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The 1991 Project

Summary:
In 1991 on the verge of bankruptcy, India abandoned the License-Raj and freed its economy from many socialist shackles. Prime Minister Narasimha Rao announced to the nation: We believe that a bulk of government regulations and controls on economic activity have outlived their utility. They are stifling the creativity and innovativeness of our people. Excessive controls have also bred corruption. Indeed, they have come in the way of achieving our objectives of expanding employment opportunities, reducing rural-urban disparities and ensuring greater social justice. And he was serious–in the plan, tariffs and controls were lifted, thousands of licenses eliminated, entire departments undone. A No Confidence motion was mounted in parliament but the opponents made a tactical error and walked

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The 1991 ProjectIn 1991 on the verge of bankruptcy, India abandoned the License-Raj and freed its economy from many socialist shackles. Prime Minister Narasimha Rao announced to the nation:

We believe that a bulk of government regulations and controls on economic activity have outlived their utility. They are stifling the creativity and innovativeness of our people. Excessive controls have also bred corruption. Indeed, they have come in the way of achieving our objectives of expanding employment opportunities, reducing rural-urban disparities and ensuring greater social justice.

And he was serious–in the plan, tariffs and controls were lifted, thousands of licenses eliminated, entire departments undone. A No Confidence motion was mounted in parliament but the opponents made a tactical error and walked out, leaving just enough votes for Rao’s government to survive and the plan to pass. The result was an economic revolution. Economic growth increased and millions were lifted out of poverty. Yet, the 1991 Project was incomplete and many young Indian’s today have little appreciation of the gains that have been made or why they happened.

The 1991 Project is about understanding the history of economic liberalization in order to better chart the future. It begins with a superb essay by Shruti Rajagopalan on living under India’s socialist system. Did you know that under the License-Raj you needed a government permit to own a bicycle in some parts of the country?

Bicycles saw increasing demand as urban populations increased. Steel was government controlled and, given the heavy demand from the construction industry, only limited allotments were made to bicycle manufacturers. To increase their allotment of steel and meet the increasing demand for bicycles, they needed an expansion permit, which was rarely approved by the government given the shortage of steel.

The license and permit system for steel also created a shortage in bicycles, which was followed by the inevitable price controls. To ensure that demand was legitimate and all available bicycles were used, owning and riding a bicycle required a government-issued token in some parts of the country. Inspectors thrived on the bribes paid when they caught anyone riding without the requisite permit.

The middle class didn’t escape the problem, either. Through a collaboration with Vespa, Bajaj manufactured scooters in India, and they became popular with the middle-class. Denied permission to expand to meet the rising demand, the waitlist for a Bajaj scooter was ten years by the late 1970s.

Even though dowry is not just illegal but is a crime in India, the entrenched dowry culture in the arranged marriage system enables grooms to make outrageous demands of the bride’s family. A Bajaj scooter became a top dowry ask. Given the decade-long waiting period, parents took to purchasing them on the black market, and by the late 1970s the price of a secondhand/used Bajaj scooter available immediately was much higher than that of a brand-new vehicle with a 5- to 10-year waiting period.

It got so bad that when a girl child was born, well-wishers would – only half in jest – suggest to the parents that they should immediately book a scooter so it would arrive in time for the wedding. This was reminiscent of the old Soviet Union joke about a man paying for an automobile. The clerk tells him it will be delivered in ten years. The man asks, “Morning or afternoon?” “What difference does it make?” responds the clerk. “Well, the plumber is coming in the morning.”

Check out The 1991 Project and Rajagopalan’s essay.

Photo Credit: Manmohan Singh with PM Narasimha Rao in 1994. Photo: Sanjay Sharma/Hindustan Times

The post The 1991 Project appeared first on Marginal REVOLUTION.

Alex Tabarrok
Alex Tabarrok is Bartley J. Madden Chair in Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University. He specializes in patent-system reform, the effectiveness of bounty hunters compared to the police, how judicial elections bias judges, and how local poverty rates impact trial decisions by juries. He also examines methods for increasing the supply of human organs for transplant, the regulation of pharmaceuticals by the FDA, and voting systems.

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