By Abhishek Banerjee and Karuna Gopal
Have you ever heard of the “Compulsory Deposit Scheme?” In the 1970s, you had to deposit a percentage of your income, sometimes up to 18 percent, with the government. This was for a period of 3-5 years. It was not a tax. You had to do this on top of paying income tax. The idea was simple. At the time, inflation was running at an astounding 29 percent. So if people were forced to deposit almost all their money with the government, they would have nothing to spend. This was supposed to bring down inflation. And who was the Chief Economic Adviser to Indira Gandhi at the time? It was Dr. Manmohan Singh.
This may surprise some people. Because Dr. Manmohan Singh has always been described to us as the great reformer of 1991. And he certainly was. But Dr. Singh has a much longer record of service to the nation, in every decade from the 1970s to 2014. As we remember our former Prime Minister, can we look at these periods one by one, perhaps a bit differently from the usual lens?
First the 1970s, when Dr. Singh was Chief Economic Adviser, including for a while during the Emergency. This was the time when India made a turn towards the hard left. Over two decades had passed since independence. India was still in crushing poverty, with no end in sight. As it often happens in such situations, the people at the top were looking for someone to blame. The wealthy, the middle class, foreign companies, local shopkeepers, anyone. The top income tax rate was raised to 97 percent. The middle class had to pay into the “Compulsory Deposit Scheme.” Foreign companies were all but chased out of India by the Foreign Exchange Regulation Act (FERA) of 1973. And when the country began to run out of food, the government banned private traders and took over the sale of wheat.
It was a disaster. As mentioned before, inflation soared to 29 percent. The GDP growth fell to just 1 percent by 1974. As a result of its defeat in the war of 1971, Pakistan’s per capita GDP had fallen below that of India. But just four years later, the average Pakistani was again richer than the average Indian. In India, there were protests everywhere. In 1975, Indira Gandhi decided to crush them all by declaring the Emergency
Dr. Manmohan Singh continued to serve as Chief Economic Adviser until 1976, when he was appointed Secretary in the Finance Ministry. His rise continued in the 1980s, during which time he served as Governor of the Reserve Bank of India, and later as Deputy Chairman of the Planning Commission. This was the fateful decade, when Communism was failing all around the world. In India, Nehruvian socialism was entering its final crisis. So while we are all grateful to Dr. Manmohan Singh for the economic reforms, it would only be fair to ask: Whose economic policies did he reform in 1991?
And what made those reforms possible? Let me quote from a September 2010 report in The Indian Express: “It’s open to the public now. Declassified documents from the World Bank show how it and the International Monetary Fund chivvied and cajoled India into economic liberalisation in the summer of 1991. Significantly, it blamed the poor macroeconomic policies under the Congress regime of the 1980s for India’s eventual external sector debacle. The new Congress government with finance minister Manmohan Singh was presented a stark choice by the two institutions. It will either have to undertake reforms that will promise the needed external support, or brace itself for a disorderly and painful transition that will significantly reduce growth for years to come.”
So it was the poor policies of the Congress in the 1980s that caused the crisis. The time when Manmohan Singh was promoted to a number of important positions, from RBI Governor to Deputy Chairman of the Planning Commission. And in 1991, India either had to reform, or it would get no aid from the IMF and the World Bank. With not enough money for even a month of imports, what choice did India have?
It may be confirmed now with the release of official documents. But everyone knew even back in 1991 that these reforms had been forced by the IMF and the World Bank. A cartoon at the time by R K Laxman shows Narasimha Rao and Manmohan Singh coming out of the IMF office, with their arms all twisted. The caption reads: “If anyone asks, just say nobody twisted our arms. We twisted them ourselves.” But perhaps, the historians never asked.
The period between 2004 and 2014, when Manmohan Singh served as Prime Minister, was a period of high growth for India. But what happens when we put this economic growth context? If we look at India’s BRIC peers, China expanded its GDP by 440 percent between 2004 and 2014, Brazil by 267 percent, and Russia by 223 percent. In contrast, India’s GDP increased only by 182 percent. At the per capita level, the same story repeats. Between 2004 and 2014, the per capita GDP of China increased by 406 percent, that of Russia by 243 percent, and that of Brazil by 233 percent. Again, India was the worst performing BRIC economy between 2004 and 2014, managing to increase its per capita GDP only by 150 percent.
In other words, India grew fast during the UPA years, but other countries grew even faster. In fact, take the 150 or so countries classified as emerging and developing economies by the IMF. In 2004, India’s per capita GDP was about 35 percent of the per capita GDP of these developing economies. By 2014, it had declined to 30 percent.
The most severe fall came with respect to China. In 2004, the size of India’s economy was about 37 percent that of China. By 2014, it was nearly cut in half, to just 19 percent. The period from 2004 to 2014 is when India fell decisively behind China. In almost everything from economic size, to building infrastructure to geopolitical influence. It may seem hard to believe today, but back in 2004, India used to have a small trade surplus of about $1.75 billion over China. By 2014, we were running a trade deficit of $38 billion
There can be absolutely no doubts about the commitment of Dr. Manmohan Singh. From his humble origins in a small village in Punjab, to being a partition refugee, he became one of the most important figures in India’s political history. And as India rose on the world stage, he became one of the most important gures in the world. And so we deserve to have a full account of his career, as Chief Economic Adviser in the 1970s, at the Planning Commission in the 1980s, Finance Minister in the 1990s and finally as Prime Minister in the early 2000s. For instance, after the UPA left office in 2014, our banks were in such bad shape that the RBI had to put 11 out of 21 public sector banks under its Prompt Corrective Action (PCA) framework, to save them from failing.
As with all historical figures, the debate on the economic legacy of Dr. Manmohan Singh should continue. But in examining this legacy, there can be no place for mythmaking.
Abhishek Banerjee (@AbhishBanerj on “X”) is an author and columnist. Karuna Gopal (@KarunaGopal1 on “X”) is president, Foundation for Futuristic Cities.
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