How did liberalisation in the 90s change India?

“Puri duniya ko awaaz hai. Hindustan ab jaag chuka hai. Hum aage badhenge. Hum Kaamiyab honge”. With these words, Dr. Manmohan Singh, our then finance minister signalled the start of a brand new phase of India’s economy – liberalisation.

But, much like the story of Indian independence, that of Indian liberalisation isn’t so simple. In this story, there is an economic crisis, two attempts to change the value of the rupee, the fall of the public sector — and even a truck full of gold involved!

Show Notes

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Full Transcript of Episode 23

On 24th July, 1991, when the Finance Minister Dr. Manmohan Singh presented the Union Budget of India, he ended his speech with these words: 

“Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.” 

Puri duniya ko awaaz hai. Hindustan ab jaag chuka hai. Hum aage badhenge. Hum Kaamiyab honge.

As you can imagine, this was no regular budget. With this budget, Dr. Singh declared India free from economic restrictions. The Indian market was now open to the world. As you heard, India was now wide awake — to economic liberty and opportunities. India was liberalized. 

But, much like the story of Indian independence, that of Indian liberalization isn’t so simple. In this story, there is an economic crisis,two attempts to change the value of the rupee, the fall of the public sector — and even a truck full of gold involved! 

Let’s talk about what really happened in 1991, and how India was liberalized. 

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Liberal, liberalization, liberty — we hear these words often, don’t we? While each word has a slightly different meaning and is used in different places, we know that they come from the same root: to be free. 

And that’s what we will talk about today. 

The Economic liberalization of India refers to the freedom of the Indian market. What does this mean? 

In simple terms, this means that the economy of our country is free of government inference to a large extent. The prices of the goods and services — even something as small as a toothpaste — is determined by the demand and the supply of the toothpaste, and not by the government. A liberal economy is also one that doesn’t put restrictions on businesses — you are free to open a business, to produce whatever you want and in as much quantity as you like. You can even invite foreign investors to invest in your company. The market is free, and so are you, a participant of the market. 

But the Indian market was not always liberal. In fact, it hasn’t even been 30 years since the Indian economy opened up! As we just heard, Dr. Manmohan Singh and the Prime Minister P.V. Narasimha Rao introduced to India, in 1991, three policies: Liberalization, Privatization and Globalization.

These reforms are called the New Economic Policy or the New Economic Reforms — and you could argue that these reforms have perhaps been the most important turning point in the Indian economy. 

But what do these policies mean? Let me give you a brief idea.

Globalization, like the term itself explains, generally means to connect to the rest of the world. In 1991, India opened its border to foreign trade and investment. Now, there could be free movement of goods, services — and even employees across the Indian borders. Almost 30 years later, we now realize the effects of globalization. Today, there are more than 3200 foreign companies operating in India.

Leading companies like Amazon and Google have offices in India. Foreign industrialists are keen to invest in Indian companies. What better example than this?

[We hear a news report about Facebook investing in Jio]

Broadly, that was globalization. 

When we talk about Privatization, or nijikaran, as a part of the New Economic Reforms of 1991, we are talking about the opening up of India’s public sector. Until 1991, the government owned companies in several sectors — in fact, as many as 17 sectors were only reserved for the government. Privatization opened up all these sectors for private companies. Only two sectors remained reserved for the Government — the Railways and Atomic Energy.

The government also started selling shares of their companies to private buyers — something that was a complete no-no before 1991. This move actually saved several Public Sector Undertakings that had been making losses for years.

Privatization since 1991 has allowed the government to sell PSUs to this day. Only last year, we heard this: 

[We hear a news report about the sale of 5 PSUs]

If you’re still not convinced of the power of privatization, let me tell you this — over 70% of India’s profit is generated only by 20 profitable, private firms.

Aur aakhri policy: Liberalization. In 1991, the move toward liberalization, called Udarikaran,  aimed to free the Indian market of restrictions and ensure economic growth.

One of the main objectives of liberalization was to remove the requirement of getting a licence to open a business in India. 

I know — issuing a licence sounds like a small job. But before 1991, if you wanted to open a company, you had to take permission from dozens of authorities. And this was not only to set up your company but also to produce goods, to hire employees and even to shut your company down. And when it comes to issuing licences from government authorities…well, you and I both know that this is no easy or quick task.

Liberalization put an end to this bureaucratic culture — which was interestingly called “babudom” in those days. After 1991, the process of issuing a licence became much easier. Even today, if you wish to start a business, you still need licences and approvals from the government. But the process is simpler, with less restrictions. 

