JANUARY 20, 2025

By Naresh Minocha, Consulting Editor  

NOW that the BJP-Congress spat over the cremation ground and memorial for Dr. Manmohan Singh has subsided, it is time to write another facts-based chapter on him as finance minister (FM).

(Dr Manmohan Singh - Time to Write Full Facts-based History NOVEMBER 07, 2022)

Dr. Singh would remain eternally as India's Anmol Ratan (priceless diamond), irrespective of the prospects of his being honoured with Bharat Ratna in the near or distant future. Prime Minister Narendra Modi confessed in Lok Sabha on 25th June 2019 that Dr. Singh deserved Bharat Ratna.

In his 'Reply on Motion of Thanks to the President's Address', Mr. Modi stated: "Dr. Manmohan Singhji should have received Bharat Ratna award after his first term."

One can presume he meant Dr. Manmohan as FM. Foreign Exchange crunch or balance of payments (BoP) crisis remained India's chronic ailment till he took reins of the Finance Ministry on 23rd June 1991.

Dr. Singh resolved this problem that even three popular PMs, Jawaharlal Nehru, Indira Gandhi & Rajiv Gandhi could not solve, even when they held finance portfolio briefly in their respective tenures.

Same is the story with Mr. Morarji Desai, who served as FM and PM at different points in his political career. All these four leaders shied away from structural reforms even when faced with imminent emptying of foreign exchange reserves.

Unlike Indian polity, multilateral institutions and other entities were quick to recognize & laud Dr. Singh's success as FM in their documents. The World Bank (WB), for instance, hailed the success of five years of reforms as "economic revolution" in its report dated 8th August 1996.

Captioned 'India Country Economic Memorandum-Five Years of Stabilization and Reform: The Challenges Ahead', the Report noted: "India Has Fundamentally Altered Its Development Paradigm."

It stated: "Many of the measures introduced over the past five years have brought India's development policies closer to those of East Asian countries such as Indonesia and China which have been successful in reducing the incidence of poverty in a relatively short period of time. In particular, the sharp devaluation of the rupee and the decline in the protection of manufacturing have improved the agricultural terms of trade."

This column excludes Dr. Singh's performance as PM. This is because an objective assessment of his tenure as PM would necessitate comparison with his predecessor Atal Bihari Vajpayee and his successor Narendra Modi. This requires an exhaustive, separate column.

The best way to marshal facts for proving Dr. Singh's credentials as an Anmol Ratan is to invoke BJP's forgotten wisdom buried in its 2004 Vision document. It says: "The past is inseverable from the present and the future. That is why Swami Vivekananda said, 'It is out of the past that the future is moulded. It is the past that becomes the future'."

Thus, one has to look at the distant past to value Dr Singh's herculean task of pulling back the Nation from precipice of economic disaster. It could have led to foreign loans repayment default. Had the crisis ran its course, it would have left no foreign exchange even to finance essential imports such as medicines, fertilizers and edible oil. The situation could have exploded into anarchy.

It is equally important to mention that three preceding regimes prior to formation of P.V. Narasimha Rao (PVNR) Government frittered opportunity to take the challenges head on. All three kept deferring tough call on brewing BoP crisis for want of political will or want of political consensus.

Dr. Singh's predecessor, Yashwant Sinha, for instance, drew the Nation's attention to "The sharp deterioration" in the BoP situation, resulting in depletion of foreign exchange reserves (FERs). These dropped to Rs. 3142 crores at the end of November 1990 and this sum weren't even sufficient to finance imports for one month.

In the interim budget for 1991-92, Mr. Sinha also stated: "the time has come for the Government to share its concerns with the Parliament and the people, in an endeavour to evolve a national consensus, so that the restoration of the health of the economy is perceived as a collective responsibility."

As Dr. Singh's success as key member of PVNR Cabinet is now history, it is equally important to connect it to the present state of economy and the cherished future visualized as Viksit Bharat @2047.

Of his multi-faceted contribution to the economic reforms, three initiatives stand out like bright stars in the sky. First, he ushered in the service tax in 1994.

Presenting the Budget for 1994-95, Dr. Singh stated: "Over the years, while attempts have been made to widen the base for domestic indirect taxes, the services sector has not been subjected to taxation. Yet this sector accounts for about 40 per cent of our GDP and is showing strong growth."

He continued: "There is no sound reason for exempting services from taxation, when goods are taxed and many countries treat goods and services alike for tax purposes. The Tax Reforms Committee has also recommended imposition of tax on services as a measure for broadening the base of indirect taxes. I, therefore, propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers."

The service tax (ST) was brought into effect from 1st July, 1994. Starting with Rs 375 crore in 1994-95, service tax receipts kept rising with expansion of its ambit to diverse services over the years.

The ST receipts aggregated to Rs 2.52 lakh crore in 2016-17 before this tax was subsumed into goods and service tax (GST) during July 2017. If one makes an off-the-cuff guess, this amount might have doubled to Rs five lakh crore in 2024-25, had there been no GST.

