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The chairman's room in the government bungalow that houses the Sanjay Gandhi Memorial Trust is sparsely furnished. In a corner stands an ordinary rectangular table. The air-conditioner hums, as it fights a desultory battle against the scorching June heat of the capital. Behind the desk sits P.V.Narasimha Rao. Across it is seated Pranab Mukherjee long time friend and Cabinet colleague.
The relationship between Rao and Mukherjee had subtly altered. A few days ago, Rao had been formally elected president of the Congress. In just over a week, he would be sworn in as India's ninth prime minister. The man who had held portfolios from defence to human resource development (HRD), and from external affairs to home, had never really handled a full blown macroeconomic crisis in his long and varied political career. So he had summoned Mukherjee to 12 Willingdon Crescent Road, where they'd be undisturbed by telephone calls, to brief him on policy options.
Rao set the ball rolling. “Pranab, I do not know much about economics. You are the expert. You will have to brief me.” And Mukherjee replied “Of course, PV of course” In this and other meetings that followed over the next few days, Mukherjee and Rao talked about the implications of the Congress Party's manifesto, the Budget that had to be presented and the new governments immediate economic tasks. Mukherjee told Rao that the new government would have to take tough measures and had no alternative but to seek a loan from the International Monetary Fund (IMF), and that an IMF loan could be managed. He also said something dramatic had to be done to strengthen the public sector.
Rao heard Mukherjee out, listening and rarely speaking. He broke into the conversation only infrequently, once to say that something should be done to attract non resident Indian (NRI) investments and on another occasion to say emphatically that privatisation did not mean selling the family silver. An aide would later say that Rao was obsessed with the subject of attracting NRI money. And Rao had obvious misgivings about privatising state controlled companies. He later brought Congress heavyweights N.D. Tiwari and Arjun Singh into the discussions on the public sector. Both opposed privatising it.
Those meetings in the capital set the stage for one of the most dramatic episodes in India's post independence economic history. In the span of barley 100 days, the Rao government swept away a vast number of rules and controls.
It devalued the rupee, introduced new industrial and trade policies, diluted the country's monopoly law so as to allow businesses to grow, amended the Foreign Exchange Regulations Act (Fera). In order to open up to foreign companies, announced a drastic fiscal stabilisation programme, and launched a public sector share disinvestments drive. The story of how all this was done has never been fully told. In essence a minority government altered India's economic landscape by ramming through an economic reforms programme without much debate and without taking most of the ruling Congress party into confidence.
“Those 100 days were critical,” admits a former government functionary who worked closely with the PM and the finance minister. “More decisions were taken in those three months than in the rest of the Narasimha Rao government's tenure. Till the budget was presented on 24 July, it was a period of extraordinary activity. The trade and industrial policies were being formulated, and negotiations with the IMF were on. A lot of the decisions were presented to many ministers as a fait accompli. There was no debate. There was just a group of people who were doing all this.”
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Even more remarkably, all this happened even as the majority of ministers in the Rao government and at least two senior finance minister bureaucrats expressed serious reservations about replacing the old socialistic model of development with a more market oriented system. In Cabinet meetings, ministers such as Arjun Singh, Madhavsinh Solanki M.L. Fotedar and B. Shankaranand found many of the new policies difficult to digest.
What follows is based on discussions with many of those who had a hand in overturning the regulations raj. Almost five years later, memories have faded or been distorted. But a broad enough picture remains of events as they unfolded then, to piece together what happened.
Rao's first job was to put together a team. It was a task he had given thought to in early June, on the campaign trail in Uttar Pradesh. He wanted former HRD secretary Anil Bordia and civil servants Ramu Damodaran on board. “When I become PM, I would like to have Ramu Damodaran. Ramu is like a son to me.” he told an aide.
Rao also hoped to draft the Janata Dal's former Karnataka chief minister Ramakrishna Hegde. “Hegde is a fine person, I would like to get him on my side. We should somehow utilise him,” he said. Damodaran did join the prime minister’s office (PMO), but it’s not clear if Hegde was sounded on crossing floors.
The key post Rao had to fill I the government was the finance minister's. In early June Rao placed a telephone call to economist and former London School of Economics director I.G. Patel and sounded him on joining the government. Contacted last month over the telephone in Baroda, Patel also clarified that he was not offered the finance minister's slot before the offer was made to Manmohan Singh, as has been widely believed.
Patel had, in fact been considered for the finance ministership. But P.C. Alexander – now Maharashtra governor – who recommended several people ( A.N. Verma, Manmohan Singh) to Rao, argued that Singh was a better choice. Singh was accepted internationally, had better credentials as a socialist than Patel and so would be more acceptable to the Congress party. That proved to be the clincher.
Singh had been deputy chairman of the planning commission during the time Rajiv Gandhi called commission members a pack of jokers. He would, according to a minister in the Rao government and a prime ministerial aide, later refer to Gandhi's economics as “wonky” or “wobbly”. Singh had also been economic advisor to the previous PM Chandreshekhar, but was distinctly uneasy in his slot. He told economist and Chandrashekhar confidant. S.K Goyal who was chairman of the planning commission's programme committee during the Chandrashekhar regime, that he could not prove effective in his post. “You should have been here. I cannot convince Chandrashekhar,” he said.
Singh would, however be in sync with the new regime. At about 8.30 am on 21 June, Rao telephoned him at his house and told him that he would be finance minister. As Rao telephoned Singh, the six or seven officials who were present there looked at one another in wonder. One of them later said, “We has one thought : Manmohan Singh ko kya ho raha hai (what is happening to Manmohan Singh)?” Singh attended office at North Block before his portfolio was officially announced.
