Introduction
24 July 1991 happens to be one of the most underrated important days in the history of republic of India. The day had started with the new government present the budget of this nation, which in future would be referred as the epochal budget whose speech would be second most important after “Tryst with Destiny”. Then finance minister Dr Manmohan Singh remarked in the budget speech, “I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “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. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome”. Indeed, this speech was quite optimistic but it was given at one of the most pessimist times when the nation had to mortgage its gold to foreign nations and had to take steps in accordance to a foreign institution owing to its bad fiscal health.
India finally decided to liberalize, privatize and globalize at the behest of I.M.F. in order to get loans to deal with the balance of payment crisis. There can be disagreements regarding many things but one can’t deny the significance of these policy changes, as they represented a shift from Nehruvian consensus on the most important component of statecraft which was finances. While Manmohan Singh was executing these reforms, it was Prime Minister Pamulaparthi Venkata Narsimha Rao’s backing that it was done under.
Narsimha Rao’s government was facing resistance regarding these reforms not only from opposition but also within his party. First let us understand what did these reforms translate into policy front before delving upon how Narsimha Rao dealt with its opposition.
What were 1991 reforms?
- L — Liberalization (lowering of government power)
- P — Privatization (Transfer of economic resources ownership from the public to the private sector)
- G — Globalisation (Blending the national economy with the international economy)
Major Reforms of the Indian Economy
The primary policy initiatives undertaken by the Indian Government to address the balance of payments issues and structural inflexibleness were as follows.
Financial Sector Reforms
Under these reforms, new private banks were permitted to compete with other banks in the sector, and several new banking authorizations were offered.
- SEBI, an autonomous statutory body, was formed in 1988 to manage the crucial participants of the financial markets and handle stock dealings.
- The funds market was open for portfolio investments, and Indian corporations were allowed to use international capital markets with the issuance of stakes or equity overseas via GDR or Global Depository Receipts.
- Trade practices in these markets remained under stringent control, and clarity was maintained.
Public Sector Reforms
The Indian Government began a limited process of disinvestment of its ownership and equity in public sector industries rather than complete privatization, holding 51% of the equity and leadership control.
Tax Reforms
Corporate income tax was lessened to 46% from 51.75% for public enterprises. The average customs responsibility was drastically reduced to 65% from 200%. The highest marginal rate of private income tax was lowered to 40%, 56%, in June 1991.
Trade and Exchange Rate Policy
All raw materials required for manufacturing and capital products could be imported without limitations with few vital peculiarities.
- The rupee value fell about 24% in July 1991 to align the exchange rate with the market rate.
- India changed to a new system of market-based exchange rates to supervise floating rates in 1993.
Foreign Investment
The country had an intensely limited and antagonistic foreign investment guideline before the 1991 economic reforms. The new technique supported foreign investment vigorously in numerous ways.
- From a long list of 34 industries, permission was granted to a foreign equity investment of up to 51%.
- Approval from the Governance was needed in case investments were more than 51%.
Industrial Policy
This policy has noticed the most extreme changes due to the reform agenda. There is no longer a necessity for the Government to approve fresh investments or for the considerable increase of present capability as it was earlier under License Raj or industrial licensing.
- Presently, only a few businesses need to hold licenses due to pollution and environmental circumstances. It also witnessed the abolishment of the MRTP Act.
- Private sectors included various important sectors like hydrocarbons (oil and gas probe, production, and refining), telecommunications, air transport, power generation, etc. Whereas there was seen a decline in the operation of enterprises in the public sector.
Fiscal Stabilization
The effectiveness of the economic reforms of 1991 was based upon the attainment of fiscal stabilization. The fiscal deficit of the Central Government was required to be lowered for the reforms to thrive.
- The expenditure on growth, like the cost of economic and social infrastructure, was reformed.
- Fertilizer grants were restructured partly in 1992–1993, and export allowances were cancelled in 1991–1992.
Why was there opposition to these reforms?
