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I'm Sahaj Sankaran, winner of Yale’s South Asian Studies Prize and Diane Kaplan Memorial Prize for my historical research, and this is Today in Indian History. Four days a week, I'll dig into the context and consequences of an event in India's history that happened on that date. I'll walk you through what happened, what the world around looked like at the time, and how it shaped the India we live in today.

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July 22, 2020

India Accepts an Emergency Loan from the International Monetary Fund

On 22 July, 1991, India accepted an emergency loan of $220 million from the International Monetary Fund. The loan was meant to keep the country’s economy afloat during an acute financial crisis, and signalled to the world that India was willing to open its economy and adopt reforms to manage the crisis and strengthen its economy. The implications of that acceptance, and the liberalization that followed, have continued to define India to this day.

Since its independence in 1947, India had frequently walked a fine economic line. The ideas of central planning and self-reliance that India’s first Prime Minister, Jawaharlal Nehru championed closed a number of doors for the Indian economy; free enterprise and foreign investment were severely curtailed for the first decades of India’s history. This meant that when India had to weather frequent crises – food scarcity, inflation, balance of payments problems – it weathered them alone, and without much help from the outside world.

Reforms before 1991 were often erratic and inconsistent. As the decades passed, free enterprise was slowly permitted and the infamous License-Permit Raj regulations on business activity were slowly eased; on the other hand, the banking sector was largely nationalized by Nehru’s successors, and the Indian government maintained its virtual monopoly in agricultural markets, life insurance, mutual funds, and a host of other areas. Unfortunately, despite its emphasis on self-reliance, India remained dependent on imports for a number of vital things; while food self-sufficiency was eventually achieved under Nehru’s daughter, Prime Minister Indira Gandhi, the country continued to import virtually all of its oil needs. Oil price shocks frequently destabilized the Indian economy as a result, and India’s meagre foreign exchange reserves – the paucity of which had been a problem since the 1950s – were increasingly hard-pressed to compensate.

During the 1980s, as the world liberalized and neoliberal capitalism took over the global economy, India fell even further behind. Oil imports increased out of necessity even as global oil prices rose sharply (with a particularly significant surge during the 1990 Gulf War), and exports dried up as Indian manufacturers were outcompeted on both price and quality by global competitors. Investment in the country was practically non-existent; international corporations remembered their unceremonious forced exit from India in the late 1970s, and didn’t trust the consistency of Indian policy. The trade deficit rose even as the government ran up its own debts. By the last years of the 1980s, a crisis loomed on the horizon.

To give credit where it’s due, India’s governments in the 1980s were well aware of the danger. Throughout that decade, reforms – tax breaks, export incentives, delicensing and deregulation, the relaxation of price controls – were quietly implemented by successive coalitions. The cautious reforms held the economy together for a few years, but by early 1991 foreign exchange reserves had reached a critical low; India was months, if not weeks, away from defaulting on its payments.

A default would have shaken worldwide faith in the economy for years, and intensified the growing crisis. Desperate action was now necessary. Under conditions of secrecy, much of India’s gold reserves – nearly 70 tons – were airlifted to Europe, some to be sold for foreign exchange and some as collateral for loans. Meanwhile, political crises hit the embattled country, one after another. In March, Prime Minister Chandra Shekhar resigned after just months in office when his party’s coalition partner, the powerful Indian National Congress, withdrew its support during his failed attempt to pass a budget in Parliament. The President of the Congress, former Prime Minister Rajiv Gandhi, was assassinated in May by an operative of the Sri Lankan Tamil secessionist organization, the Liberation Tigers of Tamil Eelam (LTTE). The Congress nevertheless triumphed in the 1991 general election, forming a government with its allies in June. The new Prime Minister, P.V. Narasimha Rao, was convinced of the necessity of quick and sweeping reforms; among his first acts was the appointment of the economist and former Reserve Bank of India governor Manmohan Singh to the post of Finance Minister.

Over the first weeks of July, even more of India’s gold was pledged as collateral for loans, to the Bank of England and the Bank of Japan. But another important step was about to be taken. On 22 July, India received $220 million as an emergency loan from the International Monetary Fund.

Taking an IMF loan was important, not only for the money, but also as a signal. Since the 1950s, India had been engaged in a delicate dance with the IMF and the World Bank, trying to extract money and assistance from those two institutions while avoiding the market reforms that those two organizations inevitably demanded in return. In taking the loan on 22 July, India finally – after decades of refusal – conceded a large part of the argument, committing to comprehensive reform, deregulation, and an opening of the economy both internal and externally.

What were the consequences? In the short term, the economy recovered. Narasimha Rao’s successors, including Manmohan Singh, who himself served as Prime Minister from 2004-2014, continued along the path of reform, and India’s economy grew quickly over the two decades. New industries popped up, and foreign investors and multinational corporations entered the market, while Indian institutions made investments and acquisitions overseas. Nevertheless, with India falling behind the pace of economic development of competitors like China, Vietnam, and even Bangladesh, further economic reform remains both a necessity and a significant political issue. The process that began on 22 July, 1991, has not yet reached its end.

Sahaj Sankaran

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