Thoughts on Indian Economy (1980-1990)

The 80s in India saw a gradual movement towards relaxation of archaic policies, which would (by force) culminate into the landmark 1991 economic reforms. The understanding of the economy in the 80s is crucial to understand why the reforms of 1991 were needed.

At the beginning of this decade, life expectancy was 53 years, up from 48 years in 1970. Literacy rate was 43%, up by nearly 10% as compared to the previous decade. The National Adult Education Programme & the National Policy on Education introduced earlier decades were slowly yielding fruits. Inflation was a major cause of worry - it was nearly 12%.?

One of the causes of high inflation at the beginning of 1980s was the Oil Shock caused by the? Iran-Iraq War which was in turn influenced by the Iranian Revolution. Oil prices would jump from $14 per barrel in 1978 to over $35 by 1981. This would severely impact India’s foreign exchange reserves and its trade balance, a key component of the Balance of Payments (BoP). The situation worsened due to a poor monsoon and agricultural shortages.?

This was also the era when Ad-hoc Treasury Bills ruled the debt landscape. It is important to understand that India did not have a developed bond market till recently. In the 80s, the bond market was primarily run by banks. In the absence of a bond market, the government resorted to ‘deficit financing’, i.e. issuing treasury bills to the Reserve Bank of India as a promise to repay short-term loans extended by the central bank to the government. These loans would be repaid once the government would replenish its account with tax collection and the condition that the Reserve Bank would transfer a higher dividend to the Government. The key feature of ad-hocs was that it was a contract between the government and the Reserve Bank of India, and therefore, couldn’t be traded in the market. This allowed the two parties to establish an interest rate that wasn’t commensurate with the market. Furter, in the 80s, the government started issuing undated ad-hocs, i.e. treasury bills without a maturity date, and at interest rates below the skyrocketing inflation rate. Therefore, these bills had negative interest rates.

Throughout the 80s, we would witness the interplay (& escalation) of external factors, i.e. the oil shocks as seen above), and internal factors, i.e. significant increases in spending funded through excessive borrowing. For example, fertiliser subsidy would quadruple from 500 Cr. in 1980 to ~Rs. 2,000 Cr. in 1985, and grow nearly 10 times by the end of the decade. Our non-existent exports, and high reliance on oil imports would mean we’d always carry a significant trade deficit. In India’s case, given its policy of subsidising petroleum products for its consumers, a trade deficit arising from high cost of oil import would translate into a higher fiscal deficit. These two together would put pressure on the exchange rate and force the depreciation of the rupee, resulting in a vicious cycle if, like up to the 80s, a country is dependent on external debt, i.e. exactly what happened to us in the 80s.?

Also, in the early to mid 80s, the Cash Reserve Ratio and the Statutory Liquidity Ratio? were increased to almost 45%. This was done to counter inflation. An increase in CRR & SLR ratio would mean banks would end up locking more capital, and would be forced to pass on the opportunity cost of capital to the borrower, thereby increasing interest rates. During this precarious time, Dr Manmohan Singh took office as RBI Governor (1982-1985). An interesting event around this time was the ‘Loan Mela’, a large-scale loan distribution? to promote financial inclusion. Contrary to expectations (as is usually the case), inadequate vetting of loan applicants and cronyism eventually led to high default rates, putting additional pressure on banks.

India was dependent on the International Monetary Fund for financial assistance. A positive of this dependence however was that IMF required India to relax its stranglehold on the markets. As we have seen in an earlier article, the world was moving towards a free market economy (Helsinki Accords). India had to follow suit. This necessitated de-licencing the License Raj. There were quite a few peculiarities that the Indian economy was subjected to till the 1990s.?

1. Industries were classified into three groups depending on the role of the State - those reserved for the state, those where the state would participate, and those left to the private sector but under state regulation.
2. Even in the third group, i.e. businesses in the private sector, needed licences to operate and (hold your breath!), expand capacity & importing goods.
3. The government set production quotas and controlled the allocation of scarce resources such as foreign exchange, capital, and raw materials.
4. High tariffs were imposed on imports to protect local businesses, but at the same time making them non-competitive. Exports didn’t exist.?

IMF required India to let go of these restrictions, but we were resistant in the early 80s. Sample this speech (extracts) by the Finance Minister Pranab Mukherji in 1984

“... in view of the improvement in our payments position, the government has voluntarily decided not to avail of the balance of 1.1 billion SDR under the EFF of the IMF.?

