No, actually they don't deserve any credit for the liberalization of the economy. Liberalization was actually thrust upon India. Economic condition was created in such a manner that India was compelled to sign GATT. Whether Liberalization is good, or bad ugly is a different story altogether. But the fact that India was forced to go for it with a preconceived recipe can not be ignored. And I can not give any credit to anyone for opening up the economy. People may be asking for justification for my saying so, For that, I have to quote from my article on the 1991 economic crisis. This is actually part of my study of the Indian economy and its way forward. This answer is a bit extensive, so viewers' discretion is warranted.
Many of today’s generation may not be aware of the great economic crisis India faced in 1991. India was almost on the verge of becoming a sovereign defaulter. As of January 1991, the foreign exchange reserves fell to US$ 1.2 billion. A number of factors added to this crisis. Disturbed political scenario, weak leadership, and unstable government since 1989 pulled down the market confidence of the NRI investors. The NRI investors started withdrawing their deposits from September 1990 onward which further intensified along with short-term capital outflow from the commercial banks as they failed to renew the credit line. Our export was not performing well because of the recessionary market trend in the West as well as slack demand in the Middle East. There was a disruption of trade with the USSR. USSR itself was going through the process of getting dissolved and breaking into fragments. Till 1990 USSR was our largest trade partner in terms of export worth US$ 2,881 million, accounting for 16.90%(3)of our export business which came down to 9.18% in 1991 worth business US$ 1,643 million(4).
The break-up of the Soviet Block struck a crucial blow to the Indian economy. Indian export to Eastern Europe constitutes 22.1% of our total export in 1980. Even in 1989, the share was fairly high at 19.3%. Which further collapsed to 10.9% in 1991-92. The Rupee trade agreement which India entered with the USSR as early as 1953 was an essential element of India’s foreign trade with the Soviet bloc in the eighties. However, with the introduction of Glasnost as well as the breaking away of Eastern European countries, several rupee payment arrangements were terminated in 1990–91. The RPA with the former GDR ended after 1990 after the German reunification. With Poland, it ended in January 1991. And all these led to a sharp decline in our export to Eastern European countries.
India entered into a trade agreement with the USSR on 2nd December 1953. The Rupee-Rouble trade arrangement envisaged an alternative payment mechanism to settle bilateral trade dues in rupees instead of Dollars. Where all payments between India and the U.S.S.R. described in Article VII may be made in Indian Rupees. For this purpose, the State Bank of the U.S.S.R. will maintain one or more accounts with one or more commercial banks in India authorized to deal in foreign exchange. In addition, the State Bank of the U.S.S.R. will, if that Bank considers it necessary, maintain another account with the Reserve Bank of India. All the commercial transactions to be financed in Rupees will take place through the account (accounts) maintained with the commercial bank (banks).
In 1989 India’s total value of exports (FoB) was US $ 17,045 million. Whereas the total value of imports (CIF) was US $ 21,718 million. FoB and CIF are common international trading and shipping terms. The export value is always calculated in terms of FoB and the Import value is calculated in CIF. CIF stands for Cost, Insurance, and Freight. And FoB stands for Free on Board. For assessing import value we consider since it includes all the costs Under CIF contracts, the seller assumes responsibility for costs and liabilities including insurance costs until the shipment arrives at the destination. And for export we consider FoB, it gives basic value excluding freight, insurance, etc
We ended up with a trade deficit of US $ 4673 million in 1989. The situation was further aggravated in 1990 when the total value of exports (FoB) was US $ 17,940 million with a marginal increase. However, the total value of imports (CIF) increased in a much bigger proportion to US $ 23,799 million escalating the trade deficit to US $ 5859 million. While our import bill saw a steady increase because of increased oil prices. Together with the increase in imports, reduction in service sector earnings and foreign aid not increasing India had to increasingly rely on commercial borrowing which led to a rise in the debt-service ratio which rose to nearly 30.0 percent in the late 1980s.
