24TH JULY 1991

I would consider this date, i.e. 24th of July 1991, one of the most important dates in Indian history. It comes third on the list only after 15th August 1947 and 26th Jan 1950. You must be wondering why so? Well all of us know that the economic liberalization in India started in 1991, well my friends it is this exact date on which this very important reform took place. I would term it as the Independence Day of Indian Economy. Now lets try and answer a few questions. Why was this process of economic liberalization required? Whose idea was it? Why wasnt it enacted earlier? Why suddenly after almost 45 yrs of independence did the politicians want a free economy? What good did it do the economy? Right after independence, when our politicians and leaders sat down to chart an economic policy, they were afraid of any foreign exposure, they had to be, we had just got free from the British, their reluctance is understood. So when the policy was made it was one which had a lot of protectionist measures, focus on import substitution (i.e. India should only rely on internal markets for development and not international markets), the state imposed many rules and regulations on the labour and financial markets. Almost everything was to be controlled by the state. This kind of economic model was borrowed from the Russians, where they followed a mixed economy. In this mixed economy, capitalism is mixed with government intervention. Consider you are a private manufacturer of textiles, in a mixed economy the government will determine whether to grant you a license or no and if you are lucky to get a license, the government will determine how much you produce and not the markets!! So if the market demand is 100 and you are producing less, you just cant start producing more, you will have to get a grant from the government to expand. And for some reason you want to close your factory because you are making losses, well my friend you simply cant, you need government approval for that too. Ah yes! I almost forgot, you want to fire an inefficient worker? Well you cant just hand him the pink slip, you have to ask the big daddy, aka The Government. Basically till the 24th of July 1991, the day when the economic reforms were implemented, the whole private industry was under government control. It is said that to start a manufacturing unit you had to first get around 80 licenses from various government bodies and then could you start that unit. Therefore this era was aptly called the License Raj. The average GDP growth rate from 1950s to 1980s was as low as 3.5%.Prior to 1991, the Indian economy was closed to the outside world, even the Indian Rupee was inconvertible, we had fixed exchange rate system, where the value of the rupee was fixed with respect to certain other currencies and not market determined as it is now. This whole system led to a Balance of Payments crisis, i.e. a situation where the nation cant even pay for the essential imports and/or debt payments. This crisis started in 1985 and aggravated through the years and finally reached a peak in 1991. The situation was so bad that India had foreign reserves for only three weeks of imports and the central bank had denied any more loans to the government. To overcome this situation the P. V. Narsimha Rao government along with the then finance minister Dr. Manmohan Singh decided to pledge 20tons of gold to the Union Bank of Switzerland and 47tons

to the Bank of England as part of the $2.2Billion bailout deal with the International Monetary Fund (IMF). The IMF further directed India to undertake drastic economic reforms. Therefore on the 24th of July the then Finance Minister enacted several economic reforms, though many reforms which the IMF pursued were not enacted, but these reforms opened the Indian Economy to the world markets, the government regulations were curbed. The economy was on its way to become a free economy. The rupee was de-regularized. As a result of these reforms the GDP growth rate increased to an average of 5.8% since 91 to date, reaching a peak of 9% in 2007, the foreign exchange reserves have increased from $132Million to $314Billion in 2008. Around 300 million people have escaped poverty as of 2009 and currently we are the fourth in the world in terms of Purchasing Power Parity, we have the worlds fastest growing telecommunication industry, one of the largest producers of automobiles, we are one of the largest IT and ITES industries in the world. The reforms certainly did us a lot of good.