Manmohan Singh, the day before his historic July 1991 Budget. (Express Photo: Praveen Jain) Manmohan Singh, the day before his historic July 1991 Budget. (Express Photo: Praveen Jain)

TOMORROW will mark 25 years since the opening of the economy began with the devaluation of the rupee on July 1, 1991.

And yet the process of economic reforms in India continues to be trapped in the circumstances in which it began: act only when there is a crisis. That’s one of the key takeaways for its prime architect, then Finance Minister and former Prime Minister Manmohan Singh.

Reflecting on the reforms that he, working with Prime Minister P V Narasimha Rao, set in motion, Singh opened up to The Indian Express, in a rare conversation earlier this year, as he mapped the road ahead: opposition from within, role of the Prime Minister’s “political management,” fear of “blood and tears,” and the crying “need to revisit old orthodoxies.”

READ | On this day 25 years ago, an invaluable devaluation

Edited excerpts:

1991 and the Budget of July was a watershed in India’s economic and political history. There was so much done. Industrial de-licensing on Budget day, trade policy, exchange rate management and much more. How do you look back on that period? Were those ideas or solutions known already to policy-makers or were they imposed by multilateral lenders as critics claim?

I don’t see much originality in those. These were ideas which were being discussed inside the government and outside, too. All I did was put them all together in a coherent whole, when I got an opportunity. The Budget for 1991 set out the roadmap that we wanted to adopt for the next two to three years. It gave SEBI legal status. Before that, SEBI was no more than an advisory body. The banking system needed reforms and I announced the setting up of the Narasimham committee on financial sector reforms. Then, there were tax reforms.

Trade policy reforms were critical, weren’t they?

Yes. There was some work done earlier I think by Montek Singh (Ahluwalia).

P Chidambaram was very supportive. Without him, the trade policy would not have moved as fast as it did.

Is it true that the trade policy reforms were finalised in a matter of just two days?

That’s certainly true, as we were in a hurry. Chidambaram and I went to meet Prime Minister Narasimha Rao and the Prime Minister turned to me and said, ‘What do you think?’ and I said, ‘I entirely endorse it’. That was the end of it, and the Prime Minister put his signature on it.

What was the level of opposition to reforms? How did you surmount it?

There was a lot of opposition in the country and within the party (Congress). But Prime Minister Rao’s political management made it possible to overcome all that. I was a loner and had no group. Even in the Congress Parliamentary Party meeting, when the Budget was being discussed, there was a lot of opposition and the only people who supported me, (were) in favour of what I had done, were Nathuram Mirdha and Mani Shankar Aiyar.

One of the steps taken was on exchange rate management. What strategy did you have in mind?

We had to tackle the exchange rate at the start because there was a lot of speculation on the rupee’s future. And if we had not acted creatively then, the whole system would have been impacted with dire consequences. We did the exchange rate adjustment in two steps. The first step was to test the waters: what the public reaction would be, the reaction within the government and reaction from the opposition. So although there was opposition to the move, it was manageable. So I said by July 3 (1991), we must complete the full thing. C Rangarajan was the Deputy Governor (of RBI). Even then there was opposition. And Prime Minister Narasimha Rao had doubts over the second instalment of the exchange rate adjustment and told me, in fact, to stop it. But when I called up Rangarajan, he said that he had already shot the goal. Therefore, that was the end of it. He had already announced the new exchange rate. What we had announced was not any formal devaluation. We said that it was a market-driven adjustment.

That government had to mortgage gold because of the BoP crisis. What are your recollections?

By the time the government took over, one instalment of gold had already been mortgaged and dispatched abroad. I allowed the second one to go without much fanfare. That really shocked the country… the mess that the economy was in. I used that occasion to honour the commitment of the previous government to mortgage gold but at the same time, I sensitised the country on how serious the economic situation was, and that if we do not want to go down the disastrous path, reforms were the only answer.

What about sequencing of reforms — real sector first, financial sector later?

On financial sector reforms, we relatively had only a vague idea. It was only after we appointed the Narasimham committee to do banking reforms that we got going. In the first Budget, we also mentioned granting legislative status to SEBI and abolishing the Controller of Capital Issues. Some reforms we thought through committees. I appointed Raja Chelliah also to work on tax reforms. That couldn’t be done in a month. So we bought time. By the time I announced the second Budget in 1992, those recommendations were taken on board. We introduced VAT and started the process of reduction in Customs duties.

Wasn’t there resistance to new stock exchange?

The National Stock Exchange was strongly opposed by Bombay stockbrokers and captains of industry. I thought some competition is good. The exchange has given a very good account of itself.

One of the biggest changes was in allowing foreign investment in a closed economy.

I was going to England and I knew the city would be interested. So I had prepared for that route of reforms. It was also in London, if I remember, and I may be wrong, that I announced the opening up of the Indian markets to foreign investment. Over a period of time, we built it and moved cautiously and opened up a lot later.

Were you surprised by the improvement in many macro economic indicators after a year?

