India Inc reminisces the historic day when the country’s economic policies got a new direction. Business Standard catches up with some of the witnesses.
J J Irani
Former director, Tata Sons
I remember it very well. That year, I was the president of the Confederation of Engineering Industry, which was later CII. There was euphoria in the Indian industry. India was on the brink of bankruptcy—our gold had been pledged and there was no option but to liberalise. There were many good things that happened—restrictions on imports and exports were removed, items like steel were deregulated. But implementation was the best part, since India had always been long on planning, short on implementing. Most measures were followed up vigorously by the Finance Minister.
The second step to liberalisation is long overdue. FDI in retail and pension reforms must be taken care of. But packages for infrastructure are the most important. This country cannot progress without a dramatic progress in infrastructure. In 1991, the Finance Minister was very lucky because he had the full support of the then-prime minister, Narasimha Rao. Right now, there are a lot of restrictions. The country feels it has a very nice prime minister, full of integrity. But he should pass some of that to his group of ministers, which he has not been able to do.
Adi Godrej
Chairman, Godrej Group
It was a watershed budget—a move from a controlled economy to a free enterprise system. It was a system that created value the world over. It was the biggest reform India had ever seen. There were a series of steps, like doing away with licensing, all in quick succession. The signal to move towards a free enterprise was far greater. Budget 1991 offered no disappointment. The then-PM, Narashimha Rao, should also be credited for giving Manmohan Singh the freedom to go ahead with all the progressive steps. An FM couldn’t have done so much on his own.
The quick implementation of the goods and services tax (GST) would contribute 1.5-2 percentage points to the gross domestic product and, to me, this would be a very big step. Opening up of sectors through foreign direct investment is not a gamechanger by itself. Implementation of GST would be a landmark.
N Vaghul
Chairman emeritus, ICICI Bank
In 1991, India took a U-turn. From being a socialist economy, it moved to become a market economy. The turnaround did not happen out of conviction. Reforms happened due to compulsion when we ran out of funds (foreign exchange to pay for imports). It was a half-hearted attempt.
I think the agenda for reforms is open. China began reforms 10 years before us. It was thought that we would bridge the gap in the future. Today, the gap has only widened by 30 years. The laundry list for reforms is long. First, state interference (control) has to be curtailed substantially. We need to understand the difference between regulation and control. Second, we need to carry out further reforms in the financial sector. Third, we have to pursue investment and reforms in infrastructure. Currently, it looks like the economy has lost its steam.
Venu Srinivasan
Chairman & Managing Director, TVS Motors, and ex-president, CII
It was a watershed event because it assured a new phase in which people moved away from the licence raj. It was not really a budget, but a set of reforms like the opening up of revenue convertibilities and a certain degree of capital movement and borrowings—a set of what you have seen in the last 20 years of compounded growth of seven-eight per cent. The Budget was the process through which a whole set of reforms was announced. It is a landmark event in the history of the Indian economy.
First, manufacturing reforms—the Factories Act, the Labour Act, the ESI Act — a whole gamut of rules needs to be looked at. This would make India a competitive place for manufacturing. Second, agricultural marketing—the APMC Act, eliminating the middle man and setting up storage chains, allowing people to buy directly from the farmers —need to be looked at. Third, let foreign funds access and participate in the retail sector.
Baba Kalyani
Chairman & Managing Director, Bharat Forge
The 1991 Budget signalled to the world that the Indian economy was open for business by creating conditions that allowed fair play in the market. Dismantling the system of industrial licensing, reducing the import duty levels, liberalising the import-export policy and currency devaluation gave the economy an outward orientation and set it on an irretrievably new direction. Most of the policy announcements were beyond expectations. Industry, which had been kept on a tight leash till then was unshackled from regulation and given the opportunity to perform and deliver.
Economic reforms in India in the past 20 years have largely been framed through consensus. Because of this, though the pace of reforms may appear slow, implementation has generally been successful. Therefore, India does not need ‘big bang’ reforms, all bundled in one Budget. Instead, a gradual approach is more suited to our system. In the current context, the Land Acquisition Bill, opening up of some critical sectors of the economy for private sector participation and incentivising the development of hybrid technologies in the mobility and transportation sector are the key priorities.
Tarun Das
Former chief mentor, CII
The most important feature was a change in direction for the country, moving from a closed economy to an open economy framework that was based on deregulation and competition. I think Manmohan Singh had, while referring to India's destiny in his Budget speech, said when the time had come for an idea, no one could hold it back. It was a time of euphoria. There was no major disappointment in the Budget. There were so many positives that the 1991 Budget should really have been called "Dream Budget One".