Doston, if you think about it, all three moves — Liberalization, Privatization and Globalization — were a way for India to free itself from economic restrictions (aarthik bandhan). And perhaps this is why 1991 is called the year of economic liberalization of India. 

Economic Liberalization changed the face of India — and this trickled down to every citizen. In 1950, the average Indian earned Rs. 7500 per year. As of 2019, this amount has become more than 90,000 rupees.

Liberalization was not a small decision. In fact, in 1991, no other country with a GDP as low as India had ever introduced policies of this scale. So, what drove India to make such a big decision? Was it a sudden one?

You could say so. There’s a story behind what happened in 1991 — but this story starts many years before that, at the time of independence.

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In 1947, the economy of India looked very different from what it is today. 

At the time of independence, India was contributing only 3.8% to the world economy! At the end of the British rule, India was a country dependent on agriculture. The industries we know today were yet to be built. At this time, the leaders of our country asked themselves an important question:

How do we bring economic prosperity to India?

Among other leaders, Pandit Jawaharlal Nehru and statistician P.C. Mahalanobis (महालानोबिस) answered this question with the five-year economic plans. These plans focused on setting up heavy industries and introducing new technology to India. The responsibility of this task was given mainly to the government — after all, private companies in India did not have the money or the ability to do this. The government set up Public Sector Undertakings — yaani, government companies — in the Steel, energy, textile, atomic industries. This plan was based on the Soviet economic planning — and like our soviet friends, we believed that development can come from strong government control over the economy. 

But this wasn’t the only policy. To become truly self-reliant (atma nirbhar), the government closed the economy to the world. This was exactly what it sounds like – the indian market was closed to imports, foreign companies or investments. But the restrictions were not only at the Indian borders.

Even Indian companies functioned under many restrictions.

Dosston, in this age of startups, can you believe that there was a time when you’d have to take permission from as many as 80 authorities to open a business? The system of Licence Raj made it difficult for companies to grow in our economy. Business in India was a game of who could get the licence, instead of who made the most profit!

In a previous episode about PSUs in India, we talked about the growth of the public sector in the years after independence. It would be safe to say that the public sector ran the Indian economy. Let me give you an idea — in the 1960s, 70 lakh people worked in the public sector. This number rose to 2 crores in the next few years. By the 1980s, 25-30% of India’s GDP came from the public sector!

This may sound like a success story, but behind the scenes, the economy of India was in a lot of trouble. 

In 1957, India faced a Balance of Payment Crisis. We weren’t able to pay for our imports and debts to other countries. A loan of $600 million dollars and an import substitution policy was used to solve this problem. A similar crisis emerged again in 1966. By this time, with heavy debts and a falling GDP, the cracks in India’s closed economy had begun to appear.

In an interview to a newspaper, J.R.D Tata said that this mixed economy led to great industrial production in the 50s and 60s. India was growing at a rate of 8% every year! But after the 60s, Tata believed it was time to let private competition enter the market. He urged the government to “free the economy” and see the difference! 

Actually, Tata’s wishes were going to be met sooner than he imagined. And I’m not talking about 1991 — there was an attempt at liberalizing India in 1966!

In 1966, after yet another Balance of Payment crisis, Prime Minister Indira Gandhi realized that the Indian economy finally needed to be opened up to private companies and international trade. Doston, the way this was done was really interesting. First of all, several experts and politicians in the country — were opposed to the idea of a free-market economy. This included the then-Congress President K. Kamaraj, the commerce minister Manubhai Shah and even Morarji Desai.

So, Mrs. Gandhi had to keep her mission under wraps (gupt). The liberalization in 1966 was a deal (sauda) made with international bodies like the World Bank and the International Monetary Fund. These organizations asked India to lower the value of rupee against the — matlab, devalue the rupee — in exchange for funds that would meet India’s fiscal deficit. The rupee was devalued from Rs. 4.35 to 7.50 against a dollar.

We know that it takes more than just changing the value of the rupee to liberalize the economy. The Indira Gandhi government loosened its grip on the import tariffs and industrial licences. But — with the rupee more expensive now, imports cost the country even more! The funds from the international organizations weren’t coming in time. Most importantly, doston, let’s remember that at that time, we were still a new country. We had modelled our economy after the soviets by imposing complete government control. But there was no other country in the world that had gone from a closed economy to an open one suddenly! Instead of an increase in economic growth, the rate of growth decreased from 3.4% to 2.3% after this move. 