The economy recovered faster than we (had) thought. When I took over, I said that the next three years will be nothing but blood and tears. Ultimately, I said that I had confidence that the economy would emerge victorious from this crisis but there were no shortcuts. And the economy recovered faster. Inflation came down, the Balance of Payments situation turned around sooner than I anticipated.

What about ideological differences at the start of the reform process?

Well, when you are in a hurry, you don’t worry too much about ideological issues that will come in the way. I knew that if it did not work, I could have been the scapegoat. I was prepared for that.

How was the famous Bombay Club opposition to the reforms tackled?

The Bombay Club and traditional industrialists were opposed to it. I talked to a number of people — industry, politicians, people in state governments. I talked to the press also often then, and we slowly managed to overcome the resistance. In the very first week itself, there was opposition to the reforms agenda. So I managed to secure the support of P N Dhar, K N Raj, I G Patel and R N Malhotra. They came out with a statement supporting the reform process. I think the Left was against it.

Again, without A N Verma, the principal secretary to the Prime Minister, the support from the civil service would not have been as strong as it turned out to be. I wanted the PM’s Secretariat to be consciously involved in pushing the reform process.

Looking back now, how much of a change have those reforms signified to Indian industry 25 years on?

Certainly, Indian industry is much more confident. They are the children of the 1991 reforms. We removed wealth tax in the 1991 budget. That is one way in which the children of those who had wealth could put money honestly into their enterprises. Now they all feel that we did a good thing.

The fact is that some of the reforms launched in 1991 were being considered in the aborted Budget of the Chandra Shekhar government. What are your thoughts on that?

What I am saying is that what we did wasn’t original. There were ideas which were in the air. Several discussions had taken place but the political system was not responsive to implementing those reforms.

Halfway through, the government was hit by the 1992 stock market scam. How much of a setback was that?

It only gave a handle to the opponents of reforms to blackmail us. Fortunately, they didn’t find anything wrong in what I had done. They said that I should have been more active. In hindsight, there is always scope to do better. Even then, I submitted my resignation to the Prime Minister saying that since the constructive responsibility is that of the finance minister, I think it is appropriate that I resign. I gave the Prime Minister my letter of resignation, which he kept for six to seven days and sent it back later saying, ‘You continue’.

The 1990s were also marked by a convergence of like-minded policy advisors in the government and engagement of outside experts and economists to advise the government. How was it done?

I wanted to sensitise the people of India on the need to revisit old orthodoxies. It was therefore helpful when we got a group of young and learned people to back the process that we were embarking upon. So I got Nicholas Stern involved; Jagdish Bhagwati and T N Srinivasan; Vijay Joshi from Oxford. As early as 1973, I got Bimal Jalan from ICICI to join the government. Then, when I was the finance minister, I got Montek Singh to the finance ministry, brought in Shankar Acharya as chief economic advisor, Ashok Desai as advisor, Rakesh Mohan in the Planning Commission and Arvind Virmani in the Planning Commission.

Why was it difficult to do that subsequently?

Earlier, we could do all that because the Indian Economic Service was small and nobody felt threatened. So I could bring in a lot of young professional economists. But later, the IES felt that their opportunities for career advancement and promotions were being denied.

And similarly, lateral entry in the government was such a formidable challenge, wasn’t it?

But we managed to bring in Raghuram Rajan. I spotted him and first engaged him as an honorary advisor to the Prime Minister. Then when the position of the chief economic advisor fell vacant, we got him there and he told us that when the time for the RBI Governorship comes, he should be considered for the job. I was able to honour that commitment. P Chidambaram agreed with me, and that appointment turned out to be a creative one.

Having been a Governor of the RBI yourself, how do you see the differences between the central bank and the government?

There have always been differences between the finance minister and the RBI Governor. But in our time, the relationship was smooth. Rangarajan was a superb technocrat and I had known him for 20 to 25 years. During our time when I was the finance minister, we entered into a historic agreement with the RBI on doing away with automatic monetisation of the deficit. Rangarajan wanted it and I endorsed it. It was one way to ensure that financial policy was supportive of what we wanted to do. When I was the finance minister, I got on well with the RBI Governor.

But didn’t you offer to quit as RBI Governor when the government decided to take away the powers of the RBI on licensing of foreign banks?

I had strong feelings on that. Ultimately, the government saw reason and it didn’t happen. As RBI Governor, I felt strongly that the step would be detrimental to the status of the RBI.

Was your term as finance minister professionally satisfying?

Well, I came to India soon after a bypass surgery. When the offer came to become finance minister, my friends advised me not to take it up as it could kill me, they said. So I said, ‘how does it matter if I die in the process of serving one’s own country, it is alright’.

Twenty-five years later, with the economy now way bigger, and with a greater acceptance to opening up, why is it difficult to carry out reforms?

I think in a crisis, we act constructively. When it is over, status quo takes over. But I think it is remarkable that even if the process was put in place by a Congress-led government, the next United Front government, led by H D Deve Gowda and I K Gujral, carried forward the process. In fact, Chidambaram presented what came to be known as a ‘dream budget’. Then came the BJP government which also continued the reform process.

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