Manmohan Singh’s Budget when India was in serious trouble
Manmohan Singh during Budget speech said, their new government, which took office just a month ago, inherited an economy in serious trouble. The balance of payments situation is critical. Until November 1989, when the previous party was in power, there was strong international confidence in India’s economy. However, after political instability, worsening fiscal issues, and the Gulf crisis, international confidence weakened significantly. This led to a sharp decline in capital inflows from commercial borrowing and non-resident deposits. Despite borrowing large amounts from the International Monetary Fund in 1990 and 1991, India’s foreign exchange reserves dropped drastically. Since December 1990, and especially from April 1991, India has been on the verge of an economic crisis.
“The people of India have to face double digit inflation which hurts most the poorer sections of our society. In sum, the crisis in the economy is both acute and deep. We have not experienced anything similar in the history of independent India,” he said.
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In the face of this economic crisis, Singh decided to introduce reforms in 1991. These reforms focused on liberalisation, privatisation, and opening up India’s economy, moving it towards market-based principles. In his 1991-92 budget speech, Singh changed the direction of India’s economy by saying that “over-centralisation and excessive bureaucratisation of economic processes have proved to be counterproductive” and that India needed to “expand the scope and the area for the operation of market forces.”
Manmohan Singh faced some criticism after 1991 Budget
Manmohan Singh, who created India’s economic reforms, had to go through a tough time to ensure that people accepted his bold 1991 budget. This budget helped India recover from its worst financial crisis. Today, India is the world’s fifth-largest economy and is expected to become the third-largest in a few years. One might wonder how much India’s economy would have achieved if Manmohan Singh had not introduced the 1991 budget.
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“As we enter the last decade of the twentieth century, India stands at the cross-roads. The decisions we take and do not take, at this juncture, will determine the shape of things to come for quite some time. It should come as no surprise, therefore, that an intense debate rages throughout the country as to the path we should adopt,” Manmohan Singh had said during Budget speech.
Manmohan Singh had dedicated the the 1991 Budget to Rajiv Gandhi.
“I rise to present the budget for 1991-92. As I rise, I am overpowered by a strange feeling of loneliness. I miss a handsome, smiling, face listening intently to the Budget Speech. Shri Rajiv Gandhi is no more. But his dream lives on; his dream of ushering India into the twenty-first century; his dream of a strong, united, technologically sophisticated but humane India,” Manmohan Singh said at the start of his Budget speech.
However, what followed altered the couse of Indian economy. Let’s take a look at some key parts of what Manmohan Singh said in the 1991 Budget.
Manmohan Singh’s reforms for foreign investments
Manmohan Singh in 1991 Budget speech said macro-economic stabilisation and fiscal adjustments alone aren’t enough; they must be supported by crucial reforms to reduce inefficiency and boost economic growth. The reforms aim to enhance industrial efficiency, attract foreign investment, modernise the financial sector, and improve the public sector. Once implemented, these measures will help India achieve sustained growth, price stability, and greater social equity.
“Macro-economic 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 investment 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 the key sectors of our economy are enabled to attain an adequate technological and competitive edge in a fast changing global economy. I am confident that, after a successful implementation of stabilisation measures and the essential structural and policy reforms, our economy would return to a path of a high sustained growth with reasonable price stability and greater social equity.”
Manmohan Singh’s reforms for industrial policy
Manmohan Singh also flagged how restrictions on entry and limitations on the growth of firms have often resulted in an increase in licensing and a rise in monopoly power.
“This has put shackles on segments of Indian industry and made them serve the interests of producers but not pay adequate attention to the interests of consumers. There has been inadequate emphasis on reduction of costs, upgradation of technology and improvement of quality standards. It is essential to increase the degree of competition between firms in the domestic market so that there are adequate incentives for raising productivity, improving efficiency and reducing costs. In the pursuit of this objective, we have announced important changes in industrial policy which will bring about a significant measure of deregulation in the domestic sector, consistent with our social objectives and the binding constraints on the balance of payments.”
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Manmohan Singh also said industrial development policies are closely tied to trade policies. While protection was necessary in the early stages of industrial growth, the time has come to gradually expose Indian industry to foreign competition. The government has introduced changes in import-export policy, reducing import licensing, promoting exports, and optimizing imports, marking the beginning of a shift from quantitative restrictions to a price-based trade system.
Manmohan Singh asked India not to fear foreign investments
Another major highlight of the speech that redefined India’s economy was when Manmohan Singh said it was no more time to fear foreign investments.
“After four decades of planning for industrialisation, we have now reached a stage of development where we should welcome, rather than fear, foreign investment. Our entrepreneurs are second to none. Our industry has come of age. Direct foreign investment would provide access to capital, technology and markets. It would expose our industrial sector to competition from abroad in a phased manner,” Manmohan Singh said.
In the 1991 Budget, Manmohan Singh proposed to liberalize the policy regime for direct foreign investment in several key ways. First, he suggested that direct foreign investment in specified high-priority industries, with a raised foreign equity limit of 51%, would be promptly approved, provided the equity inflows could finance capital goods imports and the dividends were balanced by export earnings over time. Second, he proposed allowing foreign equity up to 51% for trading companies primarily engaged in export activities. Third, he recommended the creation of a special board to negotiate with large international firms and approve direct foreign investment in selected sectors, aiming to attract significant investments, high technology, and access to global markets.
Manmohan Singh 1991 budget plan for public sector
His next big announcement was the intent to turn public sector an engine of growth rather than an absorber of national savings without adequate return.
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In the 1991 Budget, Manmohan Singh proposed a review of the public sector investment portfolio to focus on strategic areas essential for the nation’s economy, requiring advanced technology, and critical infrastructure. To raise resources, encourage wider public participation, and promote greater accountability, he suggested offering up to 20% of government equity in select public sector undertakings to mutual funds, investment institutions, and workers in those firms. He also recommended that chronically sick public enterprises, which could not be revived, be referred to the Board for Industrial and Financial Reconstruction (BIFR) or a similar high-powered body for rehabilitation schemes.
A social security mechanism would be created to protect workers’ interests during the rehabilitation process. Furthermore, Singh proposed providing public sector enterprises with management autonomy, accompanied by accountability through memorandums of understanding with the government.
Manmohan Singh’s “no magic” plan for banking system
As for the banking system and financial institutions, Manmohan Singh said “there are no magic solutions” as financial system had developed certain rigidities and some weaknesses.
Manmohan Singh proposed the appointment of a high-level committee to examine the structure, organisation, functions, and procedures of the financial system. This committee would advise the government on necessary measures to improve the viability and health of the financial sector, ensuring that it could better meet the needs of the economy while maintaining the principles of a sound financial system.
Manmohan Singh emphasized that India stood at a crucial juncture as it entered the last decade of the 20th century. He acknowledged the intense national debate on the path the country should follow, underscoring the importance of adapting the planning process to a rapidly changing environment. Singh highlighted that India could not achieve its goal of creating a just society by abandoning the planning process. However, he stressed that the planning process must be flexible and responsive to the evolving economic landscape. He proposed that the over-centralization and excessive bureaucratization of economic processes had proven to be counterproductive, urging for an expansion of market forces and a reformed price system to allocate resources more effectively.
Singh also recognised the need for direct government intervention to support the marginalized population, ensuring access to essential social services like education, health, and infrastructure. He emphasized the importance of planning for capital and technology-intensive sectors like transport, energy, and communications, which require careful management. Singh called for leadership to tackle issues like land and water degradation, which threatened the livelihoods of millions.