In a matter of bad luck, India was also going through a crisis of food production for the last few years. The agricultural production was so low, that in 1966, India had to import nearly 10 million tonnes of food. This was also a burden on the economy. Overall, the economic growth was extremely slow.

Clearly, economic liberalization for India failed in 1966. 

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Our economy had several more highs and lows in the next few years. The growth rate in these years remained about 3.5% and our income increased only by 1.3%. 

I’ll let you in on a controversial story: in the 80s, this low rate was called the “Hindu rate of growth”. This term was coined by Professor Raj Krishna, who explained that the low growth rate of India is because of the concept of “bhagya” and “karma” believed by Hindus. A majority of the Indian population was Hindu, and they believed that this was their “bhagya” — and hence did not do anything to change the economy. Several experts of that time used this expression.

Of course, this theory was later on rejected.

For many years, India faced problems in the economy — the low growth rate, inflation and international debts.  These big and small crises were handled by the government. But in 1991, the crisis had slipped out of the government’s hands (haath se nikal gayi thi). 

Our fiscal deficit had been increasing since 1985 — by 1990, it was 12.7% of our GDP, which was definitely a cause for concern (chinta). The inflation rate too, at 10.3%, was worrying. In 1991, our foreign exchange reserves were so low that we could hardly afford two more weeks of imports! This included oil. This means that if the government didn’t do something, then the citizens wouldn’t have gas for the cylinders in their kitchen. 

And then, this happened:

[We hear a news report about a truck of gold being transported]

Not just gold — but almost the entire gold reserve of the country! In may 1991, the government pledged 67 tons of gold in the Bank of England and the Union Bank of Switzerland to raise $2.2 billion dollars from the International Monetary Fund. 

But only paying off debts wasn’t going to change the economy. Take the example of reforms that happened in China, in 1978. Deng Xiaoping (डेंग शाओपिंग) implemented reforms that China, which had been ruled by a communist party, had never seen before. He did this gradually, “crossing the river by feeling the stones,”, as he said. He introduced reforms in the agricultural sector, in the urban industry, and opened up foreign investment. These economic reforms paid off for China — a shining example has been Shenzhen, a small fishing village that became one of the country’s wealthiest cities.

Coming back to the reforms in our country.

In may of 1991, P.V. Narsimha Rao was elected as the Prime Minister of the country, after Rajiv Gandhi was assassinated. Narsimha Rao, along with his finance minister Dr. Manmohan Singh, pledged to pull India out of this disaster for once and for all. Narsimha Rao and Dr. Singh had to act quickly — but they were not always in agreement. 

Dr. Manmohan Singh, in his quiet manner, had a plan for the economy. He wanted to free the Indian market and invite global competition, so that economic activity could increase. The first step for this was to devalue the rupee, just like in 1966. Matlab? Simple: decrease the value of the rupee against the American dollar.

This would invite foreign investment and foreign companies into the Indian market, because it would be cheaper to invest in India now. Though Narsimha Rao was against this move, Dr. Singh went ahead and devalued the rupee twice – by 18 and 19% in early July of 1991. This move was code-named “Hop, Skip and Jump”, because of its sudden nature.

The New Economic Reforms followed, slowly. In the next few days, P. Chidambaram, the Commerce Minister, announced the trade policy reforms. The office of Chief Controller of Imports and Exports was removed. The customs duty on many items were done away with. Now, you didn’t even have to get a licence to import. This was an important reform. The rest of the Industrial Policy of Liberalization, Privatization and Globalization was announced to the country on 24th July — as we know, Dr. Singh announced it in the budget. Dr. Singh assured the country that the government had not only taken care of the economic crisis that almost drove India into debt, but also that this was the beginning of a new era. 

India, as we knew, had changed. 

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Doston, isn’t it interesting how the economy of a country is intertwined to its culture? The liberalization of India, of course, had a great effect on the economy. In 1991 itself, merchandise trade made up 14% of our GDP. By 2006, this number was 33%. And like I told you before, a massive portion of the profits we make come from private companies. In fact, our national income, which grew at a rate of 5.2% in 1991, is now at the growth rate of 7.6%. 

But these are only some of the results of the reforms. 

Think of the New Economic Reforms as…as a domino! With one push, several other dominoes, fall right? In the same way, after the economic reforms were implemented in 1990, it’s not as there were only a few big and small changes in the economy. Yes, slowly, different parts of the economy started changing. And this domino pushed others — our society, parts of our culture. It affected how we buy things, and even how brands sell it to us!