The withdrawal of NRI investment was possibly an induced one. The NRI investment and withdrawal depend largely on the applicable US federal interest rate. The US federal interest rate on 1st September 1986 was at 5.89%. Which increased to 9.85% on the 1st of March 1989.(5) Though it started reducing gradually thereafter. However, the fall was not so abrupt, it was still at 9.20% on 1st September 1990. (5) Possibly with the expected fall of the USSR, NRIs were expecting another short burst of benchmark federal interest rate. So together with uncertainty in the Indian capital market. What made the matter worse for the investor was that during this period rupee was quickly losing its value in terms of dollars. In 1987-88 the average US dollar price was at Rs.12.96 which reached Rs.24.47 by 1991-92. (6) So dividend or interest-earning in the Indian rupee was no longer able to hold the interest of the NRI investors. They found even a little reduced federal interest rate more attractive. Possibly depreciation of the rupee was a conscious move to promote export and to give boost remittance earnings. However, it looks that for the NRI investors, it worked the other way. Meanwhile, the inflation which was at 7.07% in 1989 almost doubled to 13.87% by 1991.
We were left out with a foreign exchange reserve of US $ 6 Billion which could take care of only two weeks of export payment. Primarily the reason for the crisis was given as the rise in crude oil prices because of the gulf war as well as the drop in our remittance earnings.
Though personally, I am not highly convinced that the crude oil price increase was the primary reason for the economic crisis. The average annual OPEC crude oil price in 1990 was US $22.26 which is roughly around 29% higher than the previous year’s price which was US $17.31. However, India had withstood a much higher crude oil price shock from 1973 to 1985. It was highest at US $ 35.52 in 1980 and hovering around for the next two years and only reduced to US $ 27.01 in 1985. Though it substantially came down to US $ 13.53 in 1986. (8) To give a better perspective we need to draw attention to the fact that 40 years after 1980 crude oil prices went down to as low as $20 per barrel. It was the Indira government who despite such exorbitant crude oil prices shock was standing tall & strong. Maximum economic pressure was put on her government to give in and surrender to the US hegemony. It is only the Narendra Modi government that received the maximum support in terms of lower crude oil prices. Dr. Manmohan Singh government also had to suffer very high oil-pushed inflation.
The 1973 oil shock occurred because of the oil embargo imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC). By the end of the embargo in March 1974, the price of oil had risen nearly 300%, from US$3 per barrel ($19/m3) to nearly $12 per barrel ($75/m3) globally.(12). Even the oil shock of 1970 was a huge one. The benchmark Brent crude oil average price was at US $14 per barrel in 1978 which went up to US $31.6 in 1979 and to US $36.8 in 1980. (9).
Data source – Statista ( 8 & 9)
Indira Gandhi government extensively suffered because of high oil prices. But she didn’t let go of the situation out of hand in spite of high oil prices. Interestingly one can see from the above table that from 1991 onwards, after India principally agreed to sign GATT the oil prices started declining. In fact, the US Federal fund rate also drastically reduced. It was at 2.92% on 1st December 1992, whereas the rate was as high as 9.20% on 1st September 1990. (5) It was one of the steepest drops in a period of just two years. Was there any special attempt to cut down fund flow to India as well as to increase fund outflow by increasing oil prices? Possibly some kinds of design were playing. However fact remains that the fund flow to India eased out and the pressure on imports also reduced subsequently, but not before India was forced to pledge its gold to mobilize foreign exchange.
Ideally speaking just one year’s increase in the crude oil price shouldn’t have put India in so much trouble had we taken care of other parameters. I believe that the previous two governments of V P Singh and Chandra Sekhar were equally responsible for this economic disaster. It looks like they simply didn’t have any clue how to tackle the situation. Political instability and their short tenure made the case worse for them and for the Indian economy. However, I will not be surprised if there was an international design to push India into this financial turmoil and accept the liberalization process. The liberalization process started during this period. The concept of an open economy was the need of the Western economies as they were suffering from economic stagnation. They were in desperate need to find new markets and get bigger access to the existing marketplaces.
Remittance earnings have been playing a very significant role and steady source of India’s foreign exchange earnings as well as in the Forex reserve. Because unlike other sources of Forex earnings remittance to India is mostly one-way entry. As per the World Bank estimate in 2017, India made a remittance earning of US$68.968 and India’s total outward remittance was only US$5.710 billion leaving a net inflow of $ 63.258 billion. (10) The expatriate Indians have provided vital support to India’s Balance of Payment (BoP) for several decades. In particular, they have mitigated the impact of the oil shocks of 1973, and 1979. In that sense, the oil shock in 1990-91 was not that intensive. India survived the massive oil shock of 1973 and that of 1979 because of the strong leadership of Indira Gandhi. However unfortunately in 1991, our political leadership couldn’t show that kind of resolve or resilience.