ST has a direct connection with the past and the present: What stopped Dr. Singh predecessors from bringing in India's most vibrant sector, the services business, under the indirect taxation? ST was one of the components of sweeping tax reforms that Dr Singh piloted in conjunction with big-bang changes in monetary, trade and industrial policies.

All these initiatives ensured that national exchequer kept ringing in with new & enhanced revenue flows. Without new avenues for revenue including telecom licences receipts, would it have been possible for Modi Government to scale up and sustain slew of social welfare schemes?

Has any citizen ever pondered over this while getting mesmerised by renamed schemes and new ones all prefixed with the high-profile title 'Pradhan Mantri'?

It is here germane to recollect what Mr. Modi said in Rajya Sabha during February 2022 while replying to the Motion of Thanks to President's address to Parliament. PM said "some Members asked - if there was no Congress, what would happen?"

Mr. Modi continued: "I would like to say, if there was no Congress there would be no Emergency, there would be no caste politics, Sikhs would never have been massacred, the problems of Kashmiri Pandits would not have happened."

If development economists are asked to answer the same question, they would have said: Had there been no Congress, there would have been no ST to expand the web of Pradhan Mantri yojanas.

There would have been no game-changing monetary and financial sector reforms. No disinvestment would have been rolled on to raise cash to contain fiscal deficit and fund social welfare. There would have been no surge in FDI & foreign portfolio investment to bridge current account deficit. And India would not have got a globally reputed economist as PM & that too from a minority community!

This hypothetical reply to Congress Question shows it is wise to always act on BJP's mantra to connect past with both the present and the future. This is needed to give a holistic view of our Bharat to successive generations.

Dr. Singh's second stellar initiative was replacement of fixed-rate exchange rates for Rupee with market-determined system. This created a pragmatic solution to the issue of assessing the value of rupee.

Mind you, the problems associated with Rupee as a currency have existed in one form or another since 1800. These led Dr. B.R. Ambedkar, the chief architect of the Constitution, to propose radical solutions in his 1923 book 'The Problem Of The Rupee: Its Origin And Its Solution'.

After Independence, India devalued the Rupee thrice. The last one was done in 1991 within a fortnight of Dr. Singh assuming charge of finance portfolio in PVNR cabinet. It is important to delve into past instances of foreign exchange crisis with or without devaluation to fathom Dr. Singh's way of Sankalp Se Siddhi (From resolve to attainment).

The first devaluation in 1949 was unavoidable for India as the UK and all Sterling area countries had either devalued their currencies or were in the process of doing so. Certain other nations too devalued their currencies as part of post-World War-II restructuring of global economy.

The second devaluation in June 1966 was due to inflation differential between India and hard currency countries and erosion in the competitiveness of exports & rapidly depleting foreign exchange reserves (FERs). None of these two devaluations were accompanied with substantial policy changes, in spite of recommendations from AIC and other quarters.

Hence the problem of plummeting FERs kept recurring under each regime prior to mid-1991. One can assess this issue by flipping through annual budget speeches since 1950. The reading gives an insight into India's Achilles heel.

Presenting budget for 1958-59 on 28th February 1958, Mr. Nehru (who held finance portfolio for few months) stated: "The House is aware of the steps that have been taken to meet the difficult balance of payments position. Drastic cuts have been made in the imports of consumer goods, and strict vigilance is being exercised in respect of the licensing of imports including imports of capital goods. Efforts are being made simultaneously to secure external assistance and deferred payment terms for projects in both the public and private sectors having high priority and likely to save foreign exchange."

BOP, however, worsened in the coming months. According to WB's document dated 18 July 1958, "Since the spring of this year, India's reserves of gold and foreign exchange have been falling rapidly, and balance of payments forecasts suggest that it will be very difficult to stem this loss without substantial further foreign assistance."

Another WB document noted: "It was feared that unless immediate remedial steps were taken, India's foreign exchange reserves would be wiped out by the end of 1958."

The Bank consulted the US and certain other developed nations on India's precarious foreign exchange (forex) situation. And this led to creation of Aid India Consortium (AIC), which held its first meeting on 25th August 1958. AIC thus bailed out India from BoP crisis by committing fresh loans and disbursing them speedily.

A few days prior to this meeting, Finance Minister Morarji Desai laid bare open the country's plight due to foreign exchange crisis. In a seven-page statement made in Lok Sabha on 13th August 1958, he listed out steps to manage the situation including reintroduction of foreign exchange budgeting.

Mr Desai stated: "Apart from restrictions on imports, foreign exchange facilities for tourist travel abroad were totally stopped and exchange was released on a restricted basis only for business travel or for travel justified on medical grounds or for attending certain educational and technical training courses."

Thus, 1958 was the first instance of BOP crisis that didn't result in structural reforms. The crisis revisited the country in 1966, necessitating 36.5% devaluation of rupee.

