1991: How P. V. Narasimha Rao Made History

by Sanjaya Baru

1991 was eventful because of an economic crisis that forced India to take a new turn in its economic policies.

1991 was about more than just that. It was also the year in which Rajiv Gandhi was assassinated and the Soviet Union imploded.

The economic crisis of 1991 was as much a consequence of bad economic management of the preceding half decade during the tenures of Rajiv Gandhi (1984-1989) and V. P. Singh, as it was of the political choices they made. That is, the responsibility for the events that combined to push India to the brink of default must lie with Rajiv Gandhi and V. P. Singh. It was then left to Chandra Shekhar and Narasimha Rao to arrest the slide and clean up the mess. And the credit for understanding the seriousness of the situation and acting in time must go to the two of them.

Indira Gandhi’s time. She was the author of the so-called ‘licence-permit raj’, of sweeping nationalization, including of foreign companies, and restrictions on the growth of firms with a view to curbing the ‘concentration of economic power’, as it was described.

Her son Rajiv Gandhi began the process of dismantling her legacy on the economic front by opening spaces for the freer play of private enterprise.

Nehru himself adopted an intermediate position, emphasizing the primacy of the state in industrialization but acknowledging the role of private enterprise, especially in agriculture, as well as in the manufacturing and services sectors.

The public sector, it said, should enter areas of vital importance to development but only where private enterprise was either unable or unwilling to invest. All other economic activity could be left to domestic private enterprise. Through the means of a mixed economy India would become self-reliant and no longer caught up in a subordinate relationship with the developed West.

While Nehruvians defined this combination of socialism and capitalism as a ‘mixed economy’, Marxist critics dubbed it ‘state capitalism’ and free market critics labelled it ‘bureaucratic socialism’.

the leadership of the Indian National Congress (INC) always sought to function on the basis of a consensus. It was only Mahatma Gandhi who had the moral authority to force his point of view on the organization. The rest, including Nehru and Sardar Vallabhbhai Patel, had to learn to take everyone along. As prime minister, Nehru had no option but to work with colleagues in his council of ministers who had very different views on economic, social and foreign policy.

During the 1960s and the early 1970s, many of the ‘internal’ factions that defined the ‘Congress system’ became externalized with the creation of new parties representing specific castes and regions.

Her brutal assassination in her own home by her own bodyguards resulted in a tsunami wave of sympathy that delivered 404 seats to the Congress under Rajiv Gandhi.

After the defeat of the Indira Congress, V. P. Singh headed India’s second coalition government with the outside support of the Bharatiya Janata Party (BJP) and the Communist parties.

The momentum of the 1984 election verdict would have normally lasted for two, even three terms, perpetuating Rajiv Gandhi’s leadership (in his own right, not as Indira’s son) for a long spell such as his grandfather’s and mother’s. But that was not to be… The meteoric rise plummeted to virtual zero some time in 1987—at about mid-term. Thereafter the hero of young India became almost a source of derisive entertainment to kids in a million homes.

Within a month of taking charge PV dismantled it in one fell swoop. Indian enterprise, PV believed, would bloom if liberated from the straitjacket of bureaucratic socialism. It is worth noting that he was the only prime minister who had the political courage to confer a business leader with the nation’s highest honour, when he bestowed the Bharat Ratna on J. R. D. Tata. No businessman has since been so honoured.

India’s sovereign credit ratings had gone up and down over the years but never before had any rating agency pointed to ‘political risk’ as a reason for downgrading India. That happened in October 1990.

The brinkmanship, the one-upmanship, the short-termism of the 1989-91 period, driven by the petty political ambitions of myopic and inexperienced leaders, was replaced by a long-term vision of a long distance runner.

Back in 1981 the US had threatened to do just that when Indira Gandhi’s government approached the IMF for a US$5 billion extended fund facility. At that time, the US wanted more forthright criticism of the Soviet invasion of Afghanistan than what Indira Gandhi had been willing to make.