Table source – IMF report
An International Monetary Fund (IMF) report prepared by Michael Debabrata Patra and Muneesh Kapur has done a crucial analysis of the importance of worker’s remittance earnings in comparison to export, import, and most importantly debt service payment. The above table from the IMF report explains how important is worker’s remittance earning in the Indian context. We can see that our remittance earnings dipped to the lowest in 1990-91 to US $1.7 billion from US $2 billion in 1980-81 which covered only 18.2% of our debt service payment obligation, and only 6% of our import payment. India’s remittance earnings saw the dip primarily because of the gulf war. However, thereafter India made a huge improvement in remittance earnings and by 2001-02 remittance earnings surpassed our debt service payment volume. And we could do this in spite of a massive increase in our external debt. As per RBI report our external debt stood at US $ 101,253 million by June end 2002.
During the first half of the 1980s, the current account deficit of India was fairly under control as it was restricted below 11/2 percent. Even though the export growth was slow the rapid rise of domestic petroleum production helped to keep the energy import bill under restraint as well as kept the trade deficit in check. As well as India could manage external finance at a concessional rate to keep the debt service cost low. However, in the second half, the balance of payment situation started worsening as the current account deficit widened. Rajiv Gandhi government focused on an export-oriented growth model. And to drive export promotion the restrictions on imports for the exporters were relaxed. Even though it helped register growth in export, however, this led to an increase in import volume.
The current deficit started exceeding all available arrangements of export earnings, and remittance earnings as well through aid financing. And the Indian government was constrained to tap other sources of financing. Our growing current account deficit was financed by increasing external borrowing on commercial terms.
As per an IMF report on the 1991 Currency Crisis India’s external debt nearly doubled from some $35 billion at the end of 1984/85 to $69 billion by the end of 1990/91. Medium- and long-term commercial debt jumped from $3 billion at the end of 1984/85 to $13 billion at the end of 1990/91 and the stock of non-resident deposits rose from $3 billion to $10.5 billion over the same period.
As per a Planning Commission report by Arvind Virmani the ratio of short-term debt to foreign currency reserve (i.e., excluding gold & SDRs) rose at an even faster rate because reserves were falling. Short-term debt, which was 90% of foreign currency reserves in March 1989 exploded to 2.2 times reserves by March 1990 and reached an unprecedented 3.8 of time foreign currency reserves by March 1991.
Meanwhile, because of negative market sentiment in India as well as because of the higher federal rate the NRI investors found it convenient to withdraw their deposits from September 1990 onward. The problem got further intensified along with short-term capital outflow from the commercial banks as they failed to renew the credit line. The commercial bank’s credit line couldn’t be renewed since the full budget couldn’t be tabled due to the fall of the Chandra Shekhar government. The Chandra Shekhar government lost the crucial vote on confidence in November 1990 and a minority government was formed as a caretaker government. Union Budget had to be postponed which was due at the end of February 1991, and in lieu, a vote on account was presented on March 4, 1991. This led to an erosion of the confidence of the international community in India’s ability to grapple with the balance of payment crisis. The probability of India defaulting on its commitment to external payment was looming large.
The gulf war crisis, which began with the invasion of Kuwait by Iraq on August 2, 1990, gave us a huge external shock by pushing up oil prices. The crisis though lasted about seven months until February 28, 1991, it was adequate enough to bring down the Indian economy to its knee. As per an RBI document on the Balance of Payments Crisis of 1991 The spurt in the prices of crude oil and petroleum products caused a sizeable increase in the POL bill. The POL bill during 1990–91 was estimated at around `10,820 crore (US$ 6.0 billion) as against ` 6,273 crore (US$ 3.8 billion) for 1989–90. This indicated an increase of about 72.0 per cent in rupee terms and 58.0 per cent in dollar terms. (POL - petroleum, oil, and lubricants)
However, the impact of the gulf war crisis was not limited to the only oil shock, it had an impact on our export earnings as well. It affected our export to West Asian countries which constituted 7.2% of India’s total export. The total loss of exports in the Gulf region was estimated at US$ 3,003.0 million, including US$ 1,622.0 million on account of loss of exports to Kuwait and Iraq alone. Besides, India could not realise her dues to the extent of US$ 64.0 million under deferred payment arrangements and about US$ 50.0 million under the projects outside deferred payment arrangements during 1990–91
Further, the Gulf crisis had an adverse impact on our remittance earnings as well as a loss in the employment of the labor force. Iraq and Kuwait gave employment to about 14% of India’s migrated population of an estimated 1 million population in West Asia. Together these two nations accounted for 8.7% of our total remittance earnings in 1988-89. Which saw a major dip during the war and India suffered a remittance loss of US$ 273.0 million (` 490 crores) during 1990–91
India’s Foreign Exchange Reserves (Percent of GDP)
Source: IMF, International Financial Statistics.
