By Anjan Roy
Thirty-three years can feel like a lifetime. It was thirty-three years ago that Dr. Manmohan Singh emerged into the public eye, following his formal retirement from a senior government role. Upon his passing last Friday at the age of 92, he was celebrated as India’s most esteemed finance minister and the visionary behind the nation’s modern economic framework.
Presently, there is a national outpouring of admiration and acknowledgment for Dr. Manmohan Singh—sentiments that curiously eluded him during his lifetime. Instead, he often faced derision and criticism.
Throughout his life, if there was one defining trait of Manmohan Singh, it was his avoidance of extravagance. He was known for his composed demeanor. In response to critics, his enigmatic reply was often, “history would treat me more kindly.”
As a dedicated economic reformer, his approach was characterized by careful deliberation rather than the hasty exuberance that occasionally marked the decisions of others in charge of managing India’s finances. This cautiousness spared India significant hardship.
Back in 1991, India found itself in a dire predicament, grappling with profound political instability and economic turmoil. The country was at risk of external insolvency with virtually empty financial reserves. The assassination of Rajiv Gandhi by Tamil militants further exacerbated the political turmoil.
During the 1991 general elections, the Congress party regained power, leading to P.V. Narasimha Rao’s appointment as prime minister, who immediately sought a capable finance minister.
Rao’s initial choice was Dr. I.G. Patel, a former RBI governor and distinguished economist, who had recently chosen to settle in Gujarat and declined to relocate. Patel recommended Dr. Manmohan Singh, who had extensive experience in various economic roles, including RBI governor and economic adviser to former Prime Minister Chandra Sekhar.
Prime Minister Narasimha Rao reached out to Singh through P.C. Alexander, who woke him after a long trip from Geneva. Here were two retired individuals leading a new government that would set India on a path of growth and prominence—essentially two elder statesmen in search of a new dawn.
Reflecting on his appointment as finance minister, Singh once mentioned during a book launch that he was not merely an “accidental prime minister,” as some claimed, but also an “accidental finance minister.”
The circumstances were fluid; when Dr. Manmohan Singh delivered his inaugural budget on July 24, 1991, it became legendary among economists for its striking lines and significant reforms.
The Narasimha Rao administration took office on June 21, and prior to the budget, several groundbreaking reforms were already set in motion, which would shape India’s economic landscape for years to come.
Among these reforms was the crucial decision to devalue the Indian rupee—a highly contentious issue given that a prior devaluation in 1966 had disastrous consequences. Anticipating opposition, Manmohan Singh cautioned Prime Minister Rao to keep the matter confidential and to sidestep Cabinet discussions.
To maintain secrecy, Singh crafted a handwritten note on the proposed devaluation, which received Rao’s endorsement. To mitigate potential fallout, he proposed a two-stage devaluation: a smaller initial devaluation followed by a subsequent, larger one.
I vividly recall the upheaval caused by the first devaluation. Economic journalists covering the finance ministry were informed that the Prime Minister had cold feet about proceeding with the second devaluation and had instructed Singh to delay it.
However, on the morning of June 3, Singh learned from Dr. C. Rangarajan, then deputy governor of the RBI overseeing foreign exchange, that the second stage was already executed. Rangarajan and his team had acted decisively.
The impact of both devaluations was substantial. Firstly, it effectively curtailed illegal hawala transactions involving the Indian rupee, and secondly, it dealt a significant blow to gold smuggling. Simultaneously, Singh liberalized gold imports for international travelers.
Once the immediate crisis passed, the rupee’s exchange rate became fully convertible for trade, allowing exports and imports to be dictated by market forces—an adjustment that has had lasting benefits.
These exchange rate reforms aligned India’s domestic economy with global markets, eliminating opportunities for artificial price manipulations and introducing a self-correcting mechanism.
On that pivotal day, the rupee depreciated from about 16 to around 24 per dollar, making imports more expensive and exports cheaper, leading to a shift in demand from international to domestic markets.
Years later, during the taper tantrums of 2014, the flexible exchange rate helped insulate India from severe financial fallout.
Alongside exchange market reforms, the new finance minister and his team invited foreign institutional investors into the secondary stock market, which initiated a wave of foreign investment. Foreign Direct Investment (FDI) policies were also relaxed.
The overall effect of these reforms was remarkable. By June-July 1991, India had merely $1 billion in reserves—enough for just a week’s imports—yet within two years, the nation struggled with an abundance of foreign exchange.
I recall a meeting at the Constitution Club in New Delhi, where Montek Singh Ahluwalia, then finance secretary, discussed strategies for managing foreign exchange inflows to prevent inflation.
Imagining today’s Indian economy under a fixed exchange rate system reveals the impossibility of accommodating its current complexities.
Moreover, the 1991 reform package liberated the entire economy. The restrictive industrial licensing framework was dismantled, and the tax structure was overhauled. At the heart of this transformation was Dr. Manmohan Singh’s budget, which encapsulated the spirit of the times.
In his famous remarks, Dr. Manmohan Singh quoted Victor Hugo, a sentiment that has been reiterated countless times since. Ultimately, the essence of Dr. Singh’s contributions resonates in everything he undertook. (IPA Service)
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