India’s executive director on the IMF board, M. Narasimham, was advised to tell the Americans that if the US did not support India’s application then India’s dependence on the Comecon (Council for Mutual Economic Assistance), a Soviet-led economic grouping including socialist economies and the allies of the Soviets, would only increase.

The only minor concession India had to extend was to forgo checking the cargo aboard the aircraft and take the declaration in the manifest as factual. The declaration did not list any military hardware or troops on board. But who knew what was inside?

The Left would surely have opposed any move to go to the IMF.

The negotiations yielded an immediate inflow of US$1.8 billion, made available in January 1991 through a standby arrangement and the IMF’s compensatory and contingency financing facility (CCFF).

As the IMF’s biggest shareholder, the United States never shied away from making both economic and political demands on debtor nations. One such test was to see if India would cooperate with the US in the Gulf War by allowing the refuelling of US military aircraft. India passed the test.

The Congress then upped its demand by insisting on a ‘vote on account’. A vote on account is a legislative device by which Parliament allows the government to continue spending so that the normal business of government can go on, and salaries are paid. The regular annual budget statement and the parliamentary approval of the ‘finance bill’ enables the government to legislate changes in tax policy. Through a regular budget the government can bring in new tax laws and raise additional revenue. A vote on account implies that government revenues are determined by existing tax laws. Deferring the presentation of a regular budget would also mean that no other legislative or policy business would get done and the important policy changes being demanded by the IMF would not get implemented.

On 1 August 1990, Moody’s, the New York-headquartered credit rating agency, placed India on ‘credit watch for possible downgrading’ because, as it explained, ‘political conditions in India have weakened since our initial rating assignment [in 1987]’.

But it was not just a weakening of India’s economic indicators that Moody’s worried about. Its risk assessment report drew attention to increasing communal tension, continued tension in Punjab, Kashmir and the Northeast, and the situation in Tamil Nadu arising out of India’s aborted involvement in the conflict in Sri Lanka.

From Nehru’s time and through till the end of the 1970s, the Indian government had acquired a favourable reputation for its ‘fiscal conservatism’,

‘I do not want to go down in history as the man who sold gold for buying oil,’ said a furious Chandra Shekhar.

Both Chandra and Nayyar had to explain to the prime minister the consequences of a default. To begin with, the rupee would take a serious knock. There could be a run on major banks. External trade, including vital imports like oil and food, could freeze. India’s global standing would be seriously compromised. India’s hard-earned reputation for reasonably sound macroeconomic management would simply evaporate. Foreign creditors and governments would acquire enormous influence over Indian policy. Many other developing countries had lived through that disempowering experience when a sovereign nation becomes subservient to the whims of bankers and their masters.

Twenty metric tonnes of confiscated gold, worth US$200 million, held in its vaults was made available by the RBI to the State Bank of India for sale, with a repurchase option, to the Union Bank of Switzerland.

The Chandra Shekhar government fell earlier than Rajiv had planned.

The Communist parties supported V. P. Singh’s government in 1989 and opposed Rajiv’s economic policy initiatives.

This did not mean that every company strictly adhered to government regulations. All it meant was that such restrictions encouraged corruption. Companies would operate at scales well beyond their authorized capacity and sell the excess output in the black market. Inspectors and taxmen would be bribed. For a firm, this made economic sense. Indeed, this is how many globally competitive firms had been set up.

But even as dollars were earned mortgaging gold, dollars were lost as NRIs continued to transfer funds to banks abroad. Given that the priority for the government was to avert external default, there was no other option but to further tighten import controls. The import squeeze began to hurt the economy which, on the one hand, slowed down, and, on the other, experienced inflationary pressure on the price level. The economy was in the throes of what economists define as stagflation.

The rupee slipped from Rs 17.9 to a US dollar to Rs 24.5. By the end of 1992 it was approximately Rs 31 to a dollar, and remained around that level till the end of PV’s term.

