Looking back at 1991: Memories of an economic and political crisis

In hindsight, one realises that 1991 was a rare year. We had just got cable TV (not Tata Sky, but your neighbourhood cable-walah) and were glued to watching the Gulf War.

Then the old Union of Soviet Socialist Republics (remember USSR?) collapsed in December that year, as did Japan’s asset price bubble. Somewhere in the middle, India nearly imploded in an economic crisis.

Those are a lot of huge events in global history. This does not tend to happen often in a single year. They make Brexit – Britain’s decision to exit from the European Union – pale in comparison.

But not many of you will remember 1991, or India’s liberalisation measures – a slew of reforms that opened up the economy and heralded a shift from the licence or permit-raj era – that year. After all, more than half the Indians today are aged less than 25 years and therefore, in all probability, most of you weren’t even born then.

On the brink

If you were, you would have witnessed the birth a new liberalised India. Much of the “fastest growing country in the world” claim that India flaunts today has its roots in the measures taken then. And those measures were taken with our backs against the wall, in the throes of a serious economic crisis.

In fact, the Gulf War and the collapse of USSR played an instrumental role in precipitating this crisis. The fall of the USSR resulted in a fall in exports since, in those days, exports to Eastern Europe accounted for about 20% of India’s total exports.

In any case, Indian exports weren’t growing much since global growth, including the US, in those days had stalled. The Gulf War resulted in crude prices shooting up, and this increased our imports bill. Our domestic economy those days wasn’t as strong as it is now. Fiscal deficit was running at an astronomical and unaffordable 7%.

Hence, while the rise in oil prices created ripples globally, it only added to an already stressed economic scenario in India.

Stalling exports and rising imports meant that our trade deficit shot up. We run a trade deficit today too, but we have foreign investments to pay for this deficit. But in those days, in a closed economy, India wasn’t open as it is today to foreign investment. This meant that we had to take foreign currency loans to pay for our imports. Our foreign reserves had depleted rapidly, which meant that India was close to defaulting on its foreign debt. With not many easy choices left, the Reserve Bank of India pledged our gold reserves to raise a loan from the International Monetary Fund.

A political crisis

Alongside this steady deterioration in India’s domestic and foreign fiscal situation, India was also seeing political upheavals. The resignations of Prime Ministers VP Singh and Chandra Shekhar between 1990 and 1991 created a politically charged atmosphere. Former Prime Minister Rajiv Gandhi was assassinated in May 1991, adding to the overall volatility.

General elections were held between May and June that year, after the previous government collapsed within 16 months. But coalition politics continued since no single party got a majority. The Congress formed a minority government which, thankfully, lasted its full term of five years.

Bear in mind that these elections happened against the backdrop of the economic crisis. When PV Narasimha Rao became prime minister, he didn’t have too many options. Earlier in July, the RBI had devalued the Indian Rupee in response to the ballooning trade deficit. In those days, India’s exchange rate management system was far more rigid than it is today.

A memorable speech in uncertain times

When Rao took over as prime minister, he got along Dr Manmohan Singh as India’s finance minister. What happened next is now well known, although the deeper history (for example, which politicians favoured the liberalisation reforms, which ones opposed it) is still being written. There are also plenty of arguments on whether or not what Rao and Singh did was correct, or whether it was too little. But all that is now in the realm of intellectual debate.

On July 24, 1991, Singh gave a historic Budget speech that is a must-read for any student of history, economics, and markets; or anyone with a fascination for that key moment in India’s history. For a man who chose his words carefully, Singh was very vocal in his warning.

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

After outlining the various reform measures, Singh ended on a positive note. “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,” he said. “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

The economic reforms that followed possibly changed every sector of India. Our Gross Domestic Product has risen six-fold, our finances are far stronger and economy far more vibrant. Sure, a lot more could have been done at the time but then a lot more also needs to be done now.

But, in this 25th year of our economic reforms, let us remember the chaos and turmoil that pushed us to change. And let us hope that 25 years from now, our country does far more without the need of crises to make much-required changes.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.