We need a drastic rationalisation of the tax structure, the abolition of different surcharges, cesses and exemption and reduction of customs and excise duties. There is still a long-pending agenda. I have always seen Manmohan Singh as a person who commands enormous knowledge, a person with vision and integrity. He still contributes consistently to economic policymaking. As PM, his contribution to foreign policy, domestic policy and the movement of the country has been enormous. This is a country which has to move forward based on consensus and he is the ideal PM — understated and low-key.(Click here for HOW THE ECONOMY FARED)
[WHAT HE SAID]
Excerpted from his 1991 Budget speech
The crisis in the economy is both acute and deep. We have not experienced anything similar in the history of independent India.
There is no time to lose. Neither the Government nor the economy can live beyond its means year after year.
But there can be no adjustment without pain. The people must be prepared to make necessary sacrifices to preserve our economic independence and restore the health of our economy.
Macro-economic stabilisation and fiscal adjustment alone cannot suffice. They must be supported by essential reforms in economic policy and economic management.
The time has come to expose Indian industry to competition from abroad in a phased manner... After four decades of planning for industrialisation, we have now reached a stage of development where we should welcome, rather than fear, foreign investment.
Before coming down heavily on tax evaders, I would like to give them a last opportunity to come clean. The black money so mobilised will be utilised for the achievement of social objectives such as slum clearance and low cost housing for the rural poor.
It is my intention to rationalise and simplify the procedures, rules and regulations pertaining to indirect taxes, so that the delays in the system are eliminated, and the interface between the tax collector and the tax payer is reduced to the minimum.
I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come.” 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.
| WHAT HE DID |
| KEY BUDGET INITIATIVES |
| * Foreign direct investment in high-priority industries with a raised limit for 51 per cent foreign equity to be given prompt approval |
| * Foreign equity up to 51 per cent to be allowed for export companies |
| * Setting up of the Foreign Investment Promotion Board to approve FDI proposals |
| * Up to 20 per cent of government equity in selected PSUs to be offered to mutual funds and investment institutions in the public sector and workers |
| * Sick PSUs to be referred to the Board for Industrial and Financial Reconstruction and public sector investments to be reviewed |
| * Appointment of a high-level committee to suggest financial sector reforms. |
| * Interest rate for debt instruments freed |
| * Securities and Exchange Board of India given statutory powers and the office of the Controller of Capital Issues abolished |
| * Liberalised norms for investment by NRIs, including easy investment in residential property |
| * Subsidies for low-analysis fertilisers abolished, resulting in a 40 per cent price increase |
| * Setting up of a national renewal fund to minimise the impact of technical change and upgrade on workers |
| * Petrol, gas prices raised by 10-20 per cent. Kerosene price cut by 10 per cent and diesel price remained unchanged |
| * Depositors with National Housing Bank under a new scheme to enjoy tax immunity |
| * Lower tax on dividend income received by offshore funds from the units of UTI |
| * No change in income-tax rates |
| * Corporation tax rate raised from 40 to 45 per cent for widely held companies, while the existing surcharge of 15 per cent was retained |
| * Depreication rates for machinery and plant reduced from 33.33 per cent to 25 per cent |
| * Interest-tax revived, to be levied on the gross amount of interest at 3 per cent. |
| * Remittances allowed under a specific scheme and a special bonds scheme launched by the State Bank of India. In both cases, tax immunity was assured |
| * Peak customs duty reduced from over 300 per cent to 150 per cent |
| * Capital goods import duty reduced from 85 to 80 per cent along with a components import duty cut from 70 to 65 per cent |
| * Passenger baggage allowance for duty-free imports raised from Rs2,000 to Rs2,400 |
| TRADE POLICY CHANGES* |
| * The rupee depreciated 20 per cent in two stages |
| * Abolition of export subsidies |
| * Rep licences for imports replaced with tradable Exim Scrips |
| * All supplementary import licences abolished |
| * Decanalisation of imports proposed |
| * Rupee convertibility promised in 3 to 5 years |
| *Announced before the Budget |
| INDUSTRIAL POLICY CHANGES* |
| * Asset limit for MRTP companies scrapped |
| * Industrial licensing for all projects, except 18 specified groups, abolished |
| * Private sector investment allowed in 10 areas hitherto reserved for the public sector |
| * Automatic approval for foreign technology agreements |
| * Automatic approval for foreign equity participation up to 51 per cent in 34 select areas |
| * Clause allowing conversion of loans into equity for new projects scrapped |
| *Announced separately on the Budget day |
