Manmohan Singh

Topics: Economics, Economic growth, Macroeconomics Pages: 10 (2151 words) Published: April 24, 2014
In June of 1991, India was four weeks away from defaulting on its external balance of payment obligations. India had $600 million in federal reserves, barely enough to pay for three weeks of essential imports. It was during this time that the former Prime Minister of India N. Rao elected Manmohan Singh as the Finance Minister. With the coming of Manmohan Singh came many economic reforms. These reforms helped pull India from massive debt and near collapse. This leads many to the question, “How did the economic policies of Manmohan Singh help India emerge from the 1991 economic crisis?” Right before the Prime Minister Rao took office; the former Prime Minister had sought out an emergency loan of $2.2 billion from the International Monetary Fund, the Bank of England, and the Union Bank of Switzerland by pledging 67 tons of India’s gold reserves as collateral. A major influence on the decision to seek out the loan was Manmohan Singh. He had the foresight to seek out the loan, as heed had predicted that India would financially collapse without it. The move to pay off loans to the International Monetary Fund, the Bank of England, and the Union Bank of Switzerland with India’s federal gold reserve helped kick start his other economic reforms. Besides pledging their gold, India also had to accept many economic reforms, such as devaluing the rupee and opening industries and the economy to foreign capital among other things, as part of the condition set by the International Monetary Fund. Manmohan Singh had wanted to set up these reforms earlier, but could not due to lack of support and many legal obstacles, like not being able to have congress approve the reforms. He also sought out the loan for this reason. After the loan however, India was required to start implementing these reforms. The move to pledge the gold helped tide over the balance payment crisis that they could not reverse due to the lack of funds and income, and more importantly kick started Manmohan Singh’s economic reforms that led India to become economically independent and reliable. One of the first things that Manmohan Singh did was that he opened India’s economy to multinational companies and governments allowing for internal economic growth by making native companies more competitive. When the country was first opened economically to international and foreign business, such as Exxon Mobil, Quest, and Nokia, there was a huge pouring of businesses and investors. When this was announced, the plan met much criticism. Many feared that local businesses and companies would not be able to compete with the larger and more financially stable companies that were investing and setting up in India. At the time, a typical Indian company would have very poor quality products, and they would often take out loans, causing debt. This caused many business owners and those working for businesses to fear for their jobs and income. With time, Manmohan Singh prevailed. By allowing multinationals to come in, native companies were forced to be competitive. This competition helped the economy in two ways: One was that there was a need to be innovative and to make the product likeable to consumers. Due to the lack of money, many business owners’ found ways to make very cheap products. These products were far below those of multinational companies in terms of quality. With these better products coming in to India, native companies improved their products. Another thing that some companies did was that they dropped their prices severely, with varying success, depending on the cost to make the product and the profit gained by the business. Either way, this creates a want for the product, increasing consumer and household spending. This creates cash flow to companies, allowing for growth. The second reason why the competition spurred internal economic growth was that to keep with demand for popular products, the native companies had to hire more workers to produce more material. With...
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