1991 - Liberalization

After the fall of Chandra Shekhar’s government, elections were called in 1991. During the campaign, Rajiv Gandhi got assassinated. That set off a sympathy wave – during the phases before Rajiv’s murder, the Congress won 50 of the 196 seats; post-that, it won 177 of 285 seats. The Congress now had enough seats (227) to try and form a coalition government. But who should head it? There was no obvious “heir” from the Family. With 100 of the 227 seats being from the south, PV Narasimha Rao (PV from here for short) had an edge, and he became the Prime Minister, writes Sanjaya Baru in 1991.

 

The first order of business was, yes, that balance of payments crisis. PV’s first choice for Finance Minister was IG Patel, who had been Chandra Shekhar’s first choice too. Patel declined both PM’s offers to be the Finance Minister (FM). As PV continued his search, he found Manmohan Singh.

 

In his first address to the nation, in his deadpan manner, PV made a couple of statements that indicated what he was going to do wrt the economic crisis:

“The government is committed to removing the cobwebs that come in the way of rapid industrialization. We will work towards making India internationally competitive, taking full advantage of modern science and technology and opportunities offered by the evolving global economy.”

Few paid attention – his delivery put most people to sleep, and nobody believed a minority PM could do much anyway.

 

There were two schools of thought on how to deal with the crisis – one favoured “import compression”, i.e., reduce imports to the bare minimum and not much else; PV lent his weight to the other view of trade liberalization and tighter integration into the global economy.

 

But that would require Indian companies to be competitive at a whole new level. For which they needed economies of scale, i.e., large scale and volumes. But from Nehruvian times, there had been fear and mistrust of large corporations and their greed and profiteering. Hence policies had imposed artificial limits on how much any one company could produce. Apart from making companies inefficient, costlier and thus uncompetitive globally, that policy encouraged corruption (either to waive the limit or for inspectors to ignore violations). PV’s solution?

“Legalize capacity by removing regulations that legitimized expansion of scale.”

PV understood such a measure would lead to accusations of abandoning Nehruvian principles. So:

“In typical PV style, he made PJ Kurien, a junior minister announce this radical change.”

 

That policy change, huge though it was, would take time to yield benefits. In the meantime, PV had to take short-term measures – so he mortgaged additional gold (46.91 tonnes), in addition to Chandra Shekhar (20 tonnes).

 

Another short-term measure that was necessary was that forementioned import compression. There were 2 options on how to achieve that: (1) Put physical controls and outright bans; or (2) Devalue the rupee. (Devaluation means if 1 USD was earlier equal to 5 rupees; it would now be equal to say 6 rupees. How does this help? Well, exports become cheaper and imports become costlier. That becomes an automatic incentive to import less and try and export more).

PV and Manmohan both understood devaluation was the right choice but:

“Devaluation was a bad word in Indian politics.”

Both men decided to bite the bullet anyway – but they decided to devalue in 2 steps, rather than one-shot. The inevitable backlash followed the first round and PV got nervous. He wasn’t sure if the 2^nd round of devaluation was do’able, but Manmohan pushed through anyway (Manmohan rightly understood that if they didn’t do the 2^nd round, they might as well have not done the 1^st round).

 

After devaluation, the government moved to liberalize trade. To that goal, PV put an immediate end to the Cash Compensatory System (CCS). This was basically a subsidy the government gave exporters to “compensate for all the inefficiencies” of the Indian system created by those limits on production. PV’s message was both consistent and clear – devaluation had made exports easier, so there was no place for a CCS like scheme anymore. (Not surprisingly, many in his cabinet, including Chidambaram balked at the idea, but PV pushed through anyway).

 

All of these measures also conveyed the message to foreign investors – the (minority) Indian government was willing to make the hard decisions, and India was now open for business with the world. In his next address to the nation, PV announced:

“My motto is – trade, not aid. Aid is a crutch. Trade builds pride… There is a change in outlook, a change in mindset everywhere. India too cannot lag behind if she has to survive…”

 

And then came Manmohan’s famous budget. If a single line is to capture its significance, it was that it committed to reduce the government’s fiscal deficit. In theory, there are two ways to do that: (1) increase revenue collection, or (2) reduce expenditure. #1 would take time, and India didn’t have that luxury, so #2 it was going to be. (Chandra Shekhar’s FM, Yashwant Sinha was ready with a similar budget but never got to present it thanks to Rajiv’s shenanigans). The most famous (prophetic?) lines from that budget were:

“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 is one such idea.”

 

Oh, remember that “delicensing and decontrol” announcement that junior minister PJ Kurien had made? PV timed it to be done on the morning of that famous Manmohan budget. Why? The media’s focus is on the budget, so the “big bang” policy change drew no attention whatsoever.

“This was clearly by design.”

Like any seasoned politician, PV knew how to be sneaky. In this case, he was being sneaky for a good end goal.

 

PV and Manmohan had done what neither Rajiv nor VP Singh had the courage to do, what Chandra Shekhar and Yashwant Sinha never got a chance to do (despite their willingness).

 

PV would later insist he had done “reforms with a human face”, i.e., job losses in the public sector would be avoided. Many cite this as evidence that he was a “reluctant liberalizer”. Perhaps. Or maybe he was just being pragmatic – massive layoffs would have brought the trade unions on the street, and the reforms may have had to be rolled back. My take is PV was pragmatic, that he was willing to make some compromises and hope that his successors would continue on what he had started.

“PV’s real contribution to economic reform and liberalization was his political management of a contentious process.”

After all:

“All the talented and committed economists and civil servants in government could not have pushed reforms without political support.”

 

Once PV was asked how much credit should go to Manmohan. In his deadpan style, he replied:

“A finance minister is like the numeral zero. Its value depends on the number you put in front of it. The success of the finance minister depends on the support of the prime minister.”

 

The author reiterates at the end that the book is about the 1991 reforms, not PV.

“Its central character could well have been Chandra Shekhar… He lost his place in history because he lacked the numbers in Parliament.”

And yet it is true that we must give credit to the people who get things done.

“The year made him (PV). He made the year. For India, it was a turning point.”