Next, the PM turned his attention to India's fiscal crisis The country's foreign exchange reserves were a paltry $400 million- Rs. 1,480 crore – (the banks had an additional $600 million). A flight of capital was underway, with NRIs withdrawing deposits (see chart). The Reserve Bank of India (RBI) was scrambling for foreign exchange so that India wouldn't default on loan repayments. The earlier regimes had sought and obtained IMF loans (see box). In January 1991, the IMF had disbursed $1.8 billion to India. But much of the money had gone to pay for imports and the new government would be forced to seek a structural adjustment loan from the IMF, with all the conditions attached to it. These included devaluing the rupee and cutting subsidies.
A day after he was sworn I as PM on 21 June, Rao called chief economic advisor Deepak Nayyar and Manmohan Singh and asked for a briefing on the economy. When the briefing ended, the PM said, “I realised the position was bad but I did not realise that it was this bad.”
The next day Rao, confided to an aide that the IMF was turning on the heat. “Look, I am under pressure from the IMF Manmohan says I have to announce some visible evidence of our commitment, and they have identified a cut in some major subsidies and devaluation of the rupee.” Rao then wondered aloud which would be a better option – devaluation at one shot or a two phased devaluation.
A few days later, Rao and Singh jointly met major opposition party leaders at South Block and informed them that the government intended to seek a loan from the IMF.
Yet Rao could have confined himself to fiscal adjustment and a couple of tough decisions (devaluing the rupee, cutting subsidies). This was what finance ministry officials were pressing for. The IMF and the World Bank had for years been urging successive governments to eliminate the licensing system and open the economy to foreign goods and companies. When Rajiv Gandhi was PM, the bank had demanded that the State Bank of India (SBI) and the Industrial Development Bank of India (IDBI) be privatised, in exchange for a $500 million financial sector loan, a demand it would reiterate in 1992. So Rao did not really have to proceed as far as he went. What made him do so? Says Jairam Ramesh, who joined Rao when he was elected Congress president in late may as a speech writer and aide: “Manmohan Singh was stressing fiscal consolidation and fiscal adjustment right from the beginning . The PM saw the need to have something in addition to fiscal reform.”
Temperamentally, Rao was no radical reformer. He had a sharp sense of what would go down well politically. He put his foot down on privatising the public sector, Some aides recall arguing with him that the India Tourism Development Corp's Ashok Hotel in the capital, for instance, could be privatised and the money used fruitfully to build schools. The political fallout would be minimal if it was widely publicised that the proceeds of privatisation were being put to social use. But Rao refused to budge. At first, the PM shared the view of several of his ministers that it would be unwise to open the flood gates to foreign companies. “The PM came around I think essentially because Manmohan, Chidambaram and others tried to convince him that, in many areas, unless you do it simultaneously, you will never have the real competitive edge,” says P. Rangarajan Kumaramangalam, then minister of state for law, justice and company affairs. Chidambaram recalls telling the PM: “For 20-30 years you were raised on a diet of controls and regulations which you thought was the right thing. To suddenly say that we want to decontrol and delicense can be quite traumatic.” Rao smiled and said: “Yes, for some of is it is difficult because it is not an easy thing to make a break with what we thought was the right course.”
But Rao broke with the past, and decisively. A key government secretary notes that the PM gave the broad directions, with the finance minister handling the detail. Jairam Ramesh claims that he urged the PM to proceed down the reforms road, that Rao asked him to submit some ideas and that he proceeded to do just this.
By 22 June the nation got an inkling of what Rao intended when, in his first address after becoming PM, he said that a time bound programme would be worked out to streamline industrial policies and programmes and that the government was committed “to removing the cobwebs that come in the way of rapid industrialisation.” It was a theme Rao would return to that evening when he addressed key government secretaries at South Block. According to one official who was present there, the PM told them that the government intended to “sweep away the cobwebs of the past and usher in change” the group was then told to proceed to North Block with Singh for a more detailed briefing.
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Over the next few days, Rao, Singh and Chidambaram cleared an 11-point deregulation agenda which Ramesh drafted. This included industrial delicensing amendments to the Monopolies and Restrictive Trade Practices (MRTP) Act, changes to Fera, a public sector under taking (PSU) disinvestment programme, a cut in export subsidies, a package for the involvement of foreign companies in oil exploration, a package for the participation of the Indian private sector in the power sector (foreign power companies had not been considered the idea was to allow Indian power companies to expand), al to be done in the first 7-10 days. The budget would announce increases in the prices of fertilisers, sugar and food grains and a freeze on dearness allowance to government employees. The basic tactic was to be seen first to be deregulating the tough steps were timed with the budget. It's another matter altogether that it didn't quite work out that was (the new industrial policy for instance was announced much later on 24 July along with the budget, as a tactical move).
There was also the question of the IMF loan. According to one source, the IMF had set a deadline of 30 June for the government to sign a letter of intent on what it would do. The suspicion has since been voiced that the letter was drafted in Washington by the IMF because words in it such as 'labor' are spelt the American way. But a source who was in Washington then says that the IMF commonly draws up a draft, which it then sends to the government that is seeking air, and the government draws up its own draft., which is what the Indian government did. He also denies that a deadline existed. Says IMF deputy director for central Asia Bijan B. Aghevli on the subject : “No letter is drafted completely by IMF. It is a commitment by the government. It is not true that we sat here, drafted and faxed it and the minister signed it. If we could just send it to the country to sign, that would not be worth the paper it is written on. It is a long process that culminates in a letter and a memorandum of understanding.” He also say that the question of a deadline arises only when an IMF board meeting is scheduled to discuss something. “Once that date is set, there is some pressure to sign. To my knowledge, there was no pressure on India.”
But a source who was in the PMO says that around 22 June, Singh met Rao and told him that the letter had to be signed that day to meet the deadline. The PM told an aide to read it. The aide pointed out that the letter implied that the government was committing itself to raising the prices of several items (petroleum products, fertilisers, sugar). But Singh said it was too late to get into these issues since it had to be signed that day. Rao then cleared it, and Singh signed it.
