IF India Inc is very confident today, much to the credit of Manmohan Singh, who as finance minister in 1991 initiated sweeping economic reforms and opened India to the world. Despite internal opposition, he proceeded with the full support of the then Prime Minister PV Narasimha Rao. And yet he did so carefully, sensitizing people along the way to the need to revisit old stereotypes.
As he signed off on a second term as Prime Minister in 2014, he signed off saying “History will be kind to me”. A man with no background in politics and degrees from Cambridge and Oxford universities to back up his middle-class upbringing, there is no debate about Singh’s place in history: the one who played a key role in leading India away from rebellion. The bonds of the socialist era that lasted more than four decades and then piloted the phase in India’s history when the domestic economy achieved the fastest economic growth, when the country was billed as the new Asian miracle, and when more than 300 million people were lifted out of extreme poverty.
Singh’s lasting legacy will be his achievement, under the leadership of former Prime Minister Narasimha Rao, in the era of reforms in 1991 – from the controversial two-step devaluation to liberalization and globalization policies. As Prime Minister for more than a decade thereafter, Singh’s leadership also saw the significant rollout of laws for right to education and guaranteeing rural employment. On the occasion of the Right to Education Act enacted in 2010, he gave an example of the power of education in his life journey as he was born in a normal family and grew up due to education. “I read by the dim light of a kerosene lamp. I am what I am today because of education. I want every Indian child, girl and boy, to be touched by the light of education,” he had said.
Singh’s reforms in 1991, which sought to liberalize the economy from the shackles of socialist rules until then and ended the ‘licence raj’ through industrial policy reforms, strengthened his position as finance minister, helping India emerge from a critical balance of payments rut. At the time of the crisis, the country had sufficient foreign exchange reserves for only two weeks of imports, compared to the normally safe level of three months’ import cover.
The reforms were seen as a combination of the political will shown by then Prime Minister PV Narasimha Rao and the intelligence of Singh, a trained economist. But it was not only Singh’s skill as an economist during this crisis, but also his integrity. As noted by senior Congress leader and MP Jairam Ramesh in his book ‘To the Brink and Back’, Singh was concerned that his personal “common dollar savings” born out of his South Commission tenure in Geneva would Balance Rs. During 1987-90 the inflation would be accompanied by the proposed devaluation along with the proposed change in the rupee-dollar exchange rate. Therefore, Singh informed Rao that he would deposit the “windfall profits” he had set up to deposit in the Prime Minister’s Relief Fund. And he did.
A sharp rise in oil prices in August 1990 led to an acute economic crisis, disorganizing the balance of payments situation, depleting foreign exchange reserves with massive capital outflows, and pushing India closer to the possibility of default. These peculiar circumstances led the government to resort to economic defense by devaluing the rupee on July 1, 1991, the RBI transferred over 46 tonnes of gold from its reserves to the Bank of England for foreign currency borrowing to manage the immediate liquidity problems resulting from the BOP crisis.
The rupee was devalued in two phases of 9 per cent and 10 per cent over a period of three days, with the total downward adjustment in terms of pound sterling reaching 17.38 per cent and 18.7 per cent in US terms. dollar. This two-step devaluation process was not easy. In fact, as Ramesh mentions in the book, Rao called Singh on the morning of July 3, 1991 to stop the second devaluation. Singh then called the then RBI Deputy Governor Dr C Ranjagarajan at 9:30 am and asked him to stop the second round of devaluation – only to be told that it had already taken place at 9 am. Ramesh writes in the book, ‘The Finance Minister (Singh) was certainly happy about this, but the Prime Minister (Rao) was less enthusiastic about the news.
These steps were followed by the government announcing a new industrial policy resolution, abolishing most business licenses, granting freedom to enterprises, opening up the country to foreign direct investment, which substantially deregulated the industrial sector. On 24 July 1991, Singh presented the new industrial policy along with the budget as the finance minister.
Along with these policy reforms, nearly 80 percent of the industry was taken out of the industrial licensing framework and the Monopolies and Restrictive Trade Practices (MRTP) Act was repealed to remove the need for prior approval for capacity expansion by companies. The new policy has reduced the number of sectors reserved only for public sector companies from 17 to 8. These structural reforms saw new enterprises come into the picture in both the industrial and service sectors, accelerated growth and lifted large numbers of Indians out of poverty. These measures were followed by liberalization of the banking sector and capital markets.
According to the recommendations of the Narasimham Committee report of 1991, the government proposed to reduce the SLR (statutory liquidity ratio) from 38.5 percent to 25 percent and the cash reserve ratio from 25 percent to 10 percent within three years. Over a period of four years. Bank branch licensing policies and interest rate fixing by lenders were also liberalized. These measures ensured that the financial sector had the capacity to invest in the economic expansion that was being initiated by liberal industrial and trade policies.
Equally important was Singh’s tenure at the Reserve Bank of India from September 1982-January 1985. Singh became the Governor of the RBI on September 16, 1982, with his experience as Secretary in the Ministry of Finance and Member Secretary of the Planning Commission. He was transferred on January 14 after a relatively short tenure of 16 months. 1985, a month after Rajiv Gandhi became Prime Minister.
Singh admitted in his daughter Daman Singh’s book ‘Strictly Personal: Manmohan and Gursharan’ that he had serious differences with then Finance Minister Pranab Mukherjee when he was RBI Governor.
Singh advised the government to allow Bank of Credit and Commerce International (BCCI), a foreign bank promoted a decade ago by Pakistani businessman Agha Hasan Abedi, to open two branches in India. However, the government wanted the RBI to grant the license to the BCCI and directed it to approve the application. After protests by the RBI led by Singh, the government brought a proposal to the Cabinet to take away the RBI’s authority to allow foreign banks. Singh protested and sent his resignation to Mukherjee and the Prime Minister. However, the government persuaded him to continue as governor. Singh and Mukherjee reportedly had differences over UK-based industrialist Swaraj Paul’s hostile takeover plans for Escorts and DCM.
Mukherjee wrote in his book ‘The Turbulent Years’ that the then Prime Minister Rajiv Gandhi took the decision to move Singh from the RBI to the Planning Commission. “I had no role in the departure of Dr. Manmohan Singh from the RBI. By December 1985, (then) Prime Minister Rajiv Gandhi was firmly in the saddle and I was out of the cabinet and the party,” he wrote in the book.
Singh said that the RBI governor enjoys a place of honor in our system, but the finance ministry always “want to lower the status of the governor”. “The RBI governor is not superior to the finance minister in authority. And if the finance minister insists, I don’t see how the governor can really refuse unless he is ready to quit his job,” Singh’s daughter’s book quoted him as saying.
When Singh was Governor, the National Clearing Cell (NCC) was set up by the Bank in November 1983 to introduce mechanized check processing and national clearing of cheques. That was the beginning of the automation of fund transfers in the banking system.
In January 1984, the powers of the RBI were strengthened with the enactment of the Banking Laws (Amendment) Act, 1983. This enabled the RBI to expand the activities banks could undertake – such as leasing – and facilitated enrollment to account holders and streamlined returns. . RBI was then able to prohibit unincorporated bodies from accepting deposits from the public except up to a certain extent. During his tenure, extensive legal reforms related to the banking sector were also introduced and a new chapter was introduced in the Reserve Bank of India Act and the Department of Urban Banks was set up to supervise the affairs of urban cooperative banks.
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