That the crisis was on the horizon was known to the Government three years earlier as is evident from correspondence between the WB President and Mr. Desai and from the AIC deliberations. Had the Government acted on AIC's and WB's recommendations, the forex shortage would have eased.

In a letter dated 20th June 1963 addressed to Mr Desai, WB President George D. Woods drew his attention to AIC meeting held on 30th April-1st May 1963. At this, 10 participating countries unanimously expressed concern over "the heavy burden of external debt service on India's balance of payments".

At a subsequent meeting held on 4-5th June, "there was general agreement that, in the interests of economic development, more energetic efforts should be made to expand foreign exchange earnings and to create a more favourable environment for export promotion. Great importance was also attached by members of the consortium to measures that would encourage private foreign investment in India..."

WB's memorandum dated 14th February 1964 for 9th meeting of AIC flagged official BOP projections. It noted: "The figures show the sharp worsening of the current account position from year to year. The trend is disquieting."

It is here apt to also quote the report of an Economic Mission that the WB sent to India in 1964 for comprehensive study of the economy. The Mission led by Mr. Bernard Bell, its senior economist, submitted its report, comprising 14 volumes, to WB President in October 1965.

In the main report (Volume 1), Bell Economic Mission observed: "One of the policies of the Government of India with the most pervasive negative effects on India's economic progress is, in our judgment, its insistence on maintaining the existing over-valuation of the rupee and the associated system of direct administrative controls over imports. The over-valuation of the rupee works directly to defeat the massive import substitution and the export expansion which are essential to of the objectives of the development program."

The report made 16 recommendations as "Action by India." The first recommendation was "devaluation of the rupee". As the cliché goes, the Rest is history.

Devaluation was, however, not accompanied by major policy changes, reining in of inflation and fiscal deficit to prudent levels. Thus, the past became the present in 1991 when alarming current account deficit and depleting FERs put India on the verge of loan repayment default. Gold-pledged abroad for keeping foreign exchange lifeline open and redeeming of gold in 1991 is a household story.

The 3rd crucial initiative of Dr. Singh was in the realm of monetary, financial and capital markets. The market-determined exchange rate for rupee on current account was accompanied with opening up of new stream for foreign exchange inflow - allowing Indian companies to tap overseas capital markets by offering global depository receipts (GDRs). Simultaneously, FDI investment was liberalized substantially to turn trickle into mega & buoyant inflow of foreign exchange.

Prior to Dr. Singh's big-bang reforms, India financed its current account deficit (CAD)with multilateral and bilaterial loans, projects-related commercial credit, non-resident deposits with higher rate of interest and NRI remittances.

Post 1991 reforms, India has enlarged its means to finance chronic CAD. This shortfall is due to exports receipts falling short of import bills year after year.

The forex deficit is currently financed through six streams 1) multilateral and bilateral aid, 2) commercial credit, 3) remittances by Non-resident Indians 4) bank deposits by NRIs for whom higher interest rates serve as incentives, 5) foreign investment (FDI + portfolio investments) and 6) proceeds of overseas bonds/debt issued by Indian companies.

That Dr. Singh's reforms quickly yield results was succinctly put by Dr. Ranjit Teja, a senior economist with IMF in December 1992 issue of IMF's Finance & Development Magazine.

Dr.Teja wrote: "A credible economic stabilization program, centered on controlling the fiscal deficit and setting in motion structural reforms, has made possible a reconstitution of foreign exchange reserves far in excess of the most optimistic expectations. Inflation has declined, and the economy is showing signs of revival. A decisive break with the interventionist policies of the past has been instrumental in turning around public confidence and reversing the economic decline."

He added: "Finance Minister Manmohan Singh's budget proved to be a watershed in policy orientation, insofar as there was a decisive shift away from economic intervention and a highly gradualist approach to reform."

Dr. Singh concluded his 1991-92 budget speech by acknowledging the fact that "difficulties lie ahead on the long and arduous journey on which we have embarked." He recollected Victor Hugo's quote: "no power on earth can stop an idea whose time has come."

With this, he took Sankalp (resolution) as: "I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome."

He got Siddhi (attainment) within five years. India has been on the march since then though a lot of fundamentals have remained weak since his tenure as FM. The persisting weaknesses in Indian economy requires a separate discourse. The chief weakness that can push India back to BoP crisis are high fiscal deficit and resulting inflation including populist policies that drive price spiral.

Dr Singh, who has had no political base/roots, pursued chivalrous reforms in a minority Government and that too with human face. As put by India's memorandum dated 27th August 1991 submitted to IMF, "We are committed to adjustment with a human face; therefore, a steadfast adherence to the objective of poverty alleviation is an integral part of our conception of the adjustment process."

PS: 'Sankalp Se Siddhi' is a motivational quote first delivered by Mr. Modi during August 2017 as headline for the pledge to attain his vision - "New India" by 2022.