Manmohan Singh, Architect of Economic Reforms

Manmohan Singh, former Prime Minister and Finance Minister of India, passed away on December 26, 2023, at the age of 92. He will always be remembered for playing a pivotal role in saving India's economy during the 1991 economic crisis.

Brief background

• During the 1991 economic crisis, India was on the verge of a sovereign default (unable to pay off its debts), with extremely low foreign exchange reserves. The government even had to pledge its gold reserves to raise money.
• This crisis was caused by years of poor economic management, where the government was spending more than it earned, leading to high levels of debt.
• India's economy was also heavily controlled by the government through the License-Quota Raj, which restricted business growth and hindered private enterprise.
• In 1991, when Singh took over as Finance Minister in P.V. Narasimha Rao's government, he introduced a series of economic reforms that transformed India's economic landscape:
• Deregulation: Industries that were previously tightly controlled by the government were opened up for private sector participation.
• Trade liberalization: The government reduced import tariffs (taxes on imports) and removed restrictions on exports.
• Devaluation of the rupee: The Indian currency was made weaker to make Indian products cheaper abroad, boosting exports.

Key Achievements of the Reforms

• India’s Growth in the Global Economy: The 1991 reforms played a crucial role in increasing India's presence in the global economy.
  • According to World Bank data, India’s share in global GDP (the total economic output of the world) had been declining since the 1960s. However, after the reforms, India’s economic growth accelerated, and its share in global GDP began to rise. Today, India is on track to become the third-largest economy in the world.
• Poverty Reduction and Welfare Programs: Another major achievement of the reforms was a significant reduction in extreme poverty. As the economy grew, the government was able to generate more revenue, which it could then use to fund welfare programs aimed at helping the poor.
  • Although poverty is still a problem in India, especially in rural areas, the economic growth resulting from the reforms has helped lift millions out of extreme poverty. The reforms also created a cycle of wealth generation, which improved the government's ability to address poverty.
• Rise of Private Businesses and the Stock Market: The reforms helped unleash the power of private enterprise. By deregulating industries, businesses were no longer restricted by government controls, allowing them to grow, create jobs, and compete globally.
  • The stock market also grew rapidly after the reforms. In the early 1990s, companies like Infosys were able to list their shares on the stock market, which sparked the development of an equity culture in India.
• Increased Foreign Investment: Following the reforms, India became a more attractive destination for foreign investors. The liberalization of markets and the opening up of sectors to private businesses helped bring in foreign direct investment (FDI). This investment provided stability to India's economy, even as imports increased.
  • The inflow of foreign capital also helped stabilize the Indian rupee and supported the growth of India's stock market.

Challenges That Remain

• Manufacturing Sector Stagnation: Despite the impressive growth in sectors like services (IT, software, etc.), India has not been able to boost its manufacturing sector as much as other countries like China.
  • The share of manufacturing in India’s GDP has remained stagnant since the reforms. This has been a big concern because a strong manufacturing sector can create jobs for millions of people and lead to more inclusive growth.
  • Even though India missed the opportunity to become a major manufacturing hub, some states have done better than others in attracting manufacturing investments. Moving forward, India's policymakers need to focus more on building up the manufacturing sector to create more jobs and strengthen the economy.
• Inequality and Regional Disparities: While the economic reforms helped reduce extreme poverty, they did not equally benefit all parts of India. Inequalityremains a challenge, with some regions and states growing faster than others. The growth has been more visible in urban areas, while rural regions have seen slower development.
  • There is also concern about the growing gap between the rich and poor, as a large chunk of the wealth created by the reforms has been concentrated among a smaller group of people.

The 1991 economic reforms led by Manmohan Singh marked a turning point in India's history. The country went from being an economically closed nation with a struggling economy to an open, fast-growing economy that is now one of the world’s largest. Manmohan Singh’s legacy will always be tied to the economic transformation he helped bring about.