There was a huge scepticism regarding the reforms because they were being forced upon the nation by a foreign institution which had anglo-dominance. Moreover, it even required cutting down on subsidies while cutting down the taxes, a proposition that still remains deeply unpopular thanks to the socialist discourse of our politics.
Perhaps the point which was seen with great suspicion was globalization one, where we were finally going to allow foreign companies the permission to invest in this nation and give their products access to Indian markets. This was a complete shift from the call of “Swadeshi” which called for buying only indigenous goods and was one of the cherished slogans of Congress, thereby earning the ire for them within the party.
For the left (in Indian sense) this was a typical case of “taking away from the poor and giving it to rich”, while for the right (in Indian sense) this was a case of “selling the nation to foreign hands”.
How did Narsimha Rao deal with this opposition?
P.V. Narsimha Rao was a prodigy and a multi-talented personality, he knew 17 languages as a polygot and even learned computer programming. He also translated Viswanatha Satyanarayana’s Veyi Padagalu into Hindi and Hari Narayan Apte’s Marathi novel Pan Lakshat Kon Gheto.
First, he decided to deal with the left regarding their opposition to reforms in his “trade not aid” speech where he remarked, “My objective is to make India truly self-reliant. Self-reliance is not a mere slogan for me. It means the ability to pay for our imports through our exports. My motto is — trade, not aid. Aid is a crutch. Trade builds pride. And India has been trading for thousands of years”, thereby showing his determination towards reforms. He also had enough courage to say, “We believe that the Government concessions must be for the poor and the really needy. Over the past few years, expenditure on this has increased substantially, and in many instances, the concessions are being enjoyed by people who are not in the dire need of them. This must change.”, reflecting the government’s commitment towards fiscal discipline.
Rao also declared great ingenuity when responded to communist opposition regarding import of washing machine on the fear of washermen losing their jobs by saying, “Do you want India to remain a nation of washermen”.
When it came to right one must understand that Indian Right hardly shares anything in common with the western right. Indian right also didn’t lie on much right when it came in the spectrum of economics, making LPG reforms equally unpopular for them as they were for the Indian left. However, one difference which Indian right certainly had was having pride regarding the culture and heritage.
Rao took advantage of this fact and his dealing with them was going to be even more ingenious. Being a Telugu Niyogi Brahmin and knowing Sanskrit, he had deep knowledge of Upanishads and Vedas. The highpoint of Rao’s forty-five minute intervention came when he lapsed into Sanskrit:
“What have I done? What had the government done? We know that there are no alternatives to what we have done. We have only salvaged the prestige of this country. Samutpanne ardham tyajati panditah. This is precisely what we have done. I do not say that the economy has been booming or is going to boom immediately. What I am saying is sarvanshe samputpanne.”, “Samutpanne ardham tyajati panditah”, meant that the wise man, in the event of total ruin, wriggles out by giving up half his possessions. In this context Rao reflected upon the need to make some compromises in order to save the nation from total ruin. He also gave economic reforms a spiritual dimension by calling them “mahaprasthanam”, a great start.
How do LPG reforms look from today’s perspective?
Today one would hardly find a person who refers to 1991 reforms as a bad decision. It took India’s GDP to amazing heights from an economy of 275 billion $ to an economy above 3 trillion dollars charting its path to become the third largest economy of this world from its earlier 12th position. A nation which had a mere 1 billion$ in its forex reserves and was struggling to import essentials such as oil and kerosene now has a forex reserve above 600 billion$ and rather than depending upon foreign aid, is rather sending aid to its neighbouring states. These reforms have also been responsible for creating the Indian middle class who have been churned out of service sector, most prominently the IT sector.
By looking at these statistics, the reforms seem to be unquestionable, or do they? While these statistics are indeed impressive, but as Mark Twain said, “There are lies, damn lies and then statistics”.
