Two decades ago, India’s Prime Minister Manmohan Singh unleashed radical free market reforms that were a watershed moment in the transformation and rise of the South Asian giant.
“We shall make the future happen,” declared Singh, who was then finance minister, in presenting his landmark budget on July 24, 1991, that opened up India’s markets and cut through the country’s infamous red tape.
“Let the whole world hear it loud and clear – India is now wide awake.”
Singh, today battling accusations of drift and criticism that the gradual reform process has stalled, ignited the fuse for rapid growth at a time when the economy was teetering on bankruptcy.
India had just two weeks of foreign exchange reserves to pay for food and fuel imports and had just flown 47 tonnes of gold to London to be stored at the Bank of England as collateral for an emergency loan.
Singh, a former World Bank economist, switched the country’s course from inward-looking socialist policies to a more market-friendly approach in the budget whose 20th anniversary was yesterday.
He simplified tax collection, slashed customs duties, invited foreign investment, initiated privatisation of government-owned companies and lifted the shackles on Indian industry by abolishing stifling production quotas.
The period preceding the crisis has become known as the ‘Licence Raj’ – a time when rigid government controls laid down how much companies could produce and permits were required for almost every economic activity.
“The reforms were a great catalyst for the rise of Indian entrepreneurship which was held back by dysfunctional controls on companies,” said Shankar Acharya, a former chief government economic advisor who worked with Singh.
“India was a closed economy and Dr Singh’s budget began the process of integrating it with the world,” Acharya said.
Singh allowed up to 51% foreign ownership in a wide range of industries, relaxed import controls on raw materials and machinery and allowed entry of foreign consumer goods – hitherto a luxury available only to those with relatives abroad or the means to travel.
The move to a more capitalist-style economy triggered a surge in economic growth as exports zoomed and foreign investment that cured India’s fiscal crisis, boosted incomes and dramatically expanded the country’s middle class.
“The Licence Raj was a strait-jacket on industry. Firms needed permission to produce, to import. Its end allowed us to show the world what we could do,” Confederation of Indian Industry director general Chandrajit Banerjee said.
Instead of waiting for years on a waiting list for motorbikes or phones, products were suddenly much more widely available.
The changes also transformed the lives of many Indians in more subtle ways, altering how they shopped and travelled.
“Middle class Indians stopped going around with a sheepish, hangdog expression that ‘We don’t have what the rest of the world has’,” said former Reserve Bank of India consultant T C A Srinivasa Raghavan.
“The reforms made middle class India more confident,” he said.
As liberalisation progressed, India’s skies were opened to competition and a clutch of new airlines took flight, prompting a fall in fares and migration from trains to planes.
India’s telecommunications sector has become the world’s fastest-growing, a host of foreign car makers from General Motors to Toyota have set up shop and the country’s gross domestic product has nearly quadrupled since 1990.
But bribery remains rife in the 1.2bn-strong nation, particularly in government offices with officials seeking money for everything from school entrance to marriage certificates, and the economic boom has bypassed hundreds of millions of Indians.
Some 42% of the population, or 455mn people, still live on less than $1.25 a day, according to the World Bank. Statistics on health, infant deaths and malnutrition are worse than those for some countries in sub-Saharan Africa.
And 20 years on, India’s reforms programme is at a standstill.
Singh’s stint as prime minister has disappointed businesses who hoped he would execute a “second-generation” of changes to propel growth into double-digits.
Long pending proposals include introducing a nationwide tax structure to cut business costs, simplifying land acquisition for industrial projects and fully opening up the vast retail sector to foreign investors.
But instead of driving changes, Singh has spent much of the last 18 months fighting major corruption scandals linked to the Commonwealth Games last October and the sale of telecom licences in 2008.