While the Reserve Bank of India had been constantly raising flags about the adverse consequences of increasing government deficit. Ever since RBI was repeatedly alerting the government on the negative impact of increasing fiscal deficit on the external payment situation as well as on the worsening BoP position. At the end of March 1989, India’s total short, medium, and long-term external debt together with NRI deposit liabilities accounted for 22% of GDP working up to 280% of the current receipt. The Balance of Payment crisis assumed such grave proportions that India was on the verge of becoming a sovereign defaulter in external payments in June 1991. This is in spite of India availing an SDR of 1,268.8 million approved by IMF on January 18, 1991. This led to the famous Indian economic crisis where our balance payment situation became so precarious that RBI had to pledge 47 tonnes of gold to the Bank of England to raise $405 million. The gold was dispatched in four consignments by air beginning on 4th July 1991.
India was assured of rescue and easing of economic pressures only on condition that it will agree and sign GATT (General Agreement on Trade and Tariff). India signed the GATT in 1994. It took some time in signing the GATT, the GATT itself was in the formative stage and in the evolving stage. But the fundament condition of the recipe was more or less firm - giving access to the Indian market for foreign products and handing over the public sector and giving access to foreign players in those sectors. India was given a threshold period of 10 years for GATT implementation. And during this period West practically dictated terms on GOI for giving up ownership of the public sector. I am sure a detailed laid down structured road map was given to all the signatory nations to follow under GATT. While the US wanted complete access to all the markets, the US market was still restricted and protected.
The initial product that came to India was Coca-Cola, McDonald, Uncle Chips, etc. Since the entire process was driven by the West, the government was possibly told to make sure to build up a strong positive image in favour of globalization, open market, open economy, etc. Across the world, a strong narrative was being built in favour of the open economy as if it is going to change the world. Whereas the actual story was that the US was looking for trade expansion into new markets or to the markets which was previously restricted.
GATT attempted to reduce or abolish the trade and tariff barriers. This means doing away with or reducing customs duties or countervailing duties. The narratives that the PVN Rao government did a great job in opening up the economy is something like “Achhe Din” or the “Gujarat Model”. You ask for a detailed account of what exemplary his government did or what exactly his government did to protect the interest under GATT- nobody would be able to give any written account. Rao simply tendered submission to the dictate of GATT and opened the floodgate of the Indian market. Possibly his government was not in a position to defend Indian positions. Vajpayee Ji tried quite an extent to resist the pressure, but the economy was still in a weak condition.
It was only under the MMS government, the Indian economy got into a strong position without surrendering its autonomy. The successive round of WTO talks saw India doing tough negotiation/retaliation demanding counter access and reduction of duties and barrier on their side. BRICS nations and other 3rd world nations got together to fight to protect their trade interest. The ten years of the MMS regime WTO saw intense and tough negotiations. Both the developed and the developing nations fighting tooth & nail to defend their trade interest and trade regime. This was the period the BRICS nation got the economic muscle to fight back. The US economy lost most of its muscle power after the great recession in 2008–2009. And with the rise of Dragon, it could never get back to its earlier dominant position. Meanwhile, the US lost a fierce battle with China in trade & tariff barriers during the Trump regime. Biden also tried, but unsuccessfully.
Unlike China, India lacked vision under the open economy. So India has remained mostly a consuming market rather than to become a producing economy. Most of the FDI came in the consumer product category servicing internal consumption. Look at China, they receive FDI for augmenting production capacity and occupying the international market. MMS government tried its level best to strengthen and drive the Indian economy in the right direction. However, the Modi government simply destroyed all the good work done by the MSS government because of sheer incompetency, lack of understanding, vision, and selfish political interest. Every year thousands of industrial units are beelining for filing bankruptcy or being forced to go for bankruptcy. Now we are having 2nd phase of demonetization. That is the only thing this government knows, no matter what it means for the economy. Not that I am any great admirer of all of MMS's economic policies. But in comparison with Modi, he looks saint.
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