6.28 — 1991, and the Ledger of the Republic

In July 1991 the Reserve Bank of India physically flew 47 tonnes of gold to London and Switzerland and pledged it as collateral for a loan.

India had about two weeks of import cover left. The Gulf War had raised oil prices and cut remittances from Indians in Kuwait; the Soviet Union, a major trading partner, was collapsing; the fiscal deficit had run above 8 percent of GDP; and a political crisis had spooked lenders. The country was days from defaulting on its external obligations.

The gold shipment was kept quiet and then leaked, and the humiliation of a country pledging its gold reserves became the emotional fact that made reform politically possible.

What followed changed the trajectory of the Indian economy, and this chapter covers what came before it, what the reforms did and did not do, and the honest ledger of the republic.

Why the model stalled

Chapter 6.24 described the Nehruvian model. Here is how it performed and why it was abandoned.

Growth from the 1950s to 1980 averaged around 3.5 percent a year. With population growing above 2 percent, per capita growth was around 1.3 percent — meaning income doubled roughly every fifty years. The same period saw South Korea, Taiwan and later China grow at rates that doubled income every decade or so.

The Licence Raj in practice. A firm required a licence to establish, and separate approvals to expand capacity, change its product mix, import machinery, or import raw materials. Estimates of the number of approvals needed to start a business ran to dozens. Because the approvals were discretionary, they were valuable, and the system generated corruption structurally rather than incidentally.

And its economic effect was to protect incumbents. A firm with a licence faced no new entrant. Indian industry became a set of protected monopolies with no competitive pressure to improve, and the results were visible to every consumer: a waiting list of years for a telephone connection or a scooter, two car models available for decades, and quality that could not be sold abroad.

Nationalisation extended it. Banks were nationalised in 1969, coal in 1973, and general insurance in 1972. Bank nationalisation did substantially expand rural branch coverage and lending to agriculture, which was its purpose and which it achieved. It also created a banking system whose lending decisions were politically directed, whose consequences appear in the bad-loan crises of later decades.

The 1970s made it worse. The Monopolies and Restrictive Trade Practices Act constrained large firms; the Foreign Exchange Regulation Act made foreign investment nearly impossible and drove IBM and Coca-Cola out of India in 1977; and marginal income tax rates reached, at the extreme in the early 1970s, an effective rate above 90 percent. The predictable results were capital flight, a large black economy and a gold-smuggling industry.

The Green Revolution

The one unambiguous developmental success of the period, and it came with a bill.

The problem in the mid-1960s was existential. Two consecutive monsoon failures in 1965 and 1966 left India dependent on American food aid under Public Law 480, which President Johnson released on a month-by-month basis, tied to Indian policy positions. Lal Bahadur Shastri asked Indians to skip one meal a week. It was the sharpest lesson in food dependence any Indian government has had.

The response was the adoption of high-yielding dwarf wheat varieties developed by Norman Borlaug's team in Mexico, and later rice varieties from the International Rice Research Institute, supported by M. S. Swaminathan and a package of fertiliser, assured irrigation, credit, and guaranteed procurement prices through the Food Corporation of India.

Why the dwarf varieties mattered mechanically. Traditional tall wheat, given heavy fertiliser, grows more grain than the stalk can support and falls over — "lodging" — losing the crop. A short, stiff-stalked plant carries the extra grain. That is the whole technical basis of the revolution.

The results. Indian wheat production roughly tripled between the mid-1960s and the late 1970s. India stopped importing food grain and eventually became a net exporter. Famine, which had recurred for two centuries, ended.

The costs, which are now the binding problem.

It was concentrated in the irrigated northwest — Punjab, Haryana, western Uttar Pradesh — because it required assured water. Rain-fed eastern and central India largely did not participate, which widened regional inequality.

Groundwater. Punjab's aquifer is being drawn down faster than it recharges (Chapter 1.12), and free or subsidised electricity for pumping removed the only price signal that would slow it.

Soil and input dependence. Heavy fertiliser use without matching organic inputs has degraded soil in the intensive districts, and fertiliser subsidy has become a permanent, large and badly targeted budget item.

And the crop mix. Guaranteed procurement of wheat and rice at support prices, combined with free power and water, produced rice cultivation in semi-arid Punjab — which is agronomically the wrong crop in the wrong place, sustained by policy. The current stubble-burning problem that fills north India's winter air with smoke is a direct downstream consequence of the rice-wheat rotation's timing.

The honest verdict: it prevented famine and it bought thirty years, and the policy package that delivered it has not been reformed since, and its costs are now the main constraint on Indian agriculture.

1991

The reforms were designed and pushed through by Prime Minister P. V. Narasimha Rao and Finance Minister Manmohan Singh, an economist who had not previously held elected office. Rao led a minority government, which is why it is remarkable that it happened at all.

What was actually done, in the first eighteen months.

Industrial licensing was abolished for most industries. The list of industries reserved for the public sector was cut from seventeen to a handful.

The rupee was devalued in two steps in July 1991, and moved toward market determination over the following years.

Import tariffs were cut sharply — peak rates came down from over 200 percent to progressively lower levels over the decade — and import licensing on capital and intermediate goods was dismantled.

Foreign investment was permitted up to 51 percent automatically in a list of industries, and the FERA restrictions were relaxed and eventually replaced.

Capital markets were opened and a regulator, SEBI, given statutory powers.

What was not done, and this matters for what followed. Labour law was not reformed, so firms above a size threshold still could not adjust employment easily, which pushed Indian manufacturing toward capital intensity and small firm size. Land acquisition remained difficult. Agriculture was largely untouched. And privatisation was minimal — public sector firms were partially disinvested rather than sold.