There is still a chunk of intellectuals which happen to lie on the right of political spectrum when seen from the context of India, who have been sceptical of these reforms. Most of it stems from the suspicion that all the economists who were part of these reforms had globalist links, most prominent one of them being Amartya Sen getting married to the daughter of Rothschild, now whether to approve or reject their theories is something I leave up to the reader. There is also a section of intellectuals who are opposed to MNCs for the cultural deracination they have caused in this nation. One of the leading voices of this notion was late Rajiv Dixit who had done “Aazadi Bachao Aandolan” in opposition to these reforms.
One of his famous lines regarding his opposition to FDI was, “A dead man where pumping and circulation of blood from heart has stopped, can’t be revived by putting blood into him. In a similar way, a nation where capital doesn’t come naturally can’t be revived on FDI.”, he was quite critical of Indian leadership for going out of their way to bring foreign investments in India. He also opposed the cultural deracination that was happening at the hands of foreign companies.
If one has to be honest, there is indeed substance in Dixit’s arguments. As examples, Cadbury an American company has made such an environment in India that in a festival like Diwali, it has become a matter of paramount importance to eat chocolates of Cadbury, rather than having Barfi Laddoo or even Peda. This is done by MNCs because they know that cultural domination is the only way for them to achieve higher profits. It is also true that many times Indian leaders go out of there way to ensure foreign investment in India, when recently many ministers of different states went into an online race to urge Elon Musk to set a factory of Tesla in their state. One hardly remembers when was similar support offered to Indian companies, things were even funnier when a minister of West Bengal requested Elon Musk to setup a factory in West Bengal, even though his party had stormed to power by sabotaging plans of TATA to setup a NANO plant in West Bengal.
It is also true that MNCs especially the western ones hardly look upon their host nations with respect. In 1990s, there was a very interesting Pizza Hut ad in Russia, that ad featured none other than Mikhail Gorbachev, the last president of U.S.S.R., in the ad as Gorbachev entered the pizza hut, two Russians sitting there were having a heated debate whether Gorbachev was a traitor or not, however an old lady between them says that it is all thanks to him that they were able to eat at Pizza hut hence Gorbachev was great. In short, according to Pizza Hut, Russian people being able to eat their pizzas was so important that disintegration of a superpower into 15 states is simply worth it. Ironically, today the same Pizza Hut outlets has been closed owing to Western Sanction on Russia for its Russia-Ukraine war. East India Company also had similar superiority complexes.
Even if we leave aside the cultural deracination caused by the LPG reforms, they have also harmed our self sufficiency in many key sectors such as computer hardware or even Active Pharmaceutical ingredients which were quite important for India because they formed backbone of our core sectors IT and Pharmaceuticals and depending on foreign nations for them would be detrimental for national security.
One is reminded of when P.V Narsimha Rao said, “Samutpanne ardham tyajati panditah”, because at this point one realizes that “ardham tyajati” or half possessions didn’t merely refer to some physical assets or even some of our economic sectors but even our cultural pride. Was it worth the cost to save the nation from total ruin is a question, I leave upon the reader to determine its answer.
It is also true that aid is crutches and can’t build self-reliance but neither can free trade, because self-reliance in today’s terms is not only the ability to pay for your imports but to not rely on imports for sectors which are running your economy as much as possible. A simple reason for this stance is the catastrophe world is facing for depending upon the small island nation Taiwan for semiconductor chips, if tomorrow China invades this nation, the whole electronics sector may come crashing down causing a huge shock wave in global economy. In short while it is good to have huge forex reserves, one must also make sure that one doesn’t have to rely on foreign nations for critical items.
Comparison with China
I am sure typical reaction after reading all the above would be, “Look bro, China liberalized its economy back in 1978 while we have done so in 1991, and see how far ahead they are from us”. While it is indeed true that the time difference is indeed significant, one can’t even ignore the policy differences between India and China. This gives me an opportunity to compare Indian FDI policy and Chinese FDI policy and demolish the myth that China is ahead of us just because it liberalized much before us.
