The 1991 Economic Reforms: How Manmohan Singh’s Historic Budget Speech Reshaped India

Sub : Eco

Sec: External sector

Why in News

The economic reforms of 1991, led by then Finance Minister Dr. Manmohan Singh, remain a cornerstone of India’s modern economic history. This transformative moment addressed a grave fiscal crisis, marked by soaring deficits and dwindling foreign reserves, and laid the foundation for liberalization, privatization, and globalization in India.

Background: India’s Economic Crisis of 1991

The fiscal deficit had ballooned to 8% of GDP, driven by mounting government expenses.
India’s foreign reserves had dwindled, leaving the country with only three days’ worth of fuel.
By February 1991, inflation had soared to 13.7%, adding to the economic distress.
Collapse of the Soviet Union, India’s long-standing ally.
Gulf War, triggered by Saddam Hussein’s invasion of Kuwait, which skyrocketed fuel prices.

Manmohan Singh’s Historic Budget Speech:

Delivered on July 25, 1991, this speech was pivotal in addressing the crisis and outlining a vision for reform.
Acknowledgment of the Crisis: International trust in India’s economy plummeted after 1989 due to political instability and fiscal imbalances.
Internal public debt had reached 55% of GDP, creating unsustainable pressure.
Singh stated, “Neither the Government nor the economy can live beyond its means year after year.”
The Reform Agenda

- Key Priorities:
  - Stabilizing the macroeconomic environment.
  - Reducing fiscal deficits through structural adjustments.
  - Reforming industrial policies to boost efficiency and global competitiveness.
Singh criticized the underperformance of the public sector, emphasizing its need for modernization and higher productivity.
He advocated for greater reliance on foreign investments and technology to drive growth.

Key Components of LPG Reforms:

Liberalization:
- Abolition of the License Raj, reducing the need for licenses and permits for businesses.
- Deregulation of interest rates and reduction in statutory liquidity ratios.
- Reduction in tariffs and import duties to encourage foreign trade.
Privatization:
- Disinvestment: Selling government stakes in public sector enterprises to improve efficiency.
- Encouraging private investment in sectors previously reserved for the public sector.
Globalization:
- Permitting higher levels of FDI in various sectors to integrate with the global economy.
- Transition to a market-determined exchange rate system.

Outcomes and Impacts

- Post-reforms, India’s GDP growth rate accelerated significantly.
- FDI inflows increased from $97 million in 1990-91 to $81.72 billion in 2020-21.
- The manufacturing sector’s productivity saw substantial growth.
- The services sector’s contribution to GDP increased from 37.2% in 1990-91 to 54.3% in 2020-21.

The Global Parallel: Lessons from USSR’s Perestroika:

USSR’s Reform Attempt: Mikhail Gorbachev’s perestroika (restructuring) and glasnost (openness) aimed to revive the Soviet economy in 1988 but ended unsuccessfully.
The Soviet Union eventually collapsed in December 1991.
India’s Approach: Unlike the USSR, India combined stabilization measures with robust structural reforms, avoiding a similar fate.