PV would have known of the 1966 devaluation episode and how Indira Gandhi had been criticized for it. Not many are aware that when Indira devalued the rupee in 1966, again under IMF advice, she took care to depute officials from the PMO and Finance Ministry to several state capitals so that important chief ministers were briefed about it. A sudden change in the value of the rupee had to be politically managed. It was not just an economic decision.

‘The first step was to test the waters,’ Manmohan Singh recently revealed. ‘So although there was opposition to the move, it was manageable. So I said that by July 3 [1991], we must complete the full thing. C. Rangarajan was the Deputy Governor [of RBI]… Prime Minister Narasimha Rao had doubts over the second instalment of the exchange rate adjustment and told me, in fact, to stop it. But when I called up Rangarajan, he said that he had already shot the goal.’

Sir, I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘no power on earth can stop an idea whose time has come.’ 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. We shall prevail. We shall overcome.

PV had only one message for him. ‘I am willing to do whatever is good for the economy, as long as not one worker tells me he has lost his job because of me.’

business historian Gurcharan Das sees PV’s ‘reforms with a human face’ formulation as evidence of his being a ‘reluctant liberaliser’ who lacked faith in reforms and was unable to view his policies as ‘pro-poor’ in themselves.

PV summed up, ‘It is because we had a clear idea of the problem and what had to be done that we were able to move so quickly and deal with the situation.’

They charged Indira’s ‘left-oriented’ and ‘statist’ economists with preventing a change of economic direction even after China changed tracks in the late 1970s.

the union finance ministry’s own annual Economic Survey of February 1990 drew attention to at least four significant weaknesses in the economy: a low savings rate, high fiscal deficit, a widening balance of payments gap and inadequate growth in employment:

Expectations shape outcomes in a world of uncertainty. Expectations about the economy end up being self-fulfilling prophecies. If you expect tomorrow to be better than today, you take economic decisions that ensure that tomorrow is indeed better. If, on the other hand, one believes the future to be bleaker than the present, one ends up taking decisions and making choices that contribute to a less than satisfactory outcome.

A debate has also raged over the years whether the reforms and liberalization of policy in 1991 were ‘home-grown’ or ‘imposed’ by an external actor—the IMF. It

Apart from the IMF, the World Bank and several donor country governments also made their own policy demands. Finally, it is also a fact that not everything advocated by the expert committees, the IMF, World Bank and donor governments was implemented. PV picked and chose what he felt he could reasonably defend within his own party and Parliament. It was his ‘middle way’.

told Linde about India’s national movement and how it was still easier for a politician to justify unpopular policies by blaming the foreigner. ‘Just like my cousins in Cuba,’ he said, and added, ‘Why blame only the IMF? They can at least add the World Bank’s name to their placards!’

Between the United Front governments of 1996-98, the BJP-led coalition of 1998-2004 and the Congress-led coalition of 2004-14, every single major national party has either been in government or lent its support from outside to the parties in government. None of them, not one, ever sought to reverse any of PV’s policies.

Things did not, however, go the way PV may have hoped, given that his arch rival emerged as the biggest scorer and his allies, Karunakaran and Mukherjee, lost while his critics, Antony and Jakhar, won. The Kautilyan PV found a way out. He expressed displeasure that not a single woman or Dalit leader had been elected. He wondered how fair the election process was. His supporters claimed that upper castes had seized the election process. PV struck quickly by suggesting that all elected members resign so that he could bring in women and Dalit representatives.

First, that Indira Gandhi had an ‘insatiable thirst for absolute power’ and ‘would not tolerate anyone whose political standing predated her accession to Prime Ministership’. A second, and as Anand notes, ‘equally plausible’ theory was that Indira Gandhi nominated chief ministers in order to ‘break the stranglehold of powerful regional bosses’.

7 November 1917, when communist partisans, the Bolsheviks, grabbed power in Russia and ended the reign of the Tsars.