The series of economic reforms, which began in 1991 and transformed India’s corporate and industrial landscape as well as the stock market, have an important lesson for today’s policymakers: Vested interests fiercely oppose game-changing policies, but the political leadership can overcome the resistance.
The reforms that killed the infamous ‘License Raj’, kindled hopes for the economy, which was in a hopeless condition: Foreign exchange reserves had plunged below $1 billion, just enough for a few weeks of imports; fiscal deficit was more than 8 percent of GDP, and India's credit rating was falling.
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Liberalisation was obviously the best way forward for the economy, and the new policies transformed India. However, a section of industrialists, bureaucrats, politicians and stockbrokers fiercely opposed the dawn of the new competitive era, just as today vested interests have tried hard to derail the much-needed recent reforms such as the GST and the reforms in the farm laws.
Companies that focused on becoming competitive survived and thrived. They seized the opportunity to diversify and expand without needing government permission; they raised money without share prices being determined by the Controller of Capital Issues and conducted foreign trade without the oversight of the Chief Controller of Imports and Exports. Private companies built oil refineries, launched airlines and bought or sold steel at prices that were market-determined, not State set.
Markets boomed, many industrialists rejoiced, the middle class improved its standard of living, and the media unanimously supported the reforms — unlike in recent years, where sections of the media have not fully backed the recent path-breaking reforms.
After the initial euphoria over the 1991 reforms, the reality of a Darwinian competitive area began to sink in. Many business families did not want the survival of the fittest. They wanted their own survival, for which they needed protection from competition.
After hectic lobbying by the old guard, bureaucrats coined terms like the ‘Birla Syndrome’, for the demand to liberalise everything except foreign investment, which was articulated by a senior FICCI officer bearer as, “I don't want to be a second-class citizen in my own country”.
Officials also joked about the ‘Kurien Syndrome’ in which industrialists demanded liberalisation of everything except their own sector — a not-so-charitable reference to the legendary leader of India’s milk revolution, Verghese Kurien, who successfully safeguarded the interest of dairies.
On a more serious and disturbing note, a group of industrialists referred to as the ‘Bombay Club’ opposed reforms. Interestingly, many members of this club obtained licenses to enter new sectors, but after liberalisation they never set up the plants.
As a young reporter with The Economic Times, I was appalled and amused by the strong resistance from industrialists, who seemed nostalgic about the old days of tight controls. Those were days when people had to wait for five years to get a cooking gas connection and longer to get a landline telephone. Mobile phones did not exist and pagers were the privilege of the heads of the Intelligence Bureau, RAW, National Security Guard, the home secretary and a few Cabinet ministers.
I wrote an article in the newspaper about the ridiculous resistance. I still remember the first para: ‘When the going gets tough, the tough go to the government!’ After it was published, some industrialists stopped speaking to me, but they soon became irrelevant, both for the markets and for journalists. New companies replaced the uncompetitive ones in the Sensex and new stars toppled the inefficient ones in India Inc.’s top league.
Some politicians also opposed the reforms and the decision to take a loan from the International Monetary Fund (IMF). Chandra Shekhar, who was Prime Minister for a few months before PV Narasimha Rao took office in June 1991, shared an anecdote with some of us journalists, after he left office. Soon after becoming Prime Minister, a top official briefed him about the economic mess and suggested drastic steps. Shekhar asked him if the crisis had emerged the previous night. When the baffled official said the crisis had been brewing for some time, the Prime Minister snubbed him saying, “What steps did you take to control the crisis? If you did nothing to control the situation, don't ask me to take drastic steps”.
Another domain that saw drastic changes after the 1991 reforms was the stock market, which was unregulated and controlled by brokers, while investor grievances were largely ignored. Companies were not required to disclose sensitive information first to the stock exchange, and insider trading was rampant. GV Ramakrishna, as SEBI chairman, overcame fierce resistance from brokers and industrialists to discipline the market and protect investors.
The bureaucracy too was worried. In 1991, I was approached by nervous bureaucrats of the Indian Trade Service requesting favourable coverage of their ‘plight’. They had opted for the trade service after a gruelling UPSC exam thinking that they could control India’s imports and exports, but liberalisation changed everything, and fresh intake to the service was stopped.
While many industrialists, politicians, brokers and bureaucrats fretted over reforms, it was party time for the middle class, which moved up from scooters to cars and from rented accommodations to homes they owned. Many could afford air travel, dining in fancy restaurants, mobile phones, family holidays and foreign travel — all of this was earlier the exclusive privilege of the super-rich.
Today, India needs more reforms and more new faces in the top league of industrialists. To get there, the government needs to make sure steps such as the farm reforms are not blocked by vested interests.
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