Days before Dr. Manmohan Singh became the Finance Minister of India in 1991, the World Bank warned India that it owed the world $70 billion or Rs 1,82,000 crore at post-devaluation exchange rates. The government of India too admitted in a report that it overspent the whopping amount of Rs 40,000 crore annually.
On the other hand, the GDP growth rate was at 1.06% while the inflation clocked 9.87%.
Experts warned India of an economic collapse soon if the ways were not changed immediately.
Similarly, the imports have been overstipping by Rs 10,000 crore and the foreign reserve hit rock bottom with $5.8 billion, enough to meet the export bills of just two weeks.
What Did Manmohan Singh Do With IMF Loan?
After taking over the reins of the Indian Economy at such a dangerous juncture, the Cambridge-educated economist declared that he would not splurge the money taken as a loan from the IMF on financing domestic consumption or repay the short-term $4 billion commercial loans.
Also Read: How Manmohan Singh Dismantled Licence Raj To Unleash India’s Economic Potential
He declared that the IMF loan would be used as a buffer “to calm the markets” and persuade international bankers to allow a longer period for the repayment of the short-term loans.
Devaluation OF Rupees
In what may be regarded as an “economic bomb”, Manmohan Singh devalued Indian Rupee by 20% against the US Dollar. It was too quick a decision as he announced the devaluation on July 1 and July 3, 1991, only a few weeks after taking the charge. He took this drastic decision to prevent the flight of non-resident Indian (NRI) money, estimated at Rs 100 crore a week.
The economist-turned-politician was in a hurry, at the receiving end of flaks from his own party, but equally confident and resolute on resolving the issues as soon as possible.
Manmohan Singh Launches LPG
He launched the famous LPG or the Liberalisation, Privatisation and Globalisation of the moribund Indian economy.
Dismantling License Raj
Besides, he dismantled the ubiquitous License Raj, the labyrinthine mess, that kept the Indian business in fetters for decades. If reports are to be believed, a businessman needs as many as 80 permits to launch a business.
In an attempt to break the Gordian Knot, Manmohan Singh started the ‘Single Window System’, which was designed to give all permission at a single point.
Also Read: Untold Story Of How Adversity Shaped Manmohan Singh’s Legacy, Rajeev Shukla Reveals
The Finance Minister changed the policies in such a way that the number of permits and licenses required was reduced to the bare minimum.
FDI
In a bid to attract investment, Manmohan Singh removed the 40% cap on foreign equity investment. He also encouraged the Reserve Bank of India to allow “automatic approval” for foreign investment of up to 51% in 34 industries.
Pledging Gold Reserve
Dr. Manmohan Singh also took the bold decision of pledging the gold reserves as collateral for loans from international financial institutions like the IMF. He got an emergency loan of $2.2 billion and somehow avoided being a defaulter.
Tariff Reductions
When the Finance Minister tabled the Union Budget in 1991, he slashed import duties on drugs and pharmaceuticals, consumer electronics, computers, chemicals and components of commercial vehicles.
Subsidy Slashed
Manmohan Singh also cut subsidies in a big way and allowed the prices of coal to go up and railway freight rates and electricity charges to industry to increase.
It was pointed out that these steps would increase the input cost, pushing the inflation, a politically incorrect decision. He wanted the business community and the masses to take the bitter pill.
The new Finance Minister announced austerity measures as the fiscal deficit in 1991 was a whopping 8.5% of the GDP. Manmohan Singh underlined the need to lower fiscal and revenue deficit as a percentage of GDP and limited the nonplan spending.
Talking to NDTV’s Sunil Prabhu, Dr Singh once said, “I honestly believe history will be kinder to me than the contemporary media or for that matter, the Opposition parties in Parliament.”
