Author: Sanjaya Baru
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India’s foreign exchange reserves were rapidly dwindling, and it had thus approached the IMF, the lender of last resort, in December 1990.
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Moody’s decided to place India’s ratings on review for a possible downgrade because it feared an increase in two kinds of risks. First, the risk of a short-term liquidity crunch leaving India unable to finance its external imbalance and forcing her to undertake a sharp balance of payments adjustment largely dependent on compressing domestic growth. In other words, curbing growth to curb imports in order to reduce the trade deficit. Second, the risk that measures selected to achieve the balance of payments adjustment in the short-term would disrupt the process of structural change, jeopardizing political support for efforts to improve India’s international competitive position, in the medium term.
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In December 1990 Finance Minister Sinha recalls he had two ‘immediate priorities’. ‘First, to secure whatever assistance we could from the IMF on an emergency basis and, second, to prepare a path-breaking budget that would address the accumulated problems of the Indian economy.’
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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.
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The ‘evolving global economy’ was being reshaped by new geopolitical factors—the disintegration of the Soviet Union and the restructuring of the world trading system by an assertive United States. It was the US that had helped create the GATT in the 1950s with the purpose of installing a global trading regime that would enable the war-torn economies of Europe and Asia to rebuild themselves while creating new markets for US exports.
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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.
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‘The political leadership had access to all these ideas. The challenge was not in making announcements and implementing their recommendations. It was in creating the political climate in which they could get implemented.’
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The great battles of the first half of the twentieth century were between colonialism and national liberation movements; and, between socialism and democracy, on the one side, and fascism on the other. Colonialism and fascism were defeated
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In the second half of the twentieth century the battle of ideas was between bourgeois democracy and state socialism under communist party rule.
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Addressing a meeting of the Youth Congress he said the coup was a warning to all those who proceeded too fast with reform. This was viewed at once as both a word of caution to India’s enthusiastic reformers and as a diplomatic faux pas, since Gorbachev survived that coup attempt.
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As that long decade came to an abrupt end, global geopolitics shifted rapidly. India was caught unawares, dealing simultaneously with political transition and economic crisis.
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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.
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A natural consequence of this search for markets and investment was PV’s ‘Look East Policy’. PV overturned India’s longstanding reticence to dealing with the Association of Southeast Asian Nations (ASEAN) and actively sought closer links with its member countries.
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The US had an exaggerated sense of its military power at the end of the Cold War and got embroiled in military conflicts in Eastern Europe and West Asia, while China quietly built its economic capability.
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Power no longer lay in the barrel of the gun, but in a nation’s economic capability.
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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
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PV became the first Indian prime minister to travel to the Republic of Korea.
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From Nehru’s time to now, professional economists have been the modern day courtiers in the Delhi durbar, serving successive prime ministers, helping them build what I have often called their ‘policy Taj Mahals’—public policy initiatives, schemes and projects that politicians in power wish to be remembered by.
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PV praised Singh and acknowledged his loyalty and his contribution to reforms. Then, in his characteristic deadpan manner, he said to his interlocutor, ‘A finance minister is like the numeral zero. Its power depends on the number you place in front of it. The success of a finance minister depends on the support of the prime minister.’
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In the past, self-reliance had been defined as securing ‘independence’ from the world economy, now self-reliance was being redefined as creating ‘inter-dependencies’ that would give others a stake in India’s progress.
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PV gave a new lease of life to the Indian economy by boldly implementing policies that his predecessors may have wanted to but did not. He imparted new self-confidence to Indian diplomacy by quickly building new bilateral relationships in a fast changing world. He also gave new hope to his party members around India by showing that the Congress Party need not depend only on one family to run a successful government. For all these reasons 1991 was a landmark year.