Rao-Man ‘Masterstroke’ 1991 Budget That Changed India Infinitely

Newspaper: Avenue Mail

Date: 24th July 2021

Once known to be on the verge of retirement, an unlikely Narasimha Rao took the oath of office as the 9th Prime Minister of India on 21st June 1991. Emerging victorious from the Congress Party meeting as its choice as the next Prime Minister and the President of the Indian National Congress, Narasimha Rao took over the reins of the country, reeling under the shock of the assassination of its popular leader Rajiv Gandhi.


Indira and Rajiv Gandhi in their tenures had chalked out a limited plan to usher economic reforms and dismantle the license raj. After Rajiv was voted out in 1989, Prime Ministers V.P. Singh and Chandra Shekhar ran wobbly governments that drained India’s resources to the minimum alluding to the Gulf War and the dismantling of the Soviet Union. Due to political upheavals, instead of a full budget, a Vote on Account was presented before the Chandra Shekhar government resigned.


When Narasimha Rao entered the South Block, (Prime Minister’s office), he was staring at a severe economic situation which was building up since 1989. The general public was completely unaware of the dire situation. India was left with foreign exchange worth only two weeks for imports and was staring at bankruptcy with a real danger of not being able to honor its international commitments as a sovereign country. India’s foreign exchange reserves had reduced to approximately $0.5 billion as the scare of defaulting on payments loomed large.

Rao was not an economist, and the last thing he wanted was a politician to be in charge of the collapsing economy. He had to find a non-political hardcore economist who could don the hat of the Finance Minister and delve deep into the financial crisis, getting the country’s act together. Economist I.G. Patel refused the opportunity to create history as Finance Minister and fortune knocked on the doors of Dr. Manmohan Singh who did not take the offer from the Prime Minster’s Office seriously! He was tracked down to the office of the University Grants Commission where he was Chairman, to talk to Narasimha Rao urgently. The PM offered him the post of the finance minister and asked him to dress up and rush to the swearing-in ceremony!

After the ceremony, Rao gave Manmohan Singh an outline of the crisis at hand. Having served under Chandra Shekhar as an economic advisor, Singh was aware that the crisis needed urgent intervention. Manmohan wanted a free hand to do whatever was necessary that included bold and difficult policy decisions which needed political backing. Narasimha Rao provided all the necessary leadership to give Singh “to do whatever necessary” to bring India back from the brink".

Singh sat down to prioritize the work ahead which had to culminate into the first budget of the Rao government. India took an emergency loan of $2.2 billion from the International Monetary Fund by taking a risky but right decision of pledging gold as collateral security to the Bank of England and Bank of Switzerland. (India came a full circle when the Reserve Bank brought gold from the IMF in 2009) This pledge solved the matters temporarily but the hard task was ahead. Rao and Singh collaborated to devalue the rupee in installments, one on 1st of July 1991 and then injected a second devaluation on 3rd July 1991.

On 24th July 1991, Manmohan Singh rose in the Lok Sabha to present his speech as Finance Minister in the first budget of the Narasimha Rao government. The budget was keenly awaited by 90 million people to fulfil their dreams and aspirations after suffering tumultuous years from 1989 to 1991. Invoking the memory of Rajiv Gandhi, Manmohan Singh said “his dream lives on; his dream of ushering India into the twenty-first century; his dream of a strong, united, technologically sophisticated but humane India. I dedicate this budget to his inspiring memory.” Calling the economic situation unprecedented in Indian history, Singh listed down the cause and effect of the issues “the combined impact of political instability witnessed thereafter, the accentuation of fiscal imbalances and the Gulf crisis, there was a great weakening of international confidence. There has been a sharp decline in capital inflows through commercial borrowing and non-resident deposits. As a result, despite large borrowings from the International Monetary Fund in July 1990 and January 1991, there was a sharp reduction in our foreign exchange reserves. We have been at the edge of a precipice since December 1990 and more so since April 1991. The foreign exchange crisis constitutes a serious threat to the sustainability of growth processes and orderly implementation of our development programmes. Due to the combination of unfavourable internal and external factors, the inflationary pressures on the price level have increased very substantially since mid-1990.”

He explained the difficulties of the burgeoning fiscal deficit saying “the difference between revenue receipts and total expenditure, is estimated at more than 8 percent of GDP in 1990-91, as compared with 6 percent at the beginning of the 1980s and 4 percent in the mid-1970s.” even as he touched upon the balance of payments and high inflation. Throwing caution out of the window, Dr. Singh spoke boldly stating “There is no time to lose. Neither the Government nor the economy can live beyond its means year after year. The room for maneuver, to live on borrowed money or time, does not exist anymore.”

Initiating the bold trade policy and import-export reforms, Dr. Singh announced “The past four decades have witnessed import substitution which has not always been efficient and has sometimes been indiscriminate. The time has come to expose the Indian industry to competition from abroad in a phased manner. As a first step in this direction, the Government has introduced changes in import export policy, aimed at a reduction of import licensing, vigorous export promotion and optimal import compression.”

Initiating the critical reform of foreign direct investment, Manmohan Singh charted out the increase in FDI, “direct foreign investment in specified high priority industries, with a raised limit for foreign equity at 51 per cent, would be given prompt approval, if equity inflows are sufficient to finance the import of capital goods at the stage of investment and if dividends are balanced by export earnings over a period of time. Second, foreign equity up to 51 percent would be allowed for trading companies primarily engaged in export activities. Third, a special board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in selected areas; this would be a special regime to attract substantial investment that would provide access to high technology and to world markets.”

Announcing the establishment of SEBI, he said “Board adequate powers was unfortunately not enacted. This shall now be done forthwith and full statutory powers will be given to the Securities and Exchange Board of India for administering the relevant provisions of the Securities Contracts (Regulation) Act and the Companies Act. Transferring these powers from the Controller of Capital Issues and the government to an independent body would enable it to effectively regulate, promote and monitor the working of the stock exchanges in the country.”

Ensuring that “the burden of fiscal adjustment does not fall on state governments”, Dr. Singh urged the “state Governments must take effective steps to improve their fiscal performance and streamline the working of their public enterprises.” Pushing the envelope for the development of information technology, he proposed “extend the tax concession under section 80HHC of the Income-tax Act to export of software. With this concession, the exports of this industry should register rapid growth.”

Adding a dash of humor, Manmohan Singh joked “Ever since my appointment as Finance Minister, I have had to spend long hours in office. This has quite naturally made my wife very unhappy. The House will agree that it is not good for the health of our economy if the Finance Minister of the country has strained relations with his own finance minister at home” and announced an exemption from payment of excise duty on household items.

Ending the historic speech on a personal note, “a Finance Minister has to be hard headed. This I shall endeavour to be. I shall be firm when it comes to defending the interests of this nation. But I promise that in dealing with the people of India I shall be soft hearted. I shall not in any way renege on our nation’s firm and irrevocable commitment to the pursuit of equity and social justice.”

India was gauged on the Hindu rate of growth, calling out the low growth rates in the 1960s and 1970s. The economic liberalization unleashed the latent aggression in the Indian economy to compete with the industrial economies of the world. In all parameters, GDP, purchasing power parity, forex reserves foreign direct investment, and position of India’s economy in comparison to other nations have all shown remarkable improvement.


Poised to become the 2nd largest economy in the world by 2050, India continues to reap the benefits of the Rao-Man masterstroke budget of 1991.