Context
∙ S.Venkitaramanan, who served as the Governor of the Reserve Bank of India (RBI) from 1990 to1992 passed away recently.
About S.Venkitaramanan
∙ He was appointed as the 18th Governor of RBI by the government in 1990.
∙ He navigated the Reserve Bank of India through the crucial years of the 1990 balance of payment crisis, subsequent economic reforms and the Harshad Mehta scam.
∙ He played a pivotal role not only in crisis management but also in implementing subsequent reforms under then PM Manmohan Singh.
1991 Economic Crisis in India
∙ Balance of Payments Crisis: India faced a severe balance of payments crisis in 1991. The country’s foreign exchange reserves were depleted, and it struggled to meet its international payment obligations.
∙ External Debt: India had accumulated a substantial external debt, and servicing this debt became increasingly challenging. The country was at risk of defaulting on its debt payments.
∙ Stagnant Growth: The Indian economy was experiencing slow growth, and various sectors were characterized by inefficiencies, lack of competitiveness, and bureaucratic hurdles.
∙ The industrial licensing system, which required government approval for private investment in many sectors, stifled economic activity.
∙ Fiscal Deficit: The fiscal deficit was high, and the government was running large budgetary imbalances.
∙ This led to increased borrowing, contributing to the overall economic stress.
ο Global Factors: The global economic environment, including rising oil prices after the Gulf War and economic sanctions on India in response to its nuclear program, added to the economic challenges.
Immediate Step Taken by Government
∙ Pledging gold holdings to shore up forex reserves: With the foreign exchange reserves going below the critical $1-billion mark, the Government decided to sell confiscated gold.
∙ Nearly 47 tonnes of gold was shipped off to destinations abroad in four tranches.
∙ This helped raise about $400 million for the government.
∙ The entire operation, cloaked in secrecy, was conducted by State Bank of India.
∙ Devaluation of the Indian Rupee: To address the balance of payments crisis and improve export competitiveness, the government devalued the Indian rupee by about 20% against major foreign currencies.
Reforms by Government of India
∙ Liberalization: The government initiated economic liberalization by reducing trade barriers, promoting foreign direct investment (FDI), and dismantling the license raj, which had restricted private sector participation in various industries.
∙ Privatization: The government started privatizing state-owned enterprises to improve efficiency and competitiveness.
∙ This was a significant departure from the previous policy of state control in various sectors.
∙ Deregulation: The government eased regulations and bureaucratic hurdles, making it easier for businesses to operate. This contributed to increased competition and efficiency in the economy.
∙ Fiscal Reforms: Efforts were made to address the fiscal deficit by reducing government expenditure and increasing revenue generation.
∙ Creation of Special Economic Zones (SEZs): The concept of Special Economic Zones was introduced to attract foreign investment and promote export-oriented industries.
∙ These zones were granted certain exemptions and benefits to encourage economic activity.
∙ Initiation of Structural Reforms: The government embarked on a broader program of structural reforms, addressing issues such as taxation, labor laws, and infrastructure development to create a more conducive environment for economic growth.
∙ Budget 1991-92: Presented by Manmohan Singh, the budget was a continuation of the reform measures undertaken by the Indian government.
∙ The budget increased corporate tax rates by 5 percentage points to 45 per cent and introduced the concept of tax deducted at source for some financial transactions like bank deposits.
∙ A scheme for people to declare unaccounted wealth was also announced. People were given immunity.
Conclusion
∙ These reforms marked a paradigm shift in India’s economic policy, leading to higher economic growth, increased foreign investment, and improved economic indicators in the subsequent years.
∙ The year 1991 is often considered a turning point in India’s economic trajectory, as it set the stage for the country’s emergence as one of the fastest-growing major economies in the world.
