Author: Ramesh, Jairam
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India’s first major reform that partially decontrolled the cement industry took place in 1982.
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hat was the crisis that the country faced when Narasimha Rao took over as prime minister and Manmohan Singh became finance minister? It was simply this: India’s foreign exchange reserves had dropped precipitously, so as to be sufficient for just two weeks of imports.
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The first pressure on the reserves had come from the trebling of oil prices following the Gulf War of August 1990. To make matters worse, India had to repatriate thousands of workers from Kuwait back home. Obviously, their remittances, which helped the economy manage its balance of payments, stopped.
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Exports to Iraq and Kuwait also came to a halt and we lost US$500 million or thereabouts on this account alone.
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The second pressure came from political instability within the country. The nation—particularly the capital—was rocked by violent agitations against the implementation of the Mandal Commission recommendations on reservations for other backward classes (OBCs).
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The third source of pressure came from India’s short-term borrowings in the late 1980s (between 1986 and 1989), that took place because interest rates were low—it made sense then. But with a growing loss of international confidence in the Indian economy— particularly because of the political situation beginning August 1990— interest rates began to go up and the cost of international credit increased considerably.
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I explained to him that the current inflation was not due to cost-push or demand-pull but largely due to excessive liquidity and that budgetary action was unavoidable to control inflation. The whole discussion was in the nature of an academic exercise rather than consultation on programmes to be adopted.
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The crisis of 1990 had its roots in the policy stance taken in the aftermath of the second oil shock (1979-80). At that stage, exports stagnated due to real exchange rate appreciation. There was little current account adjustment.
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Even strictly a temporary shock like the Gulf War was enough to trigger a full-scale crisis.20
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We have over-borrowed both at home and abroad to finance the growth of public spending.
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Clearly, Manmohan Singh as finance minister was ‘an idea whose time had come’, to adopt a famous phrase by Victor Hugo—a phrase to be used by Singh himself in his maiden budget speech on 24 July 1991.
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also recall having told the prime minister that it was high time that we acknowledged that the exchange rate was a matter of, not pride, but a price.
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But I am really surprised that something which is meant to encourage the country’s exports, encourage its industrialisation is now considered as something anti-national.
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othing exemplified the magnitude of India’s financial crisis in the early part of 1991 better than the need to use our gold reserves to raise money to pay for the country’s imports.
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Of course, under Section 33(5) of the Reserve Bank of India (RBI) Act, 1934, the RBI had the power to keep 15 per cent of its gold outside India39 and it could exercise that power on its own.
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Once the new government came to power, gold transfers continued. This time it was the RBI that transported a total of 46.91 tonnes of gold to the Bank of England over four days—4, 7, 11 and 18 July 1991 (the last of which took Parliament by surprise). This enabled the country to borrow ‘for a period of one month at a time a total sum of about $400 million to help us tide over the serious liquidity problems we were facing.’
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In the 1960s all our debt was to multilateral institutions like the World Bank and to bilateral aid agencies. It was certainly true that the Aid-India Consortium,43 as it was then called, had renegotiated India’s debt obligations. But the situation in 1991 was totally different. This was short-term debt and debt owed to commercial institutions.
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It will, TO THE BRINK AND BACK π 61 in other words, become a lost decade
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After a brief discussion, a decision was taken to abolish the export subsidy in the form of cash compensatory system—or CCS, as it was popularly known—that was given to exporters.
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Indeed, after the two-step devaluation, it made little sense to continue with this subsidy.
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It took less than ten hours, as Ahluwalia writes, to get the 4 July trade policy reforms approved by the prime minister and the finance minister. The reforms themselves—anchored in removal of discretionary controls in the form of licensing, and in the linkage of all non-essential imports to exports (other than in the case of petroleum, fertilisers, steel and other essential purchases)—were widely welcomed by industry.
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A new package for 100 per cent export-oriented units and for units in the export-processing zone was announced. Public sector monopoly on the import and export of items was considerably curtailed.
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Exchange Rate Adjustment The Reserve Bank changed the exchange rate of the rupee. This was done so that we can export more. More garments, more leather products, more gems and jewellery, more agricultural products made in India will be sold abroad. This will not only earn us foreign exchange but also create new employment at home. And why do we need to earn foreign exchange so badly? Not to import luxury items but to buy commodities like kerosene and diesel, fertilizers, edible oil and steel. We produce these commodities, but what we produce is not enough. We are stepping up our production, but for some time, we have to import.
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I can only recall the unforgettable conversation in ‘Silver Blaze’ in The Memoirs of Sherlock Holmes:52 [Inspector Gregory:] ‘Is there any point to which you would wish to draw my attention?’ [Holmes:] ‘To the curious incident of the dog in the night-time.’ [Inspector Gregory:] ‘The dog did nothing in the night-time.’ ‘That was the curious incident,’ remarked Sherlock Holmes.
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He was not partisan but made the point effectively that the situation he had inherited had left his finance minister and him with no other option but to embark upon a series of tough measures—gold sales, devaluation, talks with the IMF, and trade reforms, with industrial liberalization also imminent.
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the wise man, in the event of total ruin, wriggles out by giving up half his possessions; this is done in the hope that he will save himself from total destruction by using what is left properly.
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What the preamble did was provide a political context to technocratic text, with the clincher being the line ‘continuity with change’ at the very end! To use Narasimha Rao’s own words (enunciated in another context), the preamble was a lesson in how to facilitate a desirable U-turn without it seeming to be a U-turn! This was my first major lesson in political packaging and marketing,
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A man who famously remarked, ‘Even not taking a decision is a decision,’ was remarkably decisive in the initial months.
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Winston Churchill, the British premier, said of Clement Attlee, his successor, that he was ‘a modest man, who has much to be modest about’.
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Manmohan Singh was worried that his personal rupee balance, born out of modest dollar savings from his South Commission stint in Geneva during 1987-90, would swell with the proposed changes in the rupee-dollar exchange rate. Therefore, he informed the prime minister that the ‘windfall’ gains would be deposited in the Prime Minister’s Relief Fund.
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There is a Tolstoyan perspective of history which holds that individuals are irrelevant and circumstances create events.
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‘Carpe diem,’ wrote Horace in his immortal Odes. This is exactly what the Rao-Singh jugalbandi did—they seized the day.
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Louis Pasteur said, ‘Chance favours only the prepared mind.’