1991: How P. V. Narasimha Rao Made History

by Sanjaya Baru

The news of the government’s decision to permit overflight by US military aircraft broke around the same time that the IMF sanctioned its US$1.8 billion support to India. The incident brought into sharp relief India’s own reassessment of changing global geopolitical balances. It also demonstrated how closely India’s economic and foreign policy choices and domestic politics had become intertwined in the January of 1991.

In December 1990, by which time Chandra Shekhar had taken over, India desperately needed dollars to pay for basic imports like oil and food.

‘If the Fund cannot extend a lifeline,’ Nayyar told Michel Camdessus, the managing director of the IMF during one of the meetings during the subsequent negotiations, ‘we will bring the shutters down!’

While extending a helping hand, the IMF drew attention to India’s long-term problems. The mounting external debt situation had been made worse by the fact that the share of short-term debt had risen steeply in recent years. If India wished to avert a payment default, it would be better advised to enter into a medium-term structural adjustment and stabilization programme. Camdessus assured Rangarajan and Nayyar that increased IMF support would be available provided the Indian government was able to get its annual budget passed.

To prevent this, Rajiv first forced a delay in budget presentation. Rather than allow the budget to be presented to Parliament on the last day of February, as is the norm, Rajiv demanded and secured a postponement to 7 March.

Through a regular budget the government can bring in new tax laws and raise additional revenue.

In 1987, Moody’s had given India an A2/ Prime 1 investment grade rating. India had survived Indira Gandhi’s assassination and Rajiv Gandhi’s government seemed focused on economic modernization. In its assessment of the Indian economy at the time Moody’s noted that: (a) India had a conservative tradition of keeping its external exposure within manageable limits; (b) that the government would maintain a steady pace in policy adjustment which would address such issues as the already high budget deficit and public enterprise inefficiency; and (c) it would undertake policy reform aimed at removing restraints on competition in the industrial sector.

Moody’s returned in October 1990 to take another look at India and concluded that things had become worse. The rising external debt burden and falling foreign exchange reserves was a major worry. The rising fiscal deficit and decelerating government revenues was another. The Gulf crisis had raised fresh concerns about India’s diminishing capacity to pay for its imports. Reviewing the economic, social and political situation in India, Moody’s concluded that ‘the government does not have the capacity to achieve a rapid improvement in the government budget deficit… and India’s fractious domestic political conditions make it difficult to cut spending that sustains the government’s political support.’

The total external debt trebled from US$20.6 billion in 1980-81 to US$64.4 billion in 1989-90, with the share of external debt in national income going up from 17.7 per cent to 24.5 per cent during that period. In

After hovering below 3 per cent for a long time, the share of defence spending in national income went up to 3.6 per cent in 1986-87 and 1987-88,

increased government spending on subsidies. The share of fiscal deficit, that is the deficit in the government budget and the government’s interest payment obligations in national income, shot up from an average of 6.3 per cent in the Sixth Plan period of 1980-85 to 8.2 per cent in the Seventh Plan period of 1985-90.

To make matters worse, the internal debt of the government also went up from 36 per cent of GDP at the end of 1980-81 to 54 per cent of GDP at the end of 1990-91.

Squeezing imports reduced foreign exchange spending on the trade account. It was a solution on the demand side. But with dollars flying out of foreign currency accounts thanks to non-resident Indians losing confidence, the government had to get a grip on the capital account as well. A supply side solution was needed. The simplest, though politically tough, option available was to convert India’s gold stocks into hard cash. A proposal to this effect had been examined in detail by the RBI as early as December 1990. It was revived in March 1991, the decision was taken in April and executed in May.

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.

Both the Bank of England and the Bank of Japan demanded the actual shipment of gold to their vaults. It would not just be a paper settlement. Gold bars of acceptable quality had to be airlifted and sent out. Though the final shipments began only in July, after the Narasimha Rao government took charge, the groundwork had to be done in secrecy through the summer months. RBI governor Venkitaraman and deputy governor Rangarajan personally supervised the entire operation.

Electoral data clearly shows a 9 percentage point swing in votes in favour of the Congress in the post-assassination phase.