It's tough to determine which version of all this is correct. But the IMF certainly had to be informed of the government's complete agenda. This was typed on a single sheet of paper that carried no government letterhead and faxed to Gopi Arora. India's executive director at the IMF in Washington. At around 7a.m on 28 June , the PM telephoned Arora in his Washington flat and instructed him to meet IMF managing director M.Camdessus the next day. Rao told the former finance secretary that he should urge. Camdessus not to set harsh fiscal targets for India in view of all that the government planned on doing which Arora proceeded to do. Several government functionaries would later say that the IMF managing director was most sympathetic and wanted to see a success case in India.
So the government was now committed to devaluing the rupee, introducing a new trade policy and a new industrial policy and presenting a budget all within a month.
On devaluation, the government at first favoured an unofficial depreciation of the rupee over a 7-10 day period, or the so-called crawl. This offered the advantage of not attracting a political outcry. Finance secretary S.P. Shukla and RBI governor S.Venkitaramanan went ahead and, in consultation with the finance minister and RBI deputy governor C. Rangarajan, devalued the rupee in two stages. On 1 July, the RBI devalued the rupee by 9.5% against the dollar. The next day, Singh flatly denied to the press that the rupee had been devalued. Business Standard reports him as saying: “It is the routine function of the RBI which takes various factors into consideration.”
The PM was none too pleased with the sharpness of the devaluation, and told Singh so in no uncertain terms. On 3 July, the RBI further devalued the rupee by 10.6% against the dollar. So in the span of three days, the rupee had been devalued by over 20%.
Did the Reserve Bank governor and the finance minister flout the PM's directive by opting for a two stage devaluation? Venkitaramanan says that when he flew back to Mumbai after meeting the PM in the capital, he found that the market was anticipating a sharp depreciation in the rupee. He recalls : “When we did the first step, we wanted to do it sufficiently sharp so that even if it remained like that, that would be enough to correct the imbalance. And, then after assessing the reaction, I wanted to do another step.
When a devaluation takes place, the market normally expects the second devaluation to take place after a month. So we wanted to take market by surprise. I had general clearance at that time to do it and I did it in consultation with the finance minister. The fact is that Manmohan Singhji , I found, would act with the concurrence of and in consultation with the PM.”
Even as the government was preparing for the second round of devaluation on 3 July, Singh called Chidambaram and Montek Singh Ahluwalia (then commerce secretary) to North Block in the morning. Informed them that the second devaluation was underway, and asked them to abolish cash compensatory support (CCS) because of the change in the exchange rate. Chidambaram told Singh he had no problem with that, but no commerce minister could start his tenure by abolishing CCS; the move would be seen as being unfriendly to exporters. When Singh continued to insist on the abolition, Chidambaram said: “I am sorry , I disagree.” But Rao had summoned them both , and they decided to take the matter to the PM. Both went to South Block. Seated behind an expansive bare desk, Rao asked them what they had discussed. Chidambaram said that Singh and he had no disagreement on abolishing CCS repeated what he'd told the finance minister, namely that a commerce minister could not begin his tenure with an exporter unfriendly act, and that he had announced at a press conference the previous day that he would introduce major changes in the trade policy in two-three weeks. Rao then asked the commerce minister when he would be ready with the policy. Chidambaram's startling reply: “I will be ready tonight”.
Chidambaram headed back to his office at the capital's Udyog Bhavan, which houses the commerce ministry, called Ahluwalia and D.R. Mehta who was then the chief controller of imports & exports and asked them to draft a paper. By around 7.30 p.m. Chidambaram went across to Singh's office and presented the file to the finance minister. Singh read and signed it. They and Ahluwalia went to the PM's house . Rao still lived at 9 Motilal Nehru Road. In the drawing room, principal secretary to the PM A.N. Verma Shukla and Ramesh were seated Rao was bathing.
When the PM emerged wearing a shirt and lungi, he asked: What have you decided?” Chidambaram say next to him and briefly outlined the new trade policy the import of several products would be decanalised export subsidies would be suspended and replenishment licences would become the principal instrument for imports and would be renamed Exim scrips. Rao turned to Singh and asked him whether he had seen the file. When the finance minister said he had. Rao took out his pen and signed it. By then it was 9p.m. A Senior bureaucrat later said: “I was very impressed that the trade policy could be changed between 10a.m and 9 p.m.” On Chidambaram's instructions, Ramesh and Deepak Nayyar that night rang the editors of leading dailies to inform them that CCS was being abolished; the editor of one national daily was roused from his bed.
Yet the fact remains that the trade policy was decided by just three people – the PM, the finance minister and the commerce minister. It did not go to the Cabinet. Chidambaram felt that this was a matter between Rao , Singh and himself. This was not the case with the other policy changes. The new industrial policy, for instance, wound its way tortuously, after the political leadership steamrolled it through the bureaucracy.
Some observers maintain that the tear that was responsible for the new industrial policy consisted of the PM (who held the industry portfolio), A.N. Verma, industry secretary Suresh Mathur, industry ministry economic advisor Rakesh Mohan and Jairam Ramesh, with Ramesh playing a key behind- the-scenes role. Says Venkitaramanan: “The industrial policy draft was done essentially by Jairam. Mathur and Mohan also were extremely cooperative”. At one level, the policy was discussed informally by Verma, Shukla, Nayyar, Mohan, Mathur, and Ramesh, with the group meeting every day. This would later become the steering committee on economic reforms, which met every Thursday at the PMO.
At these informal meetings, a heated debate broke out over foreign investment. The majority of those present argued at first that major changes in foreign investment policy were not called for; quicker clearances were required. Around that time, Federation of Indian Chambers of Commerce & Industry president S. K. Birla had publicly stated that a rush of foreign investments was undesirable. The group soon split, with Nayyar and Shukla favouring the status quo and the others willing to permit foreign companies to hold 51% equity stake in enterprises.
