which began operations after the reforms, have more than half the market for domestic air travel. The merged public sector carrier, Air India, is waging a grim battle for survival as travellers have many no-frill services and full-service airlines to choose from in an open sky. Major airports in the country are privatised and Delhi last year got its T3 – the sixth largest airport terminal in the world.


It is a work in progress for India’s highways network. The major arterial routes -- the Golden Quadrilateral, linking the four metros of Delhi, Mumbai, Kolkata and Chennai -- were just two lanes in most stretches and suffered from poor maintenance and congestion. In 1998, a tax was imposed on petrol and it was later extended to diesel, the proceeds of which were earmarked for national highway development. This helped finance a major programme of upgrading highways connecting Delhi, Mumbai, Chennai and Kolkata to four lanes or more. Highway reforms also introduced tolls. A few toll roads and bridges in areas of high traffic density were also given out to the private sector.

Financial sector

Wide-ranging reforms in the banking system and capital markets were undertaken relatively early and private and foreign firms were allowed into life and general insurance in 2001. The 1991-92 budget laid the foundation for banking sector reforms, which were progressively accelerated following the recommendations of the Narasimham committee in November 1991. Banking reforms included dismantling the complex system of interest rate controls, eliminating prior approval of RBI for large loans and reducing the statutory requirements to invest in government securities. There were steps too such as introduction of capital adequacy norms and strengthening banking supervision. In 1993, measures to increase competition such as licensing of private banks and freer expansion by foreign banks were allowed. The government also allowed dilution of its stake in public sector banks up to 51 per cent, letting them raise public equity.

Reforms in the stock market were accelerated by the Harshad Mehta scam in 1992 that revealed serious weaknesses in regulation. The Janakiraman committee put the size of the irregularities at Rs 3,000 crore. The market regulator, Sebi, had come into being in 1988 through an executive order of the Rajiv Gandhi government, but it had no statutory powers. Market reforms, therefore, included establishment of a statutory regulator; promulgation of rules & regulations governing participants in the market and also activities like insider trading and takeover bids. The introduction of electronic trading to improve transparency in establishing prices and dematerialisation of shares to eliminate the need for physical movement and storage of paper securities followed. India’s stock market is now widely acknowledged as well regulated. This is to an extent reflected in the robust participation of foreign institutional investors who were allowed into the market in 1993.

Private sector mutual funds were allowed in 1991. Following the collapse in 2001 of UTI, the dominant public sector mutual fund, the face of the industry has completely changed. Although UTI did not enjoy a government guarantee, it was widely perceived as having one. The need to open the sector to private insurance companies was recommended by the Malhotra committee in 1994, but there was strong political resistance. It was only in 2000 that the law was finally amended to allow private sector insurance companies, with foreign equity up to 26 per cent.


The reform process has been ambivalent on sale of government’s stake in public sector undertakings. Initially, the government adopted a limited approach of selling a minority stake in PSUs while retaining management control, a policy described as ‘disinvestment’ to distinguish it from privatisation. A 20 per cent disinvestment in PSUs was first proposed by finance minister Yashwant Sinha in the interim budget for 1991-92. This was taken forward by Singh by proposing to sell stake to state-owned financial institutions. The principal motivation was to mobilise revenue.

The NDA government, headed by AB Vajpayee, adopted the policy of strategic sale, divesting majority shares and management control to a private sector partner. In the process, the first privatisations such as those of breadmaker Modern Bakery and aluminium producer Balco were done. But strategic sales ended with the UPA government assuming office in 2004. The government has, since its return to power in 2009, however, followed an ambitious programme of disinvestment. The present policy is to list PSUs in the market and increase their public shareholding without the government losing management control in profit-making companies.


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