He told the assembled B-School students how the country was living beyond its means, that the private sector had to be unshackled so that it could seize global opportunities, how the inefficiency of the public sector was a drag on the economy, the need to modernise the creaking tax system, and the opportunities from new technologies. What he proposed that day, in his own quiet and understated way, was a radical overhaul of the way economic policy had been conducted in India till then.
Manmohan Singh then seemed to be at the end of his distinguished career as an economic policymaker that had seen him in leadership positions in the finance ministry, the Reserve Bank of India (RBI) and the Planning Commission. Instead, a little more than two months later, he became finance minister of the country, and took charge of a crisis-ridden economy that was close to an international default.
Four days after becoming finance minister, Manmohan Singh summoned his 12 top officials in the ministry, firmly telling them there was a need to change course. He had the full backing of his prime minister, and whoever was uncomfortable with the new strategy would be reassigned to some other part of the government.
These two anecdotes—his speech to business school students and the meeting with the top officials in the finance ministry—should help clear the air about two questions that have puzzled many. First, was Manmohan Singh an economic reformer by conviction or was he merely carrying out the instructions of P.V. Narasimha Rao? Second, was he capable of firm decision-making or did he habitually sit on the fence?
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Manmohan Singh left an indelible mark on India, and on its economy in particular. He is best known for his role in leading the economic reforms of 1991-93 in partnership with Rao, another man of seemingly ambiguous convictions who seized the moment when it came.
The beauty of the reforms that the duo ushered in, with the help of a supporting cast of policy economists, was that they were not a collection of scattershot actions in individual sectors, but an internally consistent programme that integrated fiscal, trade, exchange rate, industrial, and financial policies. Each fitted into the other like a set of Lego blocks. Besides his chosen band of reformers, Narasimha Rao and Manmohan Singh had the support of civil servants such as Amar Nath Verma, who steered the reforms through the inertial administrative machinery.
Singh was one of the chief architects of a severe anti-inflation package that tamed the inflation beast.
The economic reforms of 1991-93 were undoubtedly Manmohan Singh’s most towering achievement as an economic policymaker, but it would be unfair to restrict his contributions to our country to only those magical months with its bonfire of controls. There was far more in his track record.
Manmohan Singh first made his mark in Indian economics as a PhD student at Oxford University. His 1962 thesis broke with the prevailing belief in export pessimism and import substitution. Manmohan Singh argued that the Indian development strategy had to pay more attention to exports as a source of foreign exchange to fund critical imports of machinery and cut dependence on foreign aid. This was around the time that many countries in East Asia had begun to pivot towards exports as a driver of their economic growth.
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After a stint in academia and the United Nations Conference on Trade and Development in New York, Manmohan Singh joined the Indira Gandhi government in 1972 as an economic advisor. India would soon be hit by an inflation crisis fuelled by the sharp increase in international oil prices as well as a drought at home. Prices were rising at an annual rate in excess of 25%.
He was one of the chief architects of a severe anti-inflation package that tamed the inflation beast. The central feature of this package was an income policy that restricted dividend payouts by companies as well as compressed household spending by freezing higher incomes in compulsory deposits. The unconventional policy helped bring inflation down into the single digits within a year.
The Reserve Bank of India (RBI) only played a supporting role in that episode. However, when Manmohan Singh took over as governor of the Indian central bank in 1982, he brought in profound changes in its operations. It was under his watch that the RBI made a decisive move towards targeting the money supply as the primary way to control inflation, following the recommendations of a committee headed by Sukhamoy Chakravarty.
Manmohan Singh left an indelible mark on India, and on its economy in particular
The RBI moved into the age of modern monetary policy making. Those years also saw a gradual shift from direct controls on bank lending to using interest rates as the main lever of monetary policy operations. That required the liberalisation of the money market that till then was locked into a system of administered interest rates.
It was during Manmohan Singh’s tenure at RBI that India also embraced a more flexible exchange rate to help promote exports. The rupee was allowed to depreciate in sync with high domestic inflation, so that Indian exports are not priced out of international markets. Many years later, as finance minister, Manmohan Singh freed the RBI from the automatic monetisation of government deficits, through a landmark deal signed with the central bank in 1997. This has helped the RBI prioritise inflation control over funding the hole in the government budget by printing new money.
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The 1980s also saw Manmohan Singh have two stints at the Planning Commission. It was in this period that the focus of Indian development strategy—in the sixth and seventh five- year plans—move away from a blind trust in higher investment rates. There was now a focus on the efficiency of these public-sector investments, a bigger role for private-sector investments, technological upgrades of Indian industry, and a focus on the energy sector after the two oil shocks of the 1970s.
One of the underplayed fact in the standard narratives about Indian economic policy is the generational shift in the 1970s, as many of the old stalwarts from the Nehru era moved away from the spotlight. Many of the policy economists who would make a mark over the next three decades were brought into government by Manmohan Singh—Montek Singh Ahluwalia, C. Rangarajan, Ashok Desai, Bimal Jalan, Vijay Kelkar, Shankar Acharya, Rakesh Mohan and Arvind Virmani, for example.
There were two international stories that Manmohan Singh was keenly aware of. The first was from Latin America. The mismanagement of economies there had led to two decades of stagnant output, high inflation, capital flight and a collapse in real wages. The second was from East Asia. The countries in this region had successfully managed to pull millions out of poverty through labour-intensive and export-oriented industrialisation.
In his 1992 budget speech, Manmohan Singh had said that India had to pursue the East Asian path once its economy had been stabilised. In the subsequent decades, India managed to avoid the Latin American path. There was no serious macroeconomic crisis, and even the brief moments of stress in 2008, 2013 and 2020 did not end with a full-blown crisis. But India could not replicate the East Asian model of a rapid shift of people from traditional to modern sectors, from low productivity to high productivity work. That is one area where the economic reforms of 1991-93 failed to adequately deliver on their promise.
It is worth speculating whether this learning made Manmohan Singh alter course when he unexpectedly became prime minister in 2004. The main vehicle of inclusive growth was no longer massive job creation but income transfers to maintain social stability. The entire architecture of rights-based social protection that was the hallmark of the United Progressive Alliance—and which continues to be the backbone of our social protection system even today—could be seen as a second-best response to the problem of job creation.
Manmohan Singh was the archetypical insider—working within the constraints of political realities, calibrating his views to the changing circumstances and patiently waiting for windows of opportunity. His work profoundly changed India for the better, and took it closer to its potential as an economic power.
Niranjan Rajadhyaksha is executive director of Artha India Research Advisors.
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