It would be familiar divide: the two finance ministry functionaries would constantly argue that the government shouldn't open the economy so hastily and urge their colleagues to concentrate on cutting expenditure, raising taxes and working towards a deeper, more sustainable fiscal adjustment. Says a participant in these meetings: “They kept on saying, this is too radical, this is not needed, we are going too far and too fast.” On the trade policy, for instance, the finance ministry bureaucrats were not in favour of expanding the role of Exim scrips.
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All this didn't go down well with the liberalisers in the government, who soon came to view the duo as being on the opposite side of the ideological fence. Eventually, both would move out. The government offered Shukla a posting at the Asian Development Bank in Manila, he refused the offer, the government posted him anyway, and he bowed out. Nayyar too shifted to New Delhi's Jawaharlal Nehru University. Nayyar and the finance minister had been friends, but the two now meet only when they run into each other at public occasions. Nayyar has told friends that he is disillusioned and saddened by the turn the relationship has taken.
However, on foreign investment even Singh “was a bit hesitant in going the whole hog,” says a source. Singh feared that it would be tough to sell the policy to Parliament and to the Congress party unless foreign manufacturers of consumer goods, for instance were compelled to balance their dividend outgo over a seven year period with export earnings. He said: “We can't have liberalisation of foreign investment unless you bring a dividend balancing criteria. Even in China, I am told, there is a dividend balancing criteria. So the proposal is not acceptable. So a dividend balancing clause was tagged on to the policy.
This is now cited to suggest that Singh was then not the great liberaliser he is made out to be that the moving force of reforms was the PM. Says a former government functionary who interacted closely with Singh and Rao: “He (Rao) has this image of being indecisive, but he took all the decisions. The buck stopped there. It was Narasimha Rao all the way. Manmohan had been thrown in at the deep end and was not decisive then.” Confirms Ramesh: “It was the PM who was aggressive on reforms.” One official who interacted with Rao every day during the first few months of the government says admiringly that the PM was hardworking and not a slouch: Rao had read by the next morning a 12 page note which the official had submitted the previous night.
However, Chidambaram testifies to Singh's role as a liberaliser. And Mathur is convinced that Singh was the industrial policy's helmsman. He says that within the first fortnight of taking over as finance minister, Singh called a meeting of several bureaucrats, including Ahluwalia, Verma Deepak Nayyar and Ramesh, and told them clearly that the government intended to delicense industry. Says Mathur: “He told us, this is the position: I would strongly recommend that you do this.” Another bureaucrat who was present at the meeting adds : “ The finance minister said all this had been discussed with the PM, we're in the business of making changes and anyone who has reservations should speak up. The message was very clear – this is what we want.”
Singh asked Mathur to produce a paper for the Cabinet on the new policy which he and Mohan did within the next few days. And whenever he confronted a doubt, he'd consult Chidambaram. Says Mathur: “I asked his whether the phased manufacturing programme should be abolished or not. His point of view was go and abolish it.” The paper was sent to the PM – and it recommended the abolition of the directorate-general of trade and development (DGTD), the scrapping of price and other controls in the pharmaceuticals industry, fewer crore sectors permission for foreign companies to hold a 51% equity stake, and delicensing for an array of industries, including sugar and milk. Mathur had some reservations about delicensing the milk industry and was amazed when the proposal sailed through.
But the policy ran into considerable flak at a ministerial meeting in South block. As a result it could not be announced when it was scheduled to have been announced, just after the 4 July trade policy.
For the draft mentioned an exit policy. That triggered off an uproar. Says Kumaramangalam: “I said the term was something which I was allergic to, I said in a country where there is such a large unemployment problem, I don't believe that 'exit' is an answer.” Arjun Singh cut out the sentence. Adds Kumaramangalam: “The PM did stand by me, surprisingly. He said, you have got a point. that's his way of saying it. He won't say more.” Rao clearly was lukewarm on introducing an exit policy.
Serious reservations about the industrial policy were expressed by Arjun Singh, Solanki, Fotedar and B. Shankaranand, all of whom felt that it represented too radical a break with the past. Confronted with this budding revolt within the ranks, Rao summoned Ramesh and told him: “Please go to Fotedar and Arjun Singh and explain to them what we are trying to do.” Ramesh met Arjun Singh and Fotedar separately. Singh told him: “Theek hai, but political mamla hai. It is not an economic issue.” Fotedar too said that it was a political matter, that it should have been raised first at a party forum and that the party hadn't been taken into confidence – which of course, it hadn't.
To pacify the dissidents, Rao asked Ramesh after the Cabinet meeting to discover a link between the party manifesto and what the government proposed to do (one minister, however says this happened after a congress working committee meeting). He also formed a Cabinet sub-committee comprising Arjun Singh, B.Shankaranand, Solanki Fotedar and Chidambaram to look at the policy in some detail.
The committee first met in Parliament House, at the conference room for Cabinet meetings. Apart from the ministers who were committee members, others were present too: A.N. Verma, Manmohan Singh, Naresh Chandra and Jairam Ramesh.
Arjun Singh who was then HRD minister opened the proceedings by saying: “This policy is a very clear departure from the past: it is politically unacceptable. You have to show how it is linked to the past, that it is part of a continuous process. There are serious objections on that score.”
Arjun Singh's reservations were echoed by Fotedar, but the latter went a step further: he argued that the industrial policy was anti Nehruvian, and anti Indira Gandhi. Shankaranand made another point: “There is nothing in it about co-operatives.”
