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24TH JULY 1991

I would consider this date, i.e. 24th

of July 1991, one of the most important dates in Indian history. Itcomes third on the list only after 15

thAugust 1947 and 26

thJan 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 justcant 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 to1980s 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 Paymentscrisis, 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 ministerDr. Manmohan Singh decided to pledge 20tons of gold to the Union Bank of Switzerland and 47tons

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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.