La satisfacción salarial

government, but this time the chances of its survival were somewhat better. The Congress party had only narrowly missed gaining a majority, and since the situation which it had to face was so desperate, ‘toleration’ was bound to be almost unlimited, because no other party would wish to take the responsibility for the unpopular measures which the new government had to introduce.

P.V.Narasimha Rao, a veteran Congress leader who had wanted to retire from politics had to shoulder the burden of becoming the Prime Minister at this most critical juncture. He joined forces with an equally remarkable Finance Minister, Dr Manmohan Singh, an eminent economist who knew how to restore confidence in the Indian economy. India presented itself under new management and overcame the crisis very rapidly.

The emergency budget presented in July blazed a new trail. It was aimed at reducing the budget deficit by cutting subsidies and raising administered prices, e.g. the price of fertilisers was raised by 30 per cent. Tax rates were revised so as to yield an additional 20 billion rupees and another 25 billion rupees were supposed to be raised by privatising 20 per cent of selected public sector enterprises. At the same time the rupee was devalued by 18 per cent in two steps. The government once more turned to the IMF and borrowed foreign exchange worth 22.2 billion rupees in two instalments in July and September 1991. The outflow of funds of non-resident Indians receded in August and nearly ceased by the end of the year. India’s foreign exchange reserves, which had stood at about 25 billion rupees in June when the new government was formed, rose to 95 billion rupees by the end of the year. Reports in April 1992 indicated that by that time India’s foreign exchange reserves amounted to about 125 billion rupees and that India had informed the IMF that it would not need its help any longer—a striking parallel to India’s decision not to utilise the full credit sanctioned by the IMF in the early 1980s. Of course, India’s foreign debt still amounted to about

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171 1800 billion rupees, but these were medium and long-term debts. As the spectre of bankruptcy had disappeared and debt service was assured, India’s credit rating was bound to improve.

The position of India in the world market depended, of course, on its export performance and this had been affected by the sudden curtailment of imports caused by the crisis. After all the major part of Indian imports are inputs required for industrial growth and not goods for private consumption. Another big blow to India’s export industry was the collapse of the Soviet Union. As mentioned earlier, the positive balance of trade which India had with the Soviet Union was somewhat of a problem, because these export earnings could not be converted into any other currency. On the other hand Soviet demand for a great variety of goods which could not have been sold in the world market was of crucial significance to many branches of Indian industry. Of course, it could be argued that the respective industries were prevented from improving their standards so as to face international competition because of this ready access to the Soviet market. The collapse of that market suddenly compelled these industries to compete for market shares elsewhere. This meant that they had to modernise their production, which could be done only with imported capital goods. The crisis thus hit India at the most inopportune moment and the new management referred to above had to struggle hard to meet this challenge.

A new foreign trade policy was designed to encourage India’s export activities. Cumbersome procedures of licensing, etc. were abolished and exporters received so-called Eximscrips for 30 per cent of the value of their exports or even more for special items.

These scrips could be freely traded and could be sold at a premium to importers. Thus imports were linked to exports by means of a market mechanism rather than by the old controls. Moreover, firms engaged in foreign trade could now open foreign exchange accounts and raise external credits, and foreigners were permitted to hold a majority share in such firms. This was certainly a great step forward in the process of liberalisation.

The government also aimed at making the rupee fully convertible. But in order to achieve this goal it would have had to restore the independence of the Reserve Bank of India, which was envisaged when it was established in 1934, but was never really respected by the government of India even at that time. As pointed out earlier, the Reserve Bank is obliged to finance the budget deficit and to print money for this purpose. Unless this practice is stopped a convertible rupee would be of doubtful value, because

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governments would always be tempted to debase the currency in order to escape all kinds of pressures. The stresses and strains of India’s economic development will always generate pressures and therefore it is even more important to build institutions which guarantee internal and external stability. The Reserve Bank is such an institution and its authority should be strengthened. The committee on the working of the monetary system whose report has been mentioned earlier stressed that there should be no mis-match between the responsibility of the central bank to control the functioning of the monetary system on the one hand, and its authority to do so on the other. The committee had been appointed in 1982 by the then Governor of the Reserve Bank, Dr Manmohan Singh. He may have had reasons to think about this statement of the committee when he became Finance Minister in 1991, but it remains to be seen whether he will be able to enhance the authority of the Reserve Bank in his period of office or not.

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Population Growth and