(June 1991 to May 1996)

Pamulaparti Venkata (P.V.) Narasimha Rao was chosen to lead the Congress (I) after Rajiv Gandhi was assassinated. Narasimha Rao was an erudite scholar and knew several languages, and he was a Congress loyalist. He had held important ministerial posts – external affairs, defence, human resources and home – in the governments of Indira Gandhi and Rajiv Gandhi.

After the elections, he formed a minority government. Narasimha Rao himself had not contested elections in 1991, probably with the intention of retiring from politics. But after he was sworn in a prime minister, he won in a by-election from Nandyal in Andhra Pradesh to become a member of the Lok Sabha.

Rao is best remembered for the economic reforms undertaken by his government; however, he has other achievements to his credit as well. And a few blots as well.

Economic Reform

On becoming prime minister, Narasimha Rao inducted Manmohan Singh, a non-political economist who was at the time Chairman of the University Grants Commission, into his cabinet as finance minister. He backed his finance minister in all the steps he took and took a few on his own as industries minister. He also managed the reactions, especially within the Congress party, which were not initially in favour of reform when socialism had been the basic approach under Nehru and Indira Gandhi.

The economy of India was in shambles. Besides the precarious balance of payment situation, domestic scene was not good with high inflation.

When Rao became prime minister, the Soviet economic model was discredited. China under Deng Xiao Ping had undertaken market-oriented reforms. Narasimha Rao also opted for market reforms, but not the free market type; he opted for the middle path. He focused on reforms that would produce the least pain to the masses in general even while producing high growth rates. The government approach was not radically reformist. There was to be no bank privatisation or staff reforms. Nor would there be no opening up of the farm sector.

The New Economic Policy of 1991 aimed at correcting the weaknesses on the fiscal and balance of payments fronts to stabilise the economy. On the structural reform side, the policy sought to remove the rigidities that infested the various sectors of the economy. An effort was to be made to control inflation and release industries from unnecessary controls and regulations so that hurdles in the way of growth would be removed. The fundamentals of the new economic model were to be liberalisation, privatisation and globalisation.

The rupee was devalued. Manmohan Singh explained that this would help export. The budget took a bold step of correcting fiscal imbalance by reducing the fiscal deficit. Singh initiated the gradual reduction of import duties, income tax and corporate tax.

The finance minister with the support of his prime minister specifically targeted the highly restrictive trade and industrial policies. The quotas on the imports of most machinery and equipment and manufactured intermediate goods were removed. There was a rationalisation of the tariff structure and reduction in custom duties, especially on capital goods. Imports of technology were freed.

The Industrial Policy of 1991 was revolutionary for the times. Significantly, Narasimha Rao himself held the industries portfolio. The industrial licensing system was made applicable to a much shortened list of environmentally- sensitive or security-related industries. The MRTP Act was modified to remove sections that restricted growth or

prevented merger of large business houses. The industries reserved for the public sector was drastically reduced. The public sector was also granted more autonomy. Private investment was made welcome in the infrastructural sector. The restrictions on foreign ownership were liberalised. Foreign investment was gradually liberalised.

The service sector was also liberalised with private sector allowed to invest in insurance, banking, telecom and air travel sectors.

The Rao government abolished the Controller of Capital Issues which governed capital issues in India; introduced the SEBI Act of 1992 and the Security Laws (Amendment) to regulate all security market intermediaries; and started the National Stock Exchange as a computer-based trading system. The system may not have been wholly reformed: because of bureaucratic controls it still took much more time to start a business in India when compared to China or Malaysia; labour laws were not reformed, and the process

of exit for losing enterprises continued to be difficult.