As the criticism went on, the finance minister interrupted : No, no, it follows from self reliance: self reliance means trade and not aid.” And Chidambaram rose for the defence: “This has nothing to do with Nehru or Indira Gandhi. The only nationalisation Nehru did was of the Life Insurance Corp of India. After that all nationalisations took place between 1970 and 1977. What have these to do with Nehru? Yes, Indiraji said the state must play an interventionist role. This was inspired by the philosophy of Mohan Kumaramangalam, C. Subramaniam, to some extent I.K. Gujral and Mohan Dharia. You cannot attribute it to Nehru.“ But it looked as if the new policy was in trouble.
However, the PM was keeping tabs on the discussions. He told Chidambaram to withdraw the draft and deal with the objections that had been raised. So the commerce minister called Verma, Mathur and Ramesh to his Udyog Bhavan room and told them : “We can have a paragraph from Nehru, a paragraph from Indira Gandhi and a paragraph from Rajiv Gandhi to show the continuity.” He then dictated the three paragraphs and handed them to Ramesh to polish up the language.
When the draft went back to the Cabinet sub-committee. Fotedar was exultant. He patted Manmohan Singh and said: “Aapne kamal kar diya” (you did a good thing). It seemed that the policy would go through.
That's when external affairs minister Solanki dropped a bombshell. He pointed out that the government was going to give up control of deciding where industrial units would be located, that this was unacceptable to him and he would not allow the policy to go through. But Chidambaram argued that the government had a separate growth centre scheme, that it would be foolish to tag on a locational criterion when it was delicensing and deregulating, that to deal with the problem of decaying cities you had to allow new industrial activity and that was what the policy attempted to do. Solanki let it go. But the crux of the problem was how the new policy would be politically perceived. By the simple expedient of paying obeisance to Nehru and Indira Gandhi the government salvaged victory from the jaws of defeat.
When the draft of the policy went to the Cabinet, defence minister Shared Pawar urged that the sugar industry be delicensed. And Chidambaram of all people shot that down by raising a host of questions. What would happen to the sugarcane control order and to cane growers? Who will they supply cane to? If the sugarcane control order is repealed, how will the farmer get his price? Will he have to bargain with the mill? But time was running out, and the PM said the sugar industry could be delicensed later. It never was.
The policy eventually went back to Rao. He cleared it and decided not to make an official announcement on it lest it should attract unwanted attention.
But before the industrial policy was cleared, the underlying ideas were the subject to some debate in the Rao ministry. Most ministers favoured an initial period of opening the economy to further internal competition before allowing foreign enterprises in. That would have meant continued protection for industry through high tariffs. And at meetings at the PM's house and over private dinners, views were aired on specific industries. While all ministers were unanimous that the car industry had to be opened to further competition (“there was a general view that motor car technology is very bad.” a former minister chukles). Ministers were divided on opening the scooter industry. Opposition was also voiced in the areas of steel, textiles and small scale industry. “The mood was of uncertainty because they did not know whether this was the right thing to do,” says a minister. “the older ministers couldn't argue against the new ideas nor support them wholeheartedly. They had never examined their faith in the earlier policy: they had just accepted it. I don't think the foreign debt, the fiscal deficit and the current account deficit had much of an impact on them.”
On occasions, some of the older ministers were bypassed. Vijay Bhaskar Reddy, the Cabinet minister for law, justice and Company affairs, had very little to do with amending the MRTP Act. He resisted the amendments yielding ground only at the very end. His minister of state Kumaramangalam took up the idea of scrapping the asset ceiling for big business with A.N. Verma. Both jointly met the PM in the afternoon at South Block. Rao said: “If you are convinced go ahead. You have my support.” A day later Manmohan Singh called Kumaramangalam at 6p.m and urged him to change the MRTP Act. “Your father was responsible for creating MRTP, he would be the happiest man to learn that his son was responsible for dismantling what is clearly an unproductive piece of legislation.” he said, adding: “He was a supreme pragmatist.”
Kumaramangalam was only too happy to agree. He had long felt that the law's very purpose had been defeated since big business had only grown in the years the Act had been on the statute books. So he went ahead and amended it. Confident he had Rao's backing.
While the government eventually issued an ordinance to push through the amendments, the to-ing and fro-ing on the industrial policy pushed its deadline back. The PM finally decided to unveil it on 24 July, in the hope that it would be drowned in the media hype over the budget on that day. But in the end, neither the industrial policy nor the budget attracted flak- the fertiliser price increase did. Suddenly the congress party was up in arms. At around 7p.m agriculture minister Balram Jakhar, Solanki and communications minister Rajesh Pilot met at Jakhar's house. They agreed that the higher fertiliser price was unacceptable. The sound of protest rent the air. The government caved in, and partially rolled back the urea price increase.
This was not the only occasion that the party would protest. When Singh addressed the Congress Parliamentary Party, he said bluntly that it was not possible to roll back the prices of items such as kerosene, a promise the party manifesto had made. When word got back the PM of what his finance minister had said, Rao put his head in his hands and said in despair: “What am I to do with these technocrats!” He later summoned Singh, who told him that a note had been submitted to Rao during his early discussions with Mukherjee. This dealt with the financial implications of the economic promises and showed that the promises were untenable. Rao was livid. He summoned an aide who told him that the note had indeed been submitted. Rao had not read the note. Eventually, he asked Singh to explain the government's policies to the party.
With the policy on foreign investment clear by now, the question arose of clearing projects. The committee of secretaries was too unwieldy; one official described it as a panchayat. So in mid August, Rakesh Mohan and Ramesh went to the finance minister and told him : “Sir, we think the committee of secretaries will be too big and you should intervene.” Singh felt that the agency to clear foreign investment proposals should be located in the PMO. He called a meeting of Verma , Mathur and Ahluwalia. They decided to set up a Foreign Investment Promotion Board (FIPB) with four crore members the principal secretary to the PM, the finance secretary, the industrial development secretary. Ramesh took the file to the PM's residence and Rao then signed the file. That's how the FIPB came into being.
