Rao Manmohan Model of Growth - Indian Economy Notes
India in 1991 faced its worst economic crisis and was on the brink of a sovereign default. This also included complex international events such as the 1990-91 Gulf War which resulted in a sharp increase in oil prices and a fall in remittances from the Indian workers working overseas. This led to a series of reforms undertaken by the government known as the Rao Manmohan Model. This article will discuss this model of economic development which is important for aspirants preparing for the UPSC examination.
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What is the Rao-Manmohan Model?
- This model of development abolished licensing in all industries except a few of 18 industries, MRTP companies which were free from the ceiling limit of assets.
- It reduced import barriers to globalizing the economy, by granting greater autonomy and making management more professional,
- The functioning of public sector companies was to be improved, foreign direct investment was facilitated and automatic approvals of upto 51% of the equity were required.
Features of The Rao-Manmohan Model
- Devaluation of the rupee was carried out against major currencies by around 9 percent on 1 July 1991, this was accompanied by another devaluation of 11 percent two days later to make Indian exports more competitive.
- India’s gold holdings were pledged with the Bank of England in four tranches from 4-18 July 1991 raising around $400 million through this route.
- 20 tonnes of gold was sold to the Union Bank of Switzerland or UBS by the State Bank of India to raise around $200 million.
- The government acquired emergency loans from the International Monetary Fund in two tranches totaling around $2 billion.
- A new trade policy was brought in to bring a change in the licensing process. It also linked non-essential imports to exports to discourage such imports.
- Tradeable Exim scrips were introduced granting such scrips to exporters for their use or for sale. Such scrips were calculated based on the value of exports.
- New Industrial Policy (NEP) 1991 was proposed that suggested drastic changes in the way India treated its industries and foreign investment by moving away from a license raj regime.
- The changes brought about by NEP resulted in easier to do business in India and saw an inflow of foreign goods and investments flooding the Indian market in the subsequent years.
- Due to the increasing fiscal deficit, the budget increased corporate tax rates by 5 percentage points to 45 percent and introduced the concept of tax deducted at source for some financial transactions like bank deposits.
- Various committees were introduced for proposing financial sector reforms such as a committee under former RBI governor M. Narasimham and another committee for recommending tax reforms under well-known public finance economist Raja Chelliah.
Criticism of the Rao-Manmohan Model
- The model succeeded in terms of growth by raising the GDP growth rate to over 6%, but it failed in terms of equity because it had a narrow focus, limited to the corporate sector only, due to the indiscriminate entry of multinationals, and a highly capital intensive pattern of development has been adopted.
- It has bypassed agriculture, and multinationals have begun the process of devouring Indian enterprises by raising equity levels above 51 percent.
- In a nutshell, the Rao-Manmohan model has worked in terms of growth but has failed in terms of equity, employment, and poverty reduction.
Conclusion
Rao-Manmohan's model of economic growth is credited with ushering in reforms that brought drastic structural changes in the economy. They helped in removing various restrictions in the economy such as license raj and helped in opening up the economy, which resulted in increased foreign investment.
FAQs
Question: What is the Rao-Manmohan Model of Growth?
Answer: The Rao-Manmohan Model of Growth refers to the economic reforms implemented in India under the leadership of Prime Minister P.V. Narasimha Rao and his Finance Minister Dr. Manmohan Singh in 1991. These reforms aimed at liberalizing the Indian economy, promoting market-driven growth, reducing the role of the government in economic planning, and integrating India into the global economy. Key features included fiscal reforms, trade liberalization, industrial deregulation, and the introduction of foreign direct investment (FDI).
Question: What were the key features of the Rao-Manmohan Model of Growth?
Answer: The key features of the Rao-Manmohan Model include:
- Economic Liberalization: Reducing government control over industries, opening up markets, and encouraging private sector participation.
- Trade Liberalization: Reducing import tariffs, removing trade barriers, and increasing exports.
- Foreign Direct Investment (FDI): Opening up sectors to foreign investments, which stimulated economic growth.
- Fiscal Reforms: Reducing fiscal deficits and improving public sector efficiency.
- Monetary Reforms: Strengthening the financial sector and improving inflation control.
Question: How did the Rao-Manmohan Model impact India's economy?
Answer: The Rao-Manmohan Model of Growth significantly transformed the Indian economy by accelerating its growth rate, making it one of the fastest-growing economies in the world. The liberalization policies attracted foreign investment, boosted exports, and led to the development of a more competitive market environment. The reforms also laid the foundation for economic diversification, with services, particularly the IT and software sectors, emerging as major contributors to GDP. However, while the reforms led to economic growth, they also contributed to widening income inequality and increased the dependence on global markets.
Question: What role did Dr. Manmohan Singh play in the Rao-Manmohan Model of Growth?
Answer: Dr. Manmohan Singh, as the Finance Minister, was the architect of the economic reforms in 1991. He played a crucial role in formulating and implementing policies that transformed India’s economy. His efforts included dismantling the License Raj (license-based economic system), reducing tariffs, and encouraging foreign investment. His reforms in the financial sector helped stabilize India’s economy, particularly during the balance of payments crisis in 1991, which laid the foundation for India’s economic liberalization and integration into the global market.
Question: What were the challenges faced by the Rao-Manmohan Model of Growth?
Answer: Despite its successes, the Rao-Manmohan Model faced challenges, including:
- Political Resistance: The liberalization reforms faced opposition from various political groups and sections of society who feared job losses and increased inequality.
