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By Anjan Roy
Thirty-three years are half a lifetime. Thirty-three years ago, Dr Manmohan Singh stepped into a high-profile limelight, well after his formal retirement from a senior government job. When he died last Friday at the age of 92, he was considered India's greatest finance minister and the architect of India's modern economy.
There is currently a national effusion of love and recognition for Dr Manmohan Singh, which ironically was absent during his lifetime. On the contrary, often enough, scorn and insults were heaped on him.
As in everything, if Manmohan Singh's life was marked by one quality, it was staying away from effusiveness. He was known for his measured response. To the criticisms, Manmohan Singh's cryptic response was“history would treat me more kindly”.
An enthusiastic and committed economic reformer, even his approach to economic reforms was measured and never gung-ho like that of so many others who bore the torch of managing the finances of India. That saved India a lot of suffering.
Thirty-three years back in 1991, India's situation was precarious. India was going through a period of deep political and economic uncertainty. The country faced problem of external solvency as the“coffers” were empty. On top of that, Rajiv Gandhi was assassinated by Tamil militants, creating a political vacuum.
In the 1991 general elections, the Congress was voted to power and P.V. Narasimha Rao was pulled out of retirement and made prime minister. The top priority of the new prime minister was to find a competent finance minister.
Prime Minister Rao's first choice was Dr I.G. Patel, once RBI governor and a world renowned economist. Patel had then just settled down in his hometown in Gujarat after a peripatetic life and refused to budge from there.
Patel suggested Dr Manmohan Singh, who had by then occupied almost every possible position handling the economic policies of the government; from being RBI governor to member-secretary in the Planning Commission. He was also the economic adviser to ex-Prime Minister Chandra Sekhar.
Prime Minister Narasimha Rao contacted him through P.C. Alexander, woken him up from his sleep after a long flight from Geneva. Alexander had just returned after serving as chairman of the South-South Commission in Geneva.
Here was a new government led by two retired persons. Ironically, that team has put India on its new journey of growth and future eminence. The subsequent storyline could just as well be told in a single sentence: Two old men in search of a new dawn.
Referring to his choice as finance minister, Manmohan Singh had observed in the course of launching a book of a collection of his writings and speeches, that he was not only an“accidental prime minister', as some people said, but an“accidental finance minister too”.
Such was the fluid scenario then, when on July 24 1991 Dr Manmohan Singh presented his maiden budget. Manmohan Singh's 1991 budget had become the stuff of legend for economists, for the ringing commendation lines of his budget speech.
The Narasimha Rao government was sworn in on June 21. In the following month preceding the budget, some of the most seminal reforms were already introduced which has guided the course of the Indian economy since.
Some of these were critical steps for resetting the Indian economy. And devaluing the Indian rupee was not least of them. Devaluation of the rupee was a hypersensitive matter. An earlier devaluation in 1966 had proved it to be nothing short of a disaster. Anticipating trouble, Manmohan Singh cautioned his prime minister and warned Rao that the issue should not be referred to Union cabinet but should be passed right there and then.
For maintaining secrecy, Manmohan Singh prepared a handwritten note on devaluation and got it cleared from the Prime Minister, who had advised a gradual and softer approach. To soften the blow, Dr Singh suggested a two stage devaluation - the first relatively smaller and the next slightly bigger.
I still recall the flutter that the first devaluation had caused. We the economic journalists covering the finance ministry were given indications that the Prime Minister himself developed cold feet after the first stage devaluation and instructed his FM to hold back the second dose.
Manmohan Singh had called up the deputy governor in RBI in charge of foreign exchange, Dr C. Rangarajan, in the morning of June 3 to say that he should hold back the second devaluation. However, Dr Rangarajan informed Dr Singh that the deed was already done!
Dr Rangarajan and his department of exchange control had already“jumped”, Montek Singh Ahluwalia recalls most interestingly in his memoir. The effect of the combined devaluations would be that of a sledge-hammer blow in two directions.
First, a deep devaluation could finish off the extensive hawala transactions in the Indian rupee, which was rampant. Secondly, as a corollary, it would be a body blow to gold smuggling. Along with these steps, the finance minister had liberalised gold import norms for incoming international passengers.
Later still, when the immediate crisis was over, the exchange rate of the rupee was made fully convertible on the trade account; that is, for exports and imports. Making the Indian rupee exchange rate market determined made the greatest difference and its good effects are still working out.
The exchange rate reforms gave market-linked flexibility to India's domestic economy with the rest of the world. Thus, incentives and scope for gains from extra-market manipulations disappeared and an automatic corrective mechanism was introduced.
On that fateful day when the rupee was set to float, it had depreciated from around 16 to a dollar to about 24 to a dollar by the end of the day. What it did was to make imports costlier and exports cheaper. Overall, the demand within the Indian economy shifted from external markets to domestic market.
Much later, during the taper tantrums in 2014, the flexible exchange rate insulated India from the worst financial fall-out.
Along with the exchange market reforms, the new finance minister and his team also opened up the secondary market in stocks and shares to overseas institutional investors. This started the inward flow of investment dollars. FDI was also liberalised.
The overall impact of these measures was that while in 1991 June-July, India had barely $1 billion reserve, enough foreign exchange reserve to meet just a week's imports, in two years the country was seeing a problem of plenty in foreign exchange.
I remember a meeting in the Constitution Club on New Delhi's Rafi Marg, where Montek Singh Ahluwalia, by then finance secretary, was discussing various ways in which the foreign exchange inflows were being sterilised to prevent overall rise in domestic prices.
Consider building up the picture of today's Indian economy with a fixed exchange rate system, it would be impossible to accommodate any of the present features of the economy.
Along with the reform of exchange rate system, the 1991 package freed up the entire working of the economy. The industrial licensing system, which was an absurd set to controls on the domestic industry, was dismantled and the system of taxation was recast. The capping piece was Dr. Manmohan Singh's 1991 budget which had captured the spirit of the times.
In his commendation line, Dr. Manmohan Singh had quoted Victor Hugo. It has since been recounted and retold so many times that one need not say it again. The wrap up line was and is that Dr Singh's spirit permeated all that he did. (IPA Service )
via How Dr. Manmohan Singh Reset A Floundering Indian Economy
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