The Game Changer -Economic Liberalization of India

Hi everyone. 

 We all know that Pakistan is in shambles. It is undergoing a terrible economic crisis in which it has to drain its reserves and take huge loans from the IMF (International Monetary Fund). While India is set to be the third-largest economy in the world, Pakistan is in a deep crisis which it could not come out from

But the discussion is not about Pakistan. You will be shocked to know that India too faced a similar crisis but worse than Pakistan's condition. But we averted and went on the road to becoming one of the fastest-growing economies in the world. What was the crisis that India faced? What did we do to prevent it? And how it turned out to be a game-changer for India.

This is the story of two men who completely changed India's future and turned out to be one of the best policies in Independent India. Economic Liberalization of 1991.

To understand the crisis of 1990 we have to go back to 1947 when India gained independence from British Rule. The newly formed Congress government under the leadership of PM Nehru wanted India to be a socialist sovereign state. This means that the Government wanted to control industries and also the means of production. So, the government started to open up new industries in the country, and to maintain it the government spent a huge amount of money on it.

In 1950 the government introduced something called "License Raj". Under this system, businesses in India had to obtain a special License from the government to run a business. The government intended to do it to protect Indian Industries and make our country self-reliant.  Well, all this seems to be fine but it didn't work in the long term.

Well, first thing India had a fixed exchange system. This means that if we export rice to the US at 20 rupees and South Africa at 20 rupees it means that there is no gain for us as we are selling at the same cost to two different countries-one having currency more than us and one less than us. Plus, License Raj had big government interventions that slowed down the Indian Economy. 

This continued for 43 years until 1990. 

In 1990, things started escalating

Due to the License Raj, businesses in India were shut down and people were leaving for other countries. This created a huge loss for the government as it had spent so much money on those companies and now they are leaving.

Due to fixed exchange rates, India found an empty treasure of FOREX reserves, and by November of 1990, it was about to get completely empty.

The fall of the USSR (Now Russia) in 1991 with whom India had maximum trade relations affected the Indian Trade. We had to literally sell our gold(I'm not exaggerating literally "the gold") to meet the expenses of the government. But soon the gold is about to get empty. It was expected to go empty by August of 1991.

In simple words,

"WE WERE BROKE"

After August 1991 India would have not been able to even take a loan from the IMF.

You would be disheartened to know that foreign media at that time predicted the death day of  India. People predicted that India would be disintegrated. India was in deep trouble.

If this was not enough, India was going through political turmoil. The Janata Party couldn't control its allies and the government under PM Chandrashekhar fell and fresh elections were called. During the election campaign Former PM Rajiv Gandhi was assassinated in Sriperumbudur, Tamil Nadu. This created chaos throughout the country and India underwent a series of riots.

THE NEW GOVERNMENT:

Election results of 1991 were out and no party could muster up a majority of 268 seats out of 534 (in 1991). Congress became the largest party with 232 seats. BJP got 120 seats achieving the title of second largest party.

The Congress managed to gather some allies like JMM and ADMK and made a minority government under PM Narasimha Rao(whom I'm pretty sure you would have not heard or read about in your school textbooks). Now remember if ADMK or JMM leaves the alliance then this government will collapse and fresh elections will be taking place.

Narasimha Rao, former Chief Minister of undivided Andhra Pradesh(AP + Telangana), once home minister, once external affairs minister, and once HRD minister under PM Rajiv Gandhi's cabinet, became the 9th Prime Minister of India. He appointed a former RBI governor as the Finance Minister of India.

JULY 24th 1991:

It was the time for the new government to present the budget in the parliament. The former RBI governor was really nervous as he had to present a budget and he wasn't good at politics to answer his opponents in the Parliament but more importantly, he was not sure whether the people would accept it.

He expressed his nervousness to PM Rao. PM Rao convinced him and promised to defend the budget.

In the parliament, the Budget speech was given. It highlighted the following:

First, the fiscal deficit which caused the drain of money will be converted into fiscal imbalance which means the government tried to control its expenditure and use it on useful issues rather than on industries.

Second License Raj was abolished to some extent after 43 years. This means businesses can be opened without any license and just have to register with the government. The budget promised lower interventions of the government in the market.

Third, the tax structure which was really clumsy and uneven was regularized and made it stable.

Fourth they devalued the rupee to come out of the fixed exchange system.

Fifth, India opened up trade with other countries, and technologies that were confined to the US and other European countries can be accessed by India too. This generated employment and the rise of the Tertiary Sector(IT and Engineering Fields).

After this the Finance Minister...... you know what see it for yourself.

You see that familiar face? It was none other than Manmohan Singh who presented this Budget.

Turned out to be a game-changing budget as India under the leadership and experience of Narasimha Rao India came out of the crisis within two years(1993) and immediately after that his government was asked to prove majority in the parliament which he successfully averted and saved his government. It was the first minority government that could complete a full term(1991-1996).

33 years later India is the fifth largest economy and is aiming to become the third largest but we should never forget them who made this possible. It was Narasimha Rao's quick thing and Manmohan Singh's deep knowledge of economics saved the country from bankruptcy. If our reserves are stable and we have surplus reserves it is thanks to the reforms of 1991. India will never go bankrupt.

PM Narasimha Rao showed us that even if everything doesn't go your way make sure you turn the problem into an opportunity.

This is the story of the Economic Liberalization of 1991. It is also a tribute to our  Former Prime Minister Narasimha Rao as we are celebrating his 100th birthday this year. Of course, Manmohan Singh also made history by introducing the budget.

Well, thank you for reading the blog. I will meet you with a next blog very soon

Bye👋👋
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