The myth of the economic reforms revolution of 1991

There is no stopping the self-deluded middle class, pro-market chorus from celebrating 25 years of the so-called economic reforms revolution. They believe and they perpetuate the myth that, lo and behold, in July 1991, India broke free from the shackles of the socialist economy, and that the light of free economy shattered the darkness of the four decades of socialism. Myths are indeed the stuff of life and we have not left them behind in the Stone, Bronze and Iron ages. So, it is cruel to question the myth of the economic reforms which the good souls of the Indian middle class are hugging so closely to their hearts. 

One is reminded of the two founding myths of the French Revolution of 1789. The first was the fall of Bastille on July 14 of that year. A crowd marched to Bastille, the fort held political prisoners, which symbolised the absolutism of the Bourbons. But on that day, there were no political prisoners in Bastille. There was a just a mad man who was a prisoner there. The crowd attacked the garrison which was guarding Bastille and killed them.

The second myth was enacted on August 4, when the aristocrats and the upper clergy renounced all their claims to their properties in a frenzy of democratic generosity. Most of the rights they surrendered were of no use because those rights were no more in operation. But it did send out the intoxicating message that France had turned into an egalitarian society and rid itself of the hateful feudal order. By 1789, feudalism faded away in France and a strong urban middle class was raring to go. The feudal lords were as weak and ineffective as Louis XVI himself. The masters of the economy were the farmers and merchants and lawyers in country and town. 

You need myths. So perhaps it is not right to burst the myth of the reforms revolution of India of 1991. But let us look at the state of India in 1991.

On July 12, 1991, minister of state for finance Rameshwar Thakur answered a question by Congress members, Pawan Kumar Bansal and V Seernivasa Prasad in the Lok Sabha. Thakur placed the figures of economic indicators for the years 1988-89, 1989-90 and 1990-91. The GDP growth was 10.4% in 1988-89, 5.2% in 1989-90 and 5% in 1990-91. Agriculture growth was 4.5% in 1990-91, which was up 1.7% in 1989-90.

Industry grew at 8.7% in 1988-89,  and 8.6% in 1989-90. Exports rose from 29.1% in 1988-89 and fell sharply to 17.5% in 1990-91. Imports in 1990-91 were 26.9% in 1988-89, 25.4% in 1989-90 and 17.5% in 1990-91.

The Wholesale Price Index (WPI) for 1988-89 was 5.7%, 9.1 % for 1989-90 and 12.1% for 1990-91. The Consumer Price Index (CPI) was 8.5% in 1988-89, 6.6% in 1989-90 and 13.6% in 1990-91.

The figures for foreign exchange reserve were: Rs 6,605 crore in 1988-89; Rs 5,787 crore for 1989-90; Rs 4,388 crore for 1990-91.

And what was the exact reason for the weak foreign exchange position. This is spelled out in the President’s Address to the Joint Session of Parliament on July 11: “The balance of payments position, already under severe strain, was further exacerbated by the Gulf crisis, the direct adverse impact of which is $2.7 billion (over Rs 4,900 crore). Of this the additional cost of oil imports alone accounted for $2 billion, while the rest was, among others owing to a loss of exports, evacuation of Indian nationals and reduced inflow of capital. The balance of payments situation has become critical as the flow of funds from international capital markets did not materialise as anticipated though several countries did offer help.”

There are two other important facts that need to be noted. One was the Union Budget presented by socialist-minded Narayan Dutt Tiwari in 1988. He says in his Budget speech: “The capital market is an important source for mobilisation of savings for industry and Government has taken several steps to strengthen it… Last year, the Prime Minister (Rajiv Gandhi was the finance minister for a year and he had presented the 1987 Budget) announced the decision to set up a separate Board for the regulation and development of the Stock Exchanges. Necessary legislation in this regard is under preparation and the Board is expected to become operational soon. Measures have also been taken to set up Mutual Funds, lay down ground rules for orderly operations of the Stock Exchanges, improve their infrastructure, facilitate share transfers and enforce better discipline on companies entering market.”

The more important announcement in Tiwari’s 1988 Budget was with regard to “Venture Capital Companies to invest in new companies in anticipation of future-capital gains.” Tiwari argued the case for venture capital: “We have one of the largest pools of scientific and technical manpower. Yet many of our young and new entrepreneurs find it difficult to raise capital because of the risk involved.” 

The last important pre-July 1991 reforms state of the Indian economy is in the 1991 election manifesto, much before Manmohan Singh, Montek Singh Ahulwalia and the rest of free market cheerleaders came centre stage: “Poverty alleviation was the central priority of the Indira Gandhi and Rajiv Gandhi governments. More investments were made in poverty alleviation schemes than ever before. Several new schemes were implemented. The proportion of our population below the poverty line was halved from over 51% at the time Indiraji returned to office in January 1980 to an all-time low of 25% by the time Shri Rajiv Gandhi demitted office in 1989.”

In the manifesto, under the heading of “Industrial Growth”, the manifesto says: “India’s industrial growth achieved a record increase, touching 12% per annum at its height. This was the result of the major policy initiatives taken during the Seventh Five Year Plan aimed at increasing productivity, reducing costs and improving quality. The accent was on opening the domestic market to increased competition and readying our industry to stand on its own in the face of international competition.”

And about the public sector, the manifesto says: “The public sector was freed of a number of bureaucratic constraints and given a large measure of autonomy than ever before. The technological and managerial modernisation of industry was pursued as the key instrument for increasing productivity and improving our competitiveness in the world. It was a period of visualising new horizons.”