With the FIPB in place, the government was desperate to demonstrate that it would clear new foreign investment proposals quickly. So Kellog's proposals to enter India was cleared rapidly. And IBM's proposal to tie up with the Tatas sailed through. Befor this could happen , however one official jumped the gun. In a bid to speed up clearances, Ramesh told Reuters that the government had cleared IBM's proposal to enter India, and this was a signal that the new government wanted to clear projects with the speed of lightning. The report appeared in more than one newspaper around the world. One snag: the government hadn't yet cleared the project.
In mid-August, a policy for the small sector was introduced. Rao spent far more time on this than on the industrial policy. “He had the belief that the small scale sector is the final answer to our unemployment problem.” says Kumaramangalam, who was also associated with the formulation of the policy.
Meanwhile the foreign exchange crisis was reaching a flashpoint. Like the previous government of V.P.Singh and Chandrashekhar, this one too was pinning its hope on NRIs and other governments bailing out the country, Says a former finance ministry functionary: “All the PMs wrote to heads of governments and NRIs. But it was a pie in the sky. Yashwant Singh and even Manmohan Singh travelled abroad seeking money.” But Singh himself once gloated to a journalist: “Yashwant Sinha travelled all over and couldn't get any money. Without leaving this room, I got money.”
With the prospect of defaulting on loans real, the RBI wrote to the finance minister seeking permission to continue shipping gold abroad to raise further loans. The RBI governor argued that the Congress government could always turn around and say that the Chandrashekhar government could always turn around and say that the Chandrashekhar government had cleared this. But Manmohan Singh blew his top, relenting only when the crisis mounted further. And with no foreign exchange to be had, the government soon begun clutching at straws. Singh sent Venkitaramanan to Switzerland to touch the Bank for International settlements (BIS) for a $1billion loan. India would have been willing to settlefor anything, perhaps a few hundred million, but BIS officials told Venkitaramanan that they'd lend money only after the IMF cleared India's structural adjustment programme.
As word got round the international community that India was heading for the rocks, the government instructed a first secretary in the Indian embassy to telephone the finance secretary every morning and inform him which bank was closing its line of credit to India.
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The quest for cash took RBI officials all over the world. The governor of the central bank frequently flew to Washington to tap international banks, but more often than not drew a blank. He in turn packed off RBI deputy governor R. Janakiraman to Venezuela because the Venezuelan finance minister had said that Venezuela was a friend of India. But Janakiraman received the same answer his boss had at BIS. And though Venkitaramanan had some success in Japan (the Japanese government was willing to advance over $200 million), his effort endangered India's bid for an IMF loan. Japanese government officials were told that India was not as broke as it had told the IMF it was: it had $1 billion in reserves. That was true; but the published figure included $600 million that had been given to the banks. “I said this to the Japanese finance secretary,” says Venkitaramanan. “The Japanese finance secretary immediately conveyed this to his colleagues at the IMF. And they said : “Look the government of India is giving two figures.” A desperate Venkitaramanan called M. Qureshi who was then at the World Bank and explained the position. Qureshi conveyed the message to the IMF.
For several weeks it was touch and go in July. Venkitaramanan frantically telephoned IMF managing director M. Camdessus. He was holidaying in Paris. The phone call came at around 3a.m local time, and Camdessus was woken up. Explains the former governor: “We had a problem. The money had not come in. Various tranches had to be released. He said that he would do something. He did help Camdessus was remarkable.”
But for quite some months, the government never quite gave up on its hope that NRIs would come to its rescue. It launched an indemnity scheme under which the source for money that came in from overseas would not be questioned. In October, it launched an India Development Bond, which ultimately netted the country $1.7 billion. The crisis eased only after the IMF arrived at a 20-month standby arrangement with India for a $2.26 billion loan in October.
A key question surfaces in hindsight. Were the Rao government's reforms the outcome of the IMF and the World Bank holding a gun to India's head? The left had insisted that this was the case. In November 1990, the World Bank presented the government a confidential report titled. Strategy for Trade reform, a copy of which Businessworld obtained. This charted out a strategy for opening the economy that is remarkably similar to the government's trade reforms package (among other things, the report recommended that the rupee be devalued by 22%). Several critics seize the point that the trade policy was altered in a day. How can a trade policy be put together so rapidly? Unless, of course the commerce ministry was working on a readymade gameplan that had been crafted by the international lending agencies.
Pose that question to the commerce minister, and he'll tell you that P.C. Alexander had written a report on foreign trade, that former commerce secretary and planning commission member Abid Hussain had written a report on liberalisation, that former Hindustan Lever Chairman Ashok Ganguly had submitted a report, that the commerce ministry had prepared a paper during the Chandrashekhar era for the Cabinet committee on Economic Affairs (CCEA), which went to the CCEA on 11 march 1991 and was formally cleared by it, and that the ministry had all these reports with them. Other commerce ministry bureaucrats make the point that Ahluwalia and Rangarajan had been pushing for Exim scrips for quite some time, and that the idea found a place in a paper Ahluwalia wrote: In 1989, and that V.P.Singh's long term fiscal policy contained many of these ideas.
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Chidambaram also says that even before the Congress took office, he was on a flight with Mehta and joked that it the Congress formed the government and he became commerce minister, he would abolish Mehta's job. On the day he took over as minister on 24 June he called Ahluwalia and S. Kanungo (who was special secretary in his ministry and later civil aviation secretary) and told them that all controls must go; they told him that the homework had already been done; he then looked at what they had and asked them to update parts of the paper.
Chidambaram also makes that point that the Export-import rules book was revamped in15 days, that he's set a deadline of January1992 to the CCI &E's (chief controller of imports & exports) office to come up with a new book, and when it failed to produce an acceptable version in time, commerce secretary A.V.Ganesan and he sat one Sunday at Chidambaram's house and dictated the chapters, working up to midnight. So it is possible to quickly put together a trade policy if your thoughts are clear, he says.