To understand this let us give hypothetical example of Indian FDI investment. Amazon invests 100 million$ in India and RBI gives them 8500 crore Rs to invest in India in exchange of the 100 million $ provided by Amazon. In next 10 years Amazon makes a profit of 42,500 crore Rs. Now Amazon will give RBI 42,500 crore Rs back and RBI will now have to give them back 500 million $ which means net drain of forex reserves. Only solution left with government to stop this drain is to open more sectors for FDI and selling more resources to foreigners but even this has a limit, once nothing is left the nation may become bankrupt.
Now let us talk about what China does in this situation which is to refuse to pay in dollars for the profits earned in yuan, China already puts this condition that it will pay in dollars only for the capital investment of the company. If the company wants more dollars it will have to make exports. Which in this case means that Amazon will only be paid back 100 million $ thereby preventing repatriation of forex reserves. When it comes to non-export items such as pizza or burgers of Mc Donalds which are preferred by tourists visiting China, China uses double currency system and there is another currency for tourists which is FEC Yuan. Foreign tourists can buy foreign company products only with FEC Yuan.
In simple terms while China’s FDI policy is design to serve the world or export-oriented, while India’s policy is only designed to serve the Indian needs or domestic-oriented. While China’s policy prevents any kind of forex repatriation and leads to saving of forex reserves, Indian policy doesn’t do so. While FEC yuan or double currency system protects local industry as Chinese citizens aren’t able to get FEC Yuans to buy foreign company non-export items, Indian policy simply doesn’t have any such system to protect the local industry. While Indian policy is more subservient or in favour of foreign companies which gives them the right to execute this kind of cultural deracination, Chinese policy doesn’t leave room for any of these things.
Moreover, beyond these facts, while India focused on getting FDI in services, China focused on getting FDI in manufacturing, because it was able to build infrastructure at fast pace and skill its labour force according to the needs of industry, provide them with cheap land and electricity owing to the open -policy of Deng Xiapoing. The largest reason why services sector grew in India was because it didn’t need to face many bureaucratic hurdles unlike the industrial one. In short in China economy grows because of government while in India it grows despite government. Thanks to this we did create a middle class but it was very small in size but China’s middle class is very huge in size.
Also, it has recently been proven that China’s purpose to get FDI, more than capital is to get technology transfer from foreign companies. Foreign companies saw the low cost of production in China they ignored how loose or non-existent their intellectual property rights were which meant China could easily steal their core technology which acts as an explanation behind the exponential growth of its home giants Huwaei and BYD.
There are many other factors behind China being ahead of India but I am sure that a question may come in mind that why India can’t have similar FDI policy. There are two reasons to this to be precise which are the ability of MNCs to create the fear of war by asking their home nations to fund Pakistan in order to extract benefits, or fund the media to publish anti-government propaganda thereby creating a fear of loss in election. China could go ahead with its FDI policy because it allows no foreign media, even social media is Chinese and above all even government is dictatorship. China even hired many scientists from U.S.S.R. after its collapse to build its defence industry. It even sent its people to study defence technology of U.S. and Europe and at the end of the day steal it. In short China developed its military so much that it doesn’t fear any military threat.
Conclusion :
India indeed needed L.P.G. reforms for that time, but now it is time to have a policy that suits the current times, FDI should still be encouraged but a larger focus should be regarding bringing in technology rather than capital. Indian corporates should still be given priority, though it shouldn’t be in the same way as license raj and conditions should be enhanced that they invest more in Research and Development and exports. Privatisation should always be the last resort for a public sector unit making losses and it should always be attempted first to bring public sector units in profit, also it must be ensured that the state always own one public sector bank, one telecom company, one energy company and one defence company as these play a huge role in the factors that encourage investments according to state needs and can’t be left for private sector alone. Liberalization should still be encouraged and all the unnecessary bureaucratic hurdles are removed.
Above all it is time that government starts investing in our military so we don’t have to fear any threat and even starts controlling media to a certain extent in order to ensure that foreign companies don’t dictate our policies