While intervening in the debate on the IMF loan in this House in December 1981, the Prime Minister had this to say, and I quote: It does not force us to borrow, nor shall we borrow unless it is in the national interest. There is absolutely no question of our accepting any programme which is incompatible with our policy declared and accepted by Parliament. It is inconceivable that anybody should think that we should accept assistance from any external agency which dictates terms which are not in consonance with such policies.

… None of the dire consequences that we were warned of has occurred. We have not cut subsidies. We have not cut wages. We have not compromised on planning. We have not been trapped in a debt crisis. We have not faltered in our commitment to anti-poverty programmes for the welfare of our people. We entered this loan arrangement with our eyes open. We came out with our heads held high”

The dire consequences would eventually occur by the end of the decade, and we’d be forced into to the embarrassing act of airlifting 67 tonnes of gold as collateral seeking an emergency loan of $ 2 Billion from the same institution that nudged us to become a free market economy - the IMF.?

While the economy was moving along a delicate balance, there were other events taking place in quick succession. . Indira Gandhi is assassinated following Operation Blue Star. At 40, Rajiv Gandhi takes over as India’s youngest Prime Minister. Around the time of his oath, the Bhopal Gas tragedy occurs, Mikhail Gorbachev and Ronald Reagan would meet in Geneva, Switzerland to discuss diplomatic ties and more importantly, addressing the arms race, resulting in a historic treaty, later in the decade. And while India was holding on to the policy relics of the past, the US and UK were witnessing “Reaganomics & Thatcherism”, named after their famous leaders. These economic policies were centred around? tax cuts, deregulation, free-market principles, and privatisation of state-owned industries, i.e. policies that would strengthen their position as economic powerhouses.?

Back home, Rajiv Gandhi was determined to modernise India. His policies would be aimed to enhance India’s technological capabilities. He started liberalising the tech sector allowing foreign investments, expanded the telecommunications sector, and prioritised computerisation. It was under his tenure that the Indian Railways introduced computerised railway tickets.?

It was also during his tenure that we would see a rationalisation of income tax rates, the introduction of MODVAT (the prehistoric cousin of GST). Further, exports were encouraged: business profits attributable to exports were made tax deductible, and interest rate on export credit was reduced. By the end of his tenure in the 90s, 31 industries were completely de-licensed. Firms that reached 80 percent capacity utilisation? were assured authorization to expand capacity up to 133 percent (these policies seem alien from today’s perspective!). Price and distribution controls on cement and aluminium were entirely abolished. The measured ballet towards liberalisation had begun.?

There was much happening in the sphere of public markets in the 80s. At the beginning of the 80s, the (in)famous ‘Calcutta Cartel’ aimed to short-sell Reliance Industries' shares, betting on a price drop (analogous to Hindenburg’s style). Dhirubhai Ambani countered this by mobilising his loyal investors to buy and hold Reliance shares, creating an artificial scarcity and driving up the stock price. The bear cartels were squeezed into losses and Ambani’s reputation as the protector of investor’s capital rose. By the end of the 80s, we’d witnessed two significant events. The Black Monday (1987), an unexpected stock market crash in the US that would wipe out nearly a quarter of investor wealth. India, not yet globalised, would not feel the full impact of this crash. The other event was the founding of “Grow More Research and Asset Management” - does the name ring a bell? Setup by the ‘big bull’ Harshad Mehta in 1986, Grow More would acquire legendary status (for the right, and wrong reasons) in the coming years.?

Iconic companies like Infosys (1981), NABARD, EXIM Bank, Jindal Steels (all 1982), GAIL, Hero MotorCorp (both 1983) were setup early in this decade. Satyam Computers (yes, the same one) was setup in the same year - 1987 - when the Bofors Scandal happened (the irony is unmissable). The cherry on the cake - the Adani Group and NDTV were setup in the same year - 1988 - Adani would become the majority shareholder of NDTV in 2022. This was also the year the Berlin Wall fell. Tata Technologies was set up in 1989.

The Sports Authority of India was established in 1984 - a year after India won the Cricket World Cup and four years after the legendary Prakash Padukone won the prestigious All England Championship.

The end of the 80s would see a change of power in Delhi - Janata Party would be back (again for a short stint), the Gulf War is beginning, and so is the collapse of the Soviet Union. India would be rocked by anti-reservation protests as the Mandal Commission’s suggestions are implemented later in the decade. The economy is in a dire situation - our forex reserves are depleted. If we let things slide like before, India would have to file for bankruptcy within 4 weeks!?

In my eyes, this backdrop makes the 1991 reforms all the more illustrious.