Several prominent former government ministers and functionaries also point out that the reforms are rooted in the past. In 1989, Rajiv Gandhi appointed Venkitaramanan chairman of an advisory committee on economic reforms. Consisting of current petroleum secretary Vijay Kelkar, D.R.Mehta and former finance ministry economic advisor Rajiv Kumar, the committee met several businessmen but did not submit a report. Kumaramangalam says that the political affairs committee of the Congress had started talking about liberalising the economy when the Congress was in Opposition. Around that time A.N. Verma, who was industry secretary then, wrote a paper urging that industry be delicensed. And Rajiv Gandhi Foundation vice-chairman Abid Hussain argues that the process of reforms dates back to the last days of Indira Gandhi and to the early Rajiv years. “The reforms are not really connected to the fiscal crisis, though the crisis made it possible for the government to hasten the pace of reforms.” says Hussain.
But Kumaramangalam says the government went far beyond its mandate, as spelled out in the party manifesto. “Very frankly, what was not discussed or would not be found in the manifesto is the opening up to the level which we have done,” he says.
There's no denying either that after the initial burst, the reforms programme slowed down. As IMFs Agheveli puts it: “As things improve, there is less and less urgency. It these is a heart attack, you correct it or die. As you get better, you worry less.”
Till the next time round, that is.
The Rao Era : The first 100 days
21-25 May 1991: Rajiv Gandhi is assassinated. P.V. Narasimha Rao is elected president of the Congress party. Early June Rao starts casting around for a team. Phones I.G. Patel and asks him whether he would join the government. Patel declines. Rao meets Pranab Mukherjee at the Sanjay Gandhi Memorial Trust building in the capital and asks to be briefed on the economy.
21-22 June: Rao telephones Manmohan Singh and informs him that he would be allotted the finance portfolio. Rao is sworn in as prime minister. Manmohan Singh and a few other ministers are sworn in.
Rao summons key government secretaries to South Block and tells them the government intends to sweep away the cobwebs of the past.
23 June: Ministers' portfolios are officially announced. Rao meets envoys of other nations at an Id dinner at Hyderabad House in Delhi. That night, he tells an aide that he is under pressure from the IMF, that it wants subsidies to be cut and the rupee to be devalued.
27 June: Rao decides to announce a liberalisation package first, to be followed by subsidy cuts and price increases in the budget. The rupee is to be devalued. The broad contours of the new industrial policy are decided.
29 June: With the PM's concurrence, Singh signs a letter to the IMF agreeing to raise fertiliser, sugar and petroleum prices, and cut the fiscal deficit.
Rao telephones Gopi Arora, India's executive director at the IMF in Washington, and instructs him to request IMF managing director M.Camdessus not to set harsh fiscal targets for India, since it is liberalising its economy. Arora meets Camdessus.
1 July: The RBI devalues the rupee by 9.5% against the dollar. Singh denies that the rupee has been devalued.
3 July: The RBI devalues the rupee by 10.6% against the dollar. That morning Chidambaram meets Singh, who wants export subsidies abolished. The commerce minister demurs. Both meet the prime minister. Chidambaram tells Rao he can revamp the trade policy by evening. In the evening, Singh and Chidambaram meet the prime minister, who signs the file.
4 July: Chidambaram announces the new trade policy.
7-12 July: The RBI ships over 30 tonnes of gold to the Bank of England.
July second week: At a Cabinet meeting M.L. Fotedar, Arjun Singh, B. Shankaranand and Madavsinh Solanki say the new industrial policy is too radical a break with the past. Rao informs his ministers of the government's intention to open the economy to foreign companies. Most ministers oppose this.
P.R. Kumaramangalam tells A.N. Verma that he would like to scrap the asset ceiling on big business. Verma and Kumaramangalam meet Rao, who tells them to go ahead.
18 July: More gold is transferred to the Bank of England, taking total shipments to 46.9 tonnes in four lots. The gold has been pledged to borrow $400 million.
22 July: The IMF disburses a $221 million CCFF loan. The World Bank provides $150 million as quick disbursement aid.
Mid-August: A supplementary trade policy is presented.
15 September: the IMF gives a $637 million CCFF loan.
27 September: The government issues an MRTP Ordinance removing restrictions on establishing new undertakings, expansions, amalgamations, takeovers and so on.
Countdown to a fiscal crisis
1988: Chief economic advisor Bimal Jalan writes a note to the finance ministry and to prime minister Rajiv Gandhi on the deteriorating balance of payments and fiscal deficit positions. Jalan and the finance ministry urge Gandhi to take tough economic decisions. Gandhi rules out this till after the elections.
February end 1990: In the budget, the government declares its intentions of reducing the fiscal deficit by 1-2%, from 8.3%. but the government is unable to control expenditure.
May-June 1990: Reserve Bank of India (RBI) governor R.N. Malhotra writes several letters to the finance ministry warning that a fiscal crisis is imminent, Jalan who had become finance secretary in January, writes to the prime minister's office (PMO) dismissing these fears. The finance ministry is still confident that the position is manageable (oil prices rise only later).
June 1990: V.P.Singh, by then PM, agrees to seek IMF aid, India withdraws its reserve tranche of about $500 million from the IMF. IMF officials wonder what is going on.
August 1990: Iraq invades Kuwait, oil prices climb. Finance minister Madhu Dandavate and Jalan tell the IMF that India faces an additional burden of $2 billion on account of higher oil prices. NRIs have begun withdrawing deposits. The State Bank of India borrows up to $2 billion overnight to pay for essential imports.
November 1990: Chief economic advisor Deepak Navyar sounds IMF managing director M.Camdessus on a compensatory & contingency financing facility (CCIFF) loan and on withdrawing the first credit tranche. RBI governor S.Venkitaramanan proposes that Indian embassy land in Tokyo and Bejing be handed over for development to real estate developers. The proposal is shot down. Chandrashekhar reluctantly bows to the inevitability of an IMF loan.
