Manmohan Singh: India's quiet reformer

The passing of Manmohan Singh on December 26, 2024, is an occasion to reflect on his remarkable role in changing the course of India’s economy. Singh served as prime minister of India during 2004–14, but he will be remembered mainly for his term as finance minister during 1991–96. In that role, Singh was responsible for the historic economic reforms—including opening and deregulating the economy—that unleashed much stronger growth and reduced poverty in India. These remarkable achievements deserve recognition and appreciation.

After achieving independence from Britain in 1947, India’s policymakers, led by Prime Minister Jawaharlal Nehru, opted for self-reliance and economic planning. These produced the license raj—government restrictions on imports and private production in which official permission (in the form of licenses) was required to purchase foreign goods and expand domestic production capacity. Intended to conserve scarce foreign exchange and capital, these policies held back India’s economy for decades.

The license raj suppressed foreign trade, limiting exports and imports to only about 5 percent of GDP. This prevented India from gaining access to foreign markets and hindered its ability to make use of the world’s best technology and equipment. The result was the so-called Hindu rate of growth of about 3 percent, barely enough to produce rising living standards and much too weak to put a significant dent in the country’s mass poverty. These policies remained in place for decades and seemed impervious to reform owing to what one economist called a “witch’s brew of stale ideology, vested interests, and fear of the unknown.”

A balance of payments crisis in 1990–91 brought to power a weak government headed by Prime Minister P. V. Narasimha Rao. With the country’s foreign exchange reserves exhausted, Rao appointed the soft-spoken but highly experienced Singh as finance minister, as someone who could negotiate credibly with creditors such as the International Monetary Fund and introduce reforms to improve India’s economic performance.

The appointment seemed to fulfill destiny. In the early 1960s, Singh had completed a doctoral thesis at Oxford University on the topic of India’s exports. The thesis argued that India’s own policies were responsible for its lackluster export performance, not sluggish foreign demand. Ian Little, who was Singh’s thesis adviser, later wrote that Singh’s thesis “was one of the influences that slowly lifted the veil of export pessimism from my eyes.” Now 30 years later, Singh was positioned to change the direction of India’s economic policy.

Along with a dream team of reformers in high government positions, including Commerce Minister P. Chidambaram, economic adviser Montek Singh Ahluwalia, and others, Singh devalued the rupee, increased export incentives, chipped away at the license raj, and moved to make the rupee convertible for current account transactions. Singh famously concluded his first budget speech by quoting Victor Hugo: "No power on earth can stop an idea whose time has come.” As Singh put it: “I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake.”

Singh skillfully handled the country’s short-term fiscal and debt problems and pushed for these structural reforms that improved the long-run trajectory of India’s economy. The new policies opened India’s economy and put it on a more market-oriented footing. Exports and imports rose from about 7 percent of GDP to about 20 percent of GDP by 2005. The reforms produced stronger growth as India’s economy began to achieve its potential. Economic growth accelerated to reach nearly 8 percent before the Asian financial crisis of 1997–98 and then continued strong in the early 2000s, pulling millions of people out of poverty.

Various studies have quantified how much the policy reforms under Singh’s leadership helped expand India’s economy. One synthetic control exercise suggests that India’s per capita GDP was 25 percent higher in 2001 than it would have been without the 1991 reforms. Another paper by Lant Pritchett and colleagues finds that India’s growth acceleration added over a trillion dollars to India’s economy over the next nine years, amounting to more than $1,000 per person.

Whatever the precise calculation of the higher incomes enjoyed by India after 1991, the Rao-Singh reforms marked a key turning point for India’s economy and changed the course of history. Singh’s life experience stands as a reminder of the importance of economic ideas and the power of policy reform to improve the livelihoods of millions of people.