The results over three decades.

Growth rose to around 6 to 7 percent a year on average, with periods above 8 percent. Per capita income roughly quadrupled in real terms between 1991 and the 2020s.

Poverty fell substantially. By the standard international line, the share of Indians in extreme poverty fell from well over 40 percent around 1990 to well under 15 percent by the late 2010s — which is several hundred million people, and it is one of the largest reductions in absolute poverty in history, though smaller and slower than China's over the same period.

Life expectancy rose from about 58 in 1990 to about 70. Literacy rose from 52 percent to over 77 percent. Infant mortality fell by roughly two-thirds.

And the sectors that grew fastest were the ones the state had never got round to regulating. Software services were not a licensed industry because they did not exist when the licences were written, which is a substantial part of why the Indian IT industry grew as it did. Telecommunications, aviation and finance transformed once opened.

What has not worked

The honest column, and it is long.

Manufacturing did not take off. Manufacturing has remained stuck at roughly 15 to 17 percent of GDP for decades, against 25 to 30 percent in the East Asian economies at comparable stages. India went from agriculture to services without the industrial phase that absorbed hundreds of millions of workers everywhere else — and services, particularly high-skill services, employ far fewer people per unit of output. This is the single largest structural problem in the Indian economy and Chapter 9.14 examines it directly.

Jobs. India needs to create something on the order of 8 to 10 million non-farm jobs a year to absorb its workforce growth, and has consistently created fewer. Female labour force participation is unusually low and has fallen — under 30 percent by most measures, against over 60 percent in China — which is both a rights failure and a large economic loss.

Education quality. Enrolment is now near-universal at primary level. Learning is not. The Annual Status of Education Report has documented for close to two decades that a large proportion of children in Class 5 in rural schools cannot read a Class 2 text or do simple division. India solved attendance and did not solve teaching.

Health. Public health spending has remained around 1 to 1.5 percent of GDP for decades, among the lowest in the world for a country of India's income. Out-of-pocket spending is a leading cause of household impoverishment. Malnutrition indicators — stunting in particular, at around a third of children — remain worse than in several African countries with lower incomes, which is a genuine puzzle in development economics.

Inequality has risen sharply. The share of national income going to the top 1 percent is now among the highest recorded in India's history, higher than in the colonial period by some estimates.

Urban infrastructure and air. Indian cities routinely occupy most places on lists of the world's most polluted, and the health cost is measured in years of life expectancy.

And the state's capacity remains thin. India has far fewer public servants per capita than most countries at its income level, judicial pendency runs into tens of millions of cases with waits measured in years, and police-to-population ratios are below the United Nations recommended level.

The ledger of the republic

What it got right, and none of these was guaranteed.

It stayed one country. Fifteen major languages with their own literatures, every world religion, and enormous regional variation — and no successful secession. Linguistic states, federalism and the accommodation of regional parties in national coalitions did the work (Chapter 6.25).

It stayed a democracy, through one suspension that was reversed by an election, and with regular transfers of power at both national and state level. The Election Commission's conduct of elections at this scale is a genuine administrative achievement.

It kept the army out of politics.

It ended famine.

It built scientific and technical capacity — space, nuclear, pharmaceuticals, software — from a base of essentially nothing.

And it made real gains in the things that measure a life: three decades more of it than in 1947, most children in school, most people literate, and a large majority out of extreme poverty.

What it got wrong.

It chose an economic model that cost it forty years, and the compounding is the point: a country growing at 3 percent while its neighbours grow at 8 falls behind by a factor that no later burst of growth recovers.

It neglected primary education and public health at exactly the moment those investments pay the most, and it is still paying for that.

It has not delivered equal citizenship in practice. Caste discrimination persists in employment, marriage and violence statistics. Communal violence has recurred with impunity (Chapter 6.27). Women's safety and participation lag badly.

And Ambedkar's warning has substantial force. He said in 1949 that political equality alongside social and economic inequality was a contradiction that would have to be resolved. Seventy-five years on, one person one vote is real and the social and economic inequality is larger, not smaller.

Where this shows up in your life

If you are Indian and under forty, you have lived entirely in the post-1991 economy, and almost everything you take for granted — mobile phones, private airlines, foreign brands, the IT industry, consumer credit, the possibility of a job that is not government service or a family business — dates from it.

And the open questions are the ones your working life will answer. Whether manufacturing can be made to absorb labour. Whether the education system can be made to teach. Whether the demographic dividend — the largest working-age population in the world, arriving now — becomes a workforce or a burden, which depends entirely on jobs and skills and has a closing window of perhaps two decades.

What Part 6 established

A land whose geography gave it one invasion route, no cavalry horses, and the richest indefensible plain in the world. Four thousand years of civilisation, with periods of extraordinary achievement in mathematics, philosophy, literature, engineering and art, and with social hierarchies that hardened over the same centuries. Repeated defeat by smaller unified forces, for reasons that were institutional rather than personal. Two centuries of colonial rule that left the country with a life expectancy of 32 and a literacy rate of 12 percent. A freedom movement of several distinct streams, none of which alone produced independence. A partition nobody wanted and everyone contributed to. And seventy-five years of a republic that got the political framework right and the economic framework wrong, and has spent the last three decades correcting the second while trying not to damage the first.

What the next Part covers

Part 7 returns to the wider world at the point Part 5 left it — the collapse of Rome in the west — and covers the medieval centuries: the rise of Islam and the caliphates, the Islamic golden age and what it preserved and produced, Byzantium's thousand years, Europe after Rome, the Crusades, the Mongols who built the largest land empire in history, the Black Death that killed a third of Europe, the empires of Africa that most histories omit, and China, Japan and Korea in the same centuries.