December 1990: India's foreign exchange reserves drop to under $1.2 billion. Finance minister Yashwant Sinha presents a supplementary budget. Import duties are raised, cash margins are slapped on imports. Interest rates are raised. An official delegation (Nayyar, RBI deputy governor C. Rangarajan) heads for talks with the IMF. A deal is struck to cut the fiscal deficit by 2.5% in the budget for 1991-92.
January 1991: The IMF board sanctions loans of $1.8 billion but demands that India liberalise its economy. The government makes no promise, but agrees to lift the import restrictions it had imposed earlier.
March-April 1991: Venkataramanan proposes to Chandreshekhar that India pledge its gold reserves. Chandreshekhar clears this. Some loans are disbursed. The Chandrashekhar government falls. Reserves continue to haemorrhage.
Run-up to Ruin: The V.P.Singh and Chandrashekhar Years
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The scene: prime minister Chandrashekhar's official residence in the capital. The period: around March 1991. A breakfast meeting is in progress. Present are finance secretary S.P. Shukla, additional secretary in the prime minister's office (PMO) Surendra Singh, Cabinet secretary Naresh Chandra and Reserve Bank of India (RBI) governor S. Venkitaramanan. The RBI governor has just proposed that India pledge its gold to obtain a loan.
Chandrashekhar turns to Venkitaramanan and says: “Yes, but if you mention this to anybody publicly, I will be hanged. Finance minister Yashwant Sinha will not accept it.” Venkitaramanan replies: “At this point there is no alternative. I'm sure sitting on $3 billion worth of gold and not using it when the economy is being crushed is wrong.” Chandrashekhar reluctantly replies “The honour of the country is at stake. Aap jo bolte hein, wo karna hey to karna hey (if what you say has to be done, it has to be done).”
With the Prime Minister having given clearance, the RBI went ahead and shipped to a Swiss bank some 20 tonnes of confiscated smuggled gold which it had pledged against a loan. A move to hawk Indian embassy land overseas was also aired. That year Venkitaramanan proposed at a meeting with Cabinet secretary Naresh Chandra and foreign secretary Muchkund Dubey that Indian embassy property in Beijing and Tokyo be handed over to real estate developers. Real estate prices were sky high, and a deal would net the country $1billion. But the RBI governor's idea provoked outrage. Venkitaramanan was accused of being unpatriotic. The move was dropped.
So precarious was India's foreign exchange and debt position that Sinha flew to Tokyo in search of money, but came back empty handed. And some who were in positions of power during the Chandrashekhar regime claim that the question of defaulting on loans was seriously contemplated. But economist S.K.Goyal, to whom the idea of default has been attributed , says this is simply not true. “The civil service was saying, 'We have no alternative but to go to the World Bank and the IMF. They created a panic. My position was that harsh decisions had to be taken on imports.”
How did India come to such a sorry pass? The fiscal crisis had been building up in the Rajiv Gandhi years. Bimal Jalan, then chief economic advisor, wrote a note to Gandhi warning him of it, several Gandhi aides had urged him to call an early election and take tough economic decisions after the polls, the question was discussed at a meeting Gandhi held with Jalan and the then finance minister S.B. Chavan, but Gandhi postponed the decisions.
The foreign exchange crisis, however, had been triggered off during the V.P.Singh government's tenure. The State Bank of India (SBI) couldn't roll over its short term debt any longer . It had piled up a debt of $4-5 billion. The bank usually borrows from the international capital markets on a 6-monthly, 12- monthly or 18-monthly basis. But by late 1990, it had begun borrowing up to $2 billion on an overnight basis to pay for oil imports. Oil prices had shot up in the wake of the Gulf war. The bank could no longer renew its debt. It wanted to consolidate its loans (take one huge loan to cover the debt). It had received two loan offers for this. So SBI officials camped in the capital, hoping that the finance ministry would clear the proposal. It didn't. The finance ministry downplayed the crisis. Earlier that year R.N. Malhotra, then RBI governor, had written several letters to the ministry warning that the fiscal position was out of hand and that a crisis was imminent. Amazingly, Bimal Jalan by then finance secretary, wrote to the PMO that no crisis existed.
But soon after, the V.P Singh government decided to withdraw India's $666 million reserve tranche with the IMF. After the Gulf war in August 1990 oil prices shot up and India faced an additional $2 billion import bill. The V.P. Singh government now sought a loan under the so-called compensatory & contingency financing facility (CCFF). Around November when the Singh government was on its last legs, it also asked the IMF for India's first credit tranche (any country is entitled to 25% of its quota).
After the V.P. Singh government fell, the Chandrashekhar government continued the talks with the IMF. Chief economic advisor Deepak Nayyar had made a presentation to the cabinet committee on political affairs and suggested that an IMF loan was unavoidable. The government agreed to cut the fiscal deficit by 2.5% of gross domestic product in the budget for 1991-92. It could do this by raising tax rates, cutting expenditure or a combination of both. In other words, it agreed to a deflationary policy.
In his unpresented budget- the Congress withdrew support to the government before the budget could be presented – Sinha also included a list of 10 public sector companies (including Maruti Udyog, Indian Oil Corp, Hindustan Machine Tools and Bharat Heavy Electricals) for disinvestment of equity.
Much later, after the Narasimha Rao government had signed a 20-month standby arrangement with the IMF for a $2.2 billlion loan, the opposition parties trained their guns at the government. So finance minister Manmohan Singh decided to hit back. The Economic Survey for 1992-93 carried a table which listed the money the V.P. Singh and Chandrashekhar governments had withdrawn from the IMF. The finance minister would later tell a journalist : “These people criticise me now, but they didn't even tell the country that they were taking an IMF loan.”