- Uneven Growth: While the model led to significant growth, the benefits were not evenly distributed, with some regions and sectors benefiting more than others.
- Social Impact: The shift towards a market-oriented economy resulted in increased income inequality, leading to social unrest in certain areas.
MCQs
- The Rao-Manmohan Model of Growth is associated with which year in India’s economic history?
a) 1981
b) 1991
c) 2001
d) 2011
Answer: (b) See the Explanation
The Rao-Manmohan Model of Growth refers to the economic reforms initiated in 1991 under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.
- Which of the following was a key feature of the Rao-Manmohan Model of Growth?
a) Nationalization of industries
b) Economic liberalization and market-oriented reforms
c) Complete closure of the Indian economy to foreign trade
d) Expansion of government control over private enterprises
Answer: (b) See the Explanation
The model emphasized reducing government control, liberalizing markets, and encouraging private sector participation.
- What major sector benefited the most from the Rao-Manmohan Model of Growth?
a) Agriculture
b) Manufacturing
c) Information Technology (IT) and Services
d) Mining
Answer: (c) See the Explanation
The Rao-Manmohan reforms led to the rise of India’s IT and services sector, making it a global leader in software development and outsourcing.
- Which major policy was introduced under the Rao-Manmohan Model to attract foreign investment?
a) Green Revolution
b) FDI (Foreign Direct Investment) liberalization
c) Industrial licensing
d) Minimum Support Price (MSP)
Answer: (b) See the Explanation
The Rao-Manmohan reforms opened up various sectors to foreign direct investment (FDI), which played a key role in stimulating economic growth.
- Who was the Finance Minister responsible for implementing the Rao-Manmohan Model of Growth?
a) P. Chidambaram
b) Dr. Manmohan Singh
c) Arun Jaitley
d) Pranab Mukherjee
Answer: (b) See the Explanation
Dr. Manmohan Singh, as the Finance Minister, is credited with implementing the economic reforms that defined the Rao-Manmohan Model of Growth.
GS Mains Questions and Model Answers
Q1: Evaluate the impact of the Rao-Manmohan Model of Growth on India's economic development.
Answer: The Rao-Manmohan Model of Growth, initiated in 1991, played a transformative role in India’s economic development. The liberalization policies, including trade liberalization, industrial deregulation, and the promotion of Foreign Direct Investment (FDI), helped India emerge as one of the fastest-growing economies in the world. The reforms spurred rapid growth in sectors like IT, services, and manufacturing, leading to significant increases in GDP. The liberalization of trade and reduced tariffs also helped integrate India more deeply into the global economy, attracting foreign investments and boosting exports. However, the benefits of growth were not uniformly distributed, and there were concerns over increasing income inequality. Despite this, the reforms laid the foundation for sustained economic growth, and India’s emergence as a global player in various industries.
Q2: Discuss the challenges faced by the Rao-Manmohan Model of Growth, and its long-term impact on the Indian economy.
Answer: While the Rao-Manmohan Model of Growth played a key role in shaping modern India’s economy, it faced several challenges. Political resistance, especially from those fearing job losses and increased inequality, made implementation difficult at times. Additionally, the focus on liberalization and market-driven growth led to an uneven distribution of benefits, with some sectors and regions benefiting more than others. The shift away from state-led growth models created gaps in social welfare programs, which exacerbated income inequality. However, the long-term impact of the reforms was overwhelmingly positive, leading to an era of rapid economic growth, a surge in foreign investment, and the rise of new industries, particularly in technology and services. The economic liberalization policies were instrumental in positioning India as a major player in the global economy.
Q3: Analyze how the Rao-Manmohan Model of Growth changed India's position in the global economy.
Answer: The Rao-Manmohan Model of Growth marked a significant shift in India’s approach to economic development, positioning the country as a key player in the global economy. By opening up the economy through liberalization and trade reforms, India reduced its dependence on state-run enterprises and embraced a market-driven approach. This integration into the global market allowed India to attract foreign direct investment (FDI) and encouraged rapid growth in sectors such as information technology, services, and manufacturing. India’s economic growth rate accelerated, and it became one of the world's fastest-growing economies, expanding its influence in global trade, finance, and technology. Additionally, the reforms contributed to the rise of India’s middle class, boosting domestic demand and making India an attractive destination for multinational companies.
Previous Year Questions on Rao ManMohan Model
1. UPSC CSE 2020
Question: Assess the impact of the Rao-Manmohan Model of Growth on the Indian economy.
Answer: The Rao-Manmohan Model of Growth, initiated in 1991, revolutionized the Indian economy by focusing on liberalization, deregulation, and promoting global integration. The economic reforms led to increased foreign direct investment (FDI), greater access to international markets, and a boom in the services sector, particularly information technology. While these reforms brought about rapid economic growth, they also contributed to widening income inequality and a growing divide between urban and rural areas. Despite these challenges, the reforms paved the way for India's emergence as a global economic power, setting the foundation for sustained growth in the 21st century.
2. UPSC CSE 2019
Question: Discuss the key components of the Rao-Manmohan Model of Growth and its long-term benefits to India’s economy.
Answer: The key components of the Rao-Manmohan Model included trade liberalization, fiscal reforms, deregulation of industries, and encouraging foreign direct investment (FDI). These reforms facilitated India's integration into the global economy, attracted foreign capital, and made the economy more competitive. Long-term benefits included the growth of new sectors, especially in IT and services, and an overall increase in GDP. The liberalization also led to the development of a more diversified economy, with increased private sector participation and a shift towards a market-based economy.
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