Let me explain what I’m talking about. Somewhere in the 1980s, if you went out on the street, you’d see only Ambassadors or Maruti cars on the road. Maybe a Fiat padmini somewhere. But that’s all. These companies sold to the customers who were loyal to the brand — this was almost a subscriber-led model. They hardly advertised their products!

And this was the case with many other brands in the sector, as well.

The New Economic Reforms changed this. With so many new brands entering the sector, there was more competition. And what other way to deal with competition than to…advertise! Brands started bringing in celebrities, advertising on radio, newspapers and eventually TV. Can you imagine living in a time without advertising? 

Liberalization also changed how we thought of ourselves — and others.

For instance, in the 80s, only the rich and well-connected families had a telephone. It was a symbol of wealth. After the reforms of 1991, several private companies entered the telecom sector. Not to mention international brands that introduced the smartphone in India. A telephone is no longer something special. 

But — to have a specific brand of smartphone?

That is a symbol of status and wealth. Globalization allowed the entry of international brands into every sector — automobiles, clothes, jewellery, food industry. This completely changed our lifestyles in a way that was never imagined before liberalization. 

The economic growth increased steadily at 6 to 9% after liberalization. A sector that benefited from this move has been the IT sector in India. Not having to worry about any borders, the exchange of technology, hardware and information led to a booming IT sector in India. Today, some of the world’s biggest IT companies have offices in India. 

Even though this started with globazalition, it is liberalization that allows us to set up our own companies easily — and in a way, you can say, that led to the Indian startup culture!

Economic Liberalization hit another domino — the social and financial status of the country. The standard of living has grown at a steady rate of 4% after 1991. Poverty increased immediately after the reforms — in 1994, more than 45% of the population was below the poverty line. In 2012, this number reduced to 22%, and our population increased significantly in that time.

Almost 30 years later, the benefits of liberalization are obvious to us. 

But there is another side to this story. Let’s try to understand this. 

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In 1991, you could say that the government withdrew itself from the economy. Before this, the government controlled the economic activity, even by private companies. Without this control, private companies can do whatever they want — and you can imagine what happens in that situation. 

These companies have exploited labour, land and the environment in order to manufacture products. 

Many parts of India, places that were rich in natural resources have suffered because of liberalization for many years. 

Take the case of Odisha, a place that was rich in mineral ore. Almost immediately after liberalization, the Odisha government started selling land to private companies. These companies wanted to mine this land. Almost 3,000 acres that were cultivated by the tribal community of Odisha were given, and the tribals had to vacate their homes. Not only this, it is this community that would have to suffer the environmental consequences of mining in the state. 

For years, the people of Odisha opposed this move. They protested outside government offices and didn’t allow builders into their land. But the government too, was determined to sell the land. In 2000, finally, the land was sold to private companies who mined ore and bauxite from the lands of Odisha. In the end, what could the people do? 

But here’s another question that I want to ask you … 30 years after 1991, how liberal are we?

We live in the times of profit-making private companies, and yet, in so many households getting a government job is the most prestigious thing you can do. Government colleges are associated with the country’s most high quality education. Even government companies like LIC rule the insurance sector. In fact, when it comes to the insurance and banking sectors, liberalization has been slow.

In a way, we haven’t let go of the economic culture that prevailed before 1991.

I told you about globalization and opening our borders to foreign companies. But quite recently, this happened:

[We hear a news report about tiktok getting banned in India]

Chalo, yeh toh nayi baat ho gayi. But since 2001 itself, print media in India has been hesitant in allowing foreign investment in our media. Last year, the government announced a 26% limit for foreign  direct investment ya FDI in digital media. But not everyone likes this verdict — in fact, there is a 1955 cabinet resolution that bans foreign media to publish newspapers in India — and now, Indian newspaper federations like INS and PTI are pushing to make this resolution a law. 

In many ways, we are still resistant to — and even suspicious — of globalization.

In the very beginning, doston, I told you that this episode is about freedom. Economic Liberalization certainly gave us the freedom to develop, to open our economy to the world, to welcome new technologies and a new lifestyle. But with freedom, also comes power. 

Liberalization has allowed private companies to have immense power in the economy — and perhaps it is this misuse of power that will make you think twice: has Liberalization of India been successful?

I will leave you with that thought. As always, I hope we’ve been able to learn something about our country and ask important questions. 

I’ll see you next week with a brand new episode of Maha Bharat!