1991 – The Historic Budget

Every year the Finance Minister presents the Budget and every budget is extremely important for the country as it changes the ‘Economy Policy’ and it reflects the vision of the central government. But it is the 1991-92 budget which is historic in every manner.

So why 1991 budget is called ‘game changer’, let us analyse.

General elections took place in May-June 1991.The elections were held because the previous Lok Sabha had been dissolved just after the 16 months of its formation. No party could get a clear majority in 1991 general elections. The Congress party was the single largest party, won 244 seats. So the Congress party formed the minority government with the help of Left parties and P.V. Narasimha Rao became the Prime Minister of India.

On July 24, 1991 merely one month after taking the charge of the office Dr Manmohan Singh the then Finance Minister presented his first Union Budget in the Parliament. The country was facing serious financial crisis when P.V. Narasimha Rao took the office. It was a huge challenge for Dr Manmohan Singh to handle the economy of the country. In his Budget speech Dr Manmohan Singh briefed the financial crisis that the country was facing at that time. He mentioned that the origins of the problem were directly traceable to large and persistent macro-economic imbalances and the low productivity of investment, in particular the poor rates of return on past investments. There had been an unsustainable increase in Government expenditure. Budgetary subsidies, with questionable social and economic impact, had been allowed to grow to an alarming extent. The tax system had many loopholes. The public sector had not been managed in a manner so as to generate large investible surpluses. The excessive and often indiscriminate protection provided to industry had weakened the incentive to develop a vibrant export sector. The crisis of the fiscal system was a cause for serious concern. The fiscal deficit of the Central Government, which measures the difference between revenue receipts and total expenditure, was estimated at more than 8 per cent of GDP in 1990-91. The balance of payments situation was most difficult. The current account deficit, was estimated to be more than 2.5 per cent of GDP in 1990-91. These persistent deficits, which were inevitably financed by borrowings from abroad, had led to a continuous increase in external debt which, including non-resident Indian (NRI) deposits, was estimated at 23 per cent of GDP at the end of 1990-91. These strains were stretched to a breaking point on account of the Gulf crisis. The balance of payments had lurched from one liquidity crisis to another since December 1990. The level of foreign exchange reserves, in the range of Rs.2500 crores, would suffice to finance imports for a mere fortnight.

"There is no time to lose. Neither the Government nor the economy can live beyond its means year after year. The room for maneuver, to live on borrowed money or time, does not exist any more."

- Dr Manmohan Singh, 24th July 1991

India was only weeks way from defaulting on its external balance of payment obligation. India approached the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy.

The New Economy Policy consisted of wide ranging economic reforms. The government initiated a variety of policies which fall under three heads, Liberalisation, Privatisation and Globalisation.

Liberalisation: The biggest move of the government towards the liberalization was the abolishion of license Raj. Industrial licensing was abolished for almost all except hazardous chemicals, pharmaceutical drugs, electronics, cigarettes, alcohol, industrial explosives. The government reduced the role of RBI from regulator to facilitator of the financial sector. Foreign investment limit in banks was raised to around 50 percent. Those banks which fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalise their existing branch networks. Foreign Institutional Investors such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets. The rate of corporation tax, which was very high earlier, has been gradually reduced. Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. As an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange.

Privatisation: Privatisation means giving greater role private sector and reducing the role of public sector. Government companies can be converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies. Privatisation may help in reviving sick units which have become a liability on the government. It helps in making public sector units more competitive. The government envisaged that privatisation could provide strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. For instance, some PSUs have been granted special status as navaratnas and mini ratnas. Disinvestment policy comes under privatization. Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. Government appointed Ranrajan Committee for disinvestment. Disinvestment Commission was also formed under the chairmanship of GV Ramakrishna in 1996.

Globalisation: Globalisation is the outcome of the policies of liberalisation and privatisation. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalisation establish links in such a way that the happenings in India can be influencedby events happening miles away. It is turning the world into one whole or creating a borderless world. Till 1991 Indian government was following strict policy in regard to import and foreign investment in regard to licensing of imports, tariff, restrictions, etc. but after new policy government adopted policy of globalization. Government removed many restrictions from import of capital goods, rationalized the tariff structure, abolished export duty, reduced import duty and many more steps were taken by the Government.

This New Economy Policy changed the vision of Indian Economy. It opened the doors for FDI (Foreign Direct Investment). Thanks to this policies India is now a far more successful and resilient economy.

"Sir, 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."

- Dr Manmohan Singh, 24th July 1991

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