In democracies, elections carry a degree of uncertainty no matter how consistently opinion polls predict the same result. One thing that we can be sure of in the Indian elections currently is that Prime Minister Manmohan Singh will be stepping down from parliament, and most likely from the political limelight altogether, when the new government takes office later this month. As India's third longest serving prime minister, and presiding over a time of rising prosperity and international influence, Singh's place in Indian history is assured. But in some respects it is his tenure as finance minister during the 1990s that constitutes Singh's most enduring legacy.
Holding the post for five years between 1991 and 1996, Singh and the Congress Party Prime Minister Narasimha Rao steered India through an IMF bailout and a far-reaching process of liberalisation that included lifting restrictions on foreign investment, trade and private enterprise.
The need to shift the Indian economy away from the import substitution model of development had been recognised by a number of key political leaders in the late 1970s and 1980s, but previous attempts at economic reform were stymied by opposition from unions, the Indian intelligentsia, and most notably from opponents within the governing Congress Party itself. Rajiv Gandhi came to power in 1984 calling for import liberalisation and the privatisation of inefficient public enterprises, but his plans quickly foundered.
By the late 1980s, the obvious political difficulties involved in changing India's economic course left it in the unenviable position of case study par excellence on how democratic politics obstruct reform in developing economies.
Singh and Rao's major achievement in the early 1990s was thus in constructing a political opportunity for such far-reaching restructuring, and with a minority government no less. Shortly after taking on the ministership, Singh expressed his belief that economic liberalisation was an idea whose time had finally come, and perhaps as a result of his experience in shepherding his party through those reforms, he remains fond of describing politics as the art of the possible. But Rao too showed a keen sense of historical possibility when he appointed Singh, an academic and sometime economic advisor who had never held elected office, and then gave him a free hand.
Perhaps because he was new to the political game, Singh proved willing to confront all obstacles, warning vested interests that he had no 'ideological hang-ups' about cutting government spending. He stuck to his principles, also telling the economic right he had no 'ideological' objection to public enterprises provided they were economically sound.
The international environment also helped tip the scales toward reform in 1991. The collapse of the Soviet Union had dealt a withering blow to the idea of central economic planning, and many Indians were looking to the Asian tiger economies and asking why India should not follow in their footsteps to greater prosperity.
The challenge was formidable. [fold]
Singh entered office shortly after a balance of payments crisis, with foreign debt at US$72 billion (over US$120 billion in today's terms) and the fiscal deficit at 9.4% of GDP. Economic growth was 2%, and a rupee that was overvalued by 30% was strangling exports. Singh instituted far-reaching solutions, including cutting spending and writing a new industrial policy that abolished many licensing restrictions and opened India to foreign investment. This new policy was a crucial step in fostering the culture of entrepreneurialism that has helped transform the Indian economy into a highly productive one today. Singh also overhauled the banking sector, which had been nationalised some decades before and was operating unprofitably as an arm of government policy.
All of this was politically controversial, with critics on both the right and the left uneasy about foreign competition, cuts to government spending, and the IMF's involvement. Most vexing of all was how to reform Indian agriculture. In 1991, 70% of Indians lived in the countryside and depended on agriculture for their livelihood, and most of India's poor fell into this category. Helping the most impoverished had traditionally meant agricultural subsidisation, and at that time 78% of all federal government subsidies went to fertiliser handouts to poor farmers. The challenge of making the agricultural sector profitable at the same time as reducing poverty has proved intractable, however. As prime minister, Singh has continued to rely on subsidies and handouts for the countryside, one of several aspects of economic governance that he has, ironically, been criticised for during the current election campaign.
Even in the mid-1990s, few economists were predicting that India could achieve anything like China's growth rates within ten years (one exception was Arvind Panagariya). Yet by decade's end, growth was above 6%, and by 2003-04 it would hit 'tiger' levels of 8% and above. When Singh compared India with South Korea in 1991, asking why India was so far behind when the two had comparable incomes in the mid-1950s, the comparison seemed ridiculous. Now India is firmly in the club of booming emerging economies, despite its current economic doldrums.
Poverty reduction is the greatest success story of the post-1991 period. Both in absolute terms and as a percentage of population, the number of Indians in poverty has fallen significantly, from 47% in 1990 to 22% in 2010. Singh deserves his share of the credit for that.
Photo by Flickr user World Economic Forum.