In short, PV was not ‘nominated’ as prime minister by Sonia Gandhi and her coterie. They may have tilted the scales in his favour, but that is also because they would have recognized that a large majority of MPs, almost a 100 out of the 227, hailing from the southern states, would have preferred PV over Shankar Dayal Sharma, Arjun Singh and even Sharad Pawar.

policy choices that PV made in June 1991. Within the year PV got an opportunity to prove to the Nehru-Gandhi coterie that he was the boss. In July 1992, Commerce Minister Chidambaram, one of the ministers Rajiv first drafted into government, offered to quit following allegations of financial impropriety on his part in a matter pertaining to the ownership of shares in Fairgrowth Financial Services, a Bangalore-based company charged with involvement in a stock market scam.

Civil Aviation Minister Madhavrao Scindia, another close friend of Rajiv Gandhi’s and a maharaja to boot, resigned his post, owning moral responsibility for the mishap and the mess-up. The prime minister promptly accepted his resignation.

he managed to acquire control of the IAS through Varma and Chandra,

One of the worst legacies of the licence-permit raj was to restrict firm and plant size. Joint secretaries in Udyog Bhavan decided the capacity of firms, neither the market nor technology. To become globally competitive Indian industry needed to exploit what economists call the ‘economies of scale’—building large plants that cater to a global and not just a local market.

Opinion was divided within the government on whether ‘import-compression’ ought to be ensured through physical controls, that is, an outright ban, or ensured through price signals, that is, the devaluation of the rupee. Finance Minister Manmohan Singh tilted in favour of using the exchange rate rather than import bans. Over the financial year 1990-91 the rupee had already depreciated by around 11 per cent, but it was now felt that a one-time sharp adjustment would stabilize the rupee by renewing confidence in it. On 1 July, the rupee was devalued by around 9 per cent and on 3 July there was a further devaluation by around 11 per cent, with the adjustment working out to a 17.38 per cent devaluation. 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.

India is a resources-deficient economy in per capita terms, and was vitally dependent on oil imports. It needed to finance not just essential imports but also export-promoting imports in sectors using new technologies.

Intervening in the debate on the motion of thanks to the president for his address to Parliament, on 15 July, PV claimed, ‘All [our] measures were really written about in newspapers times without number…So it is not as if the measures which we have taken have just dropped from the [heavens] overnight… People are more knowledgeable than myself on what is happening in the Soviet Union… We cannot keep out of this change, this complete global sweeping change that is coming.’ It is with this perspective in mind that PV instructed the Ministry of Industry (of which he was then the cabinet minister) to prepare a new industrial policy dismantling the infamous licence-permit raj.

the much delayed ‘big bang’ of industrial delicensing and decontrol was announced by Minister of State for Industry P. J. Kurien on the morning of the finance minister’s budget speech on 24 July. Given the political and media focus on the budget speech, the real reform of the day did not get the play it deserved. This was clearly by design.

prominence both in party and government. No other national or even major regional political leader had till then so inducted a family member into politics and policymaking.

democracies—a nation built on meritocracy and individual

On 26 December 1991 the Union of Soviet Socialist Republics (USSR), popularly referred to as the Soviet Union, formally dissolved itself. It was the end of a historic era that began on 7 November 1917, when communist partisans, the Bolsheviks, grabbed power in Russia and ended the reign of the Tsars.

India was unique in that it was the only country in the world where, in a couple of states, a traditional Leninist Communist party had acquired power through parliamentary democracy. The communists in Bengal had something to teach their comrades in Europe and Asia: how to hold power through democratic elections.

The implosion of the Soviet Union had more than geopolitical consequences for India. It also had profound economic implications at a particularly difficult time. In 1990 the Soviet Union and Eastern European countries that had rupee payment arrangement for trade with India accounted for 17 per cent of India’s total external trade. This share collapsed to 2 per cent in 1992. The sharp decline in rupee trade and the Russian insistence on moving away from the rupee-rouble arrangement to hard currency payments, especially for oil, imposed a further burden on India’s balance of payments.

Even as he improved relations with ASEAN, PV became the first Indian prime minister to travel to the Republic of Korea. In Seoul, he urged Korean chaebol to invest in India in a big way. In 1991, there was no major Korean brand available in the Indian market. A decade later, Samsung and Hyundai had become household names across the subcontinent. In

The Nehru-Indira era in foreign policy was defined by multiple imperatives: (a) the Cold War and a desire to remain outside the military blocs of that era; (b) India’s quest for a global role as a post-colonial nation committed to the empowerment of other nations of the global South; and (c) India’s own development needs.

social change requires political action.