Months after the Congress government headed by Rajiv Gandhi exited following the 1989 general elections, P Chidambaram who was a junior minister in that regime met a senior government official on a flight. The man introduced himself to the Congress leader as Chief Controller of Imports and Exports in the ministry of commerce, heading an office, which was associated with the infamous ‘licence raj’. The former minister told the official that he was baffled as to why there should be someone “controlling” exports at a time when the country was desperate for foreign exchange. The first thing which ought to be done was to shutter that office and ease controls, he told the shocked official.
Chidambaram did not have to wait long. Less than three weeks after taking over as commerce minister in the Narasimha Rao government, and hours after the two step devaluation on July 3 1991, he announced a new trade policy package marked by freeing up imports and knocking off an export subsidy - the Cash Compensatory Support. The office of the Chief Controller of Imports and Exports was not shuttered but lost much of its clout after the trade liberalisation and rechristened the Directorate General of Foreign Trade. The official who headed it then was a mute bystander as Chidambaram and the commerce secretary A.V.Ganesan drafted a new 100-page export import policy.
The trade policy and devaluation of the rupee had to precede the budget of the new government and the new industrial policy given that the foreign exchange reserves were then just over a billion dollars and there was the grave prospect of a default on servicing external debt.
But this story and many other things associated with the economic reforms of 1991 - specially the game changer of a new industrial policy -- are also reflective of what economist and former central banker, Rakesh Mohan described as a “coincidence of history” or “constellation of circumstances”.
A meeting of minds
Apart from Narasimha Rao who provided the all-important political backing for these reforms, what Mohan hints at is the unique coming together of a group of like-minded officials -- all of whom had worked on various policy drafts in economic ministries well before 1991. These included Manmohan Singh, who in the months before the July budget of 1991, was privy to discussions including the draft industrial policy, disinvestment, devaluation, cutting expenditure and subsidies, and the proposal to mortgage gold in his role as Economic Adviser to the Chandrasekhar government. Singh had also previously occupied other top jobs in the Indian economic establishment such as the governor of the Reserve Bank of India and Secretary in the Ministry of Finance.
There were others like A N Varma who had worked on a new industrial policy during the V P Singh regime along with Mohan, besides Montek Singh Ahluwalia who had produced a document detailing across-the-board changes while working in V P Singh’s PMO. At the RBI there was the solidity of Governor S.Venkitaramanan, a former finance secretary, and his deputy, C.Rangarajan.
As Singh himself admitted five years ago in an interview, there was nothing original about the raft of reforms - with many local expert committees having provided home grown solutions. As he said then “all he did was to put it in a coherent way.”
That marked the first phase of opening up. In the financial sector, there was the entry of foreign portfolio investors, a new window for Indian companies to raise capital abroad by issuing equity to overseas investors, a new stock exchange to provide competition, statutory status to SEBI, new capital norms for banks and listing of state owned lenders besides the entry of private banks.
In the real sector, the telecom, aviation, banking and oil sectors were opened up to private players. Subsequent governments built on these introducing structural reforms and also boosting infrastructure, a legacy of the Atal Bihari Vajpayee government leading to the emergence of a more open economy. Economist Vijay Kelkar said at a meeting of the India Policy Forum earlier this month that much of the credit should go to what he calls political risk entrepreneurs – or leaders rather than technical experts.
But progressively, with the low hanging fruits having been plucked in the first flush of reforms, these risk entrepreneurs appear to have found the political challenge of pursuing new reforms tough later.
A changing world
Like the 1983 World Cup win, there has been a lot of commentary celebrating the 1991 reforms too. Iraq’s invasion of Kuwait in mid-1990 and the Gulf War in 1991 triggered a Balance of Payments (BoP) crisis in India with a flight in NRI deposits, and the refusal of overseas lenders to roll over short-term credit after credit downgrades. It was this crisis that prompted the government to make a break from the past after having sought the assistance of the IMF. Finance Minister Manmohan Singh who had to counter charges of being a staffer of IMF told the Rajya Sabha on July 31 1991 that the only way of preserving the economic sovereignty of a country was to deal with those causes which brought the country to a virtual state of bankruptcy.
But few recall that India was an outlier during this period. Globally, the East Asian economies were the flavour then while China already had a head start having kicked off reforms a decade earlier. Winds of change were already blowing then in East Europe and even in neighbouring Pakistan which had announced privatisation. The Soviet Union was months away from collapsing.
In other words, even without a BoP crisis, any government would have been forced to carry out major structural changes. Almost all the political parties, including the Left, had recognised that with their election manifestos in 1991 promising change. Yet, given the ideological barriers then, devaluation was packaged as market-driven adjustment and privatisation as disinvestment while the new Industrial Policy was quietly tabled in Parliament on July 24, budget day, without drawing attention.
The Rao government did move quickly to restore economic credibility and to prevent a potential default. But there appears to be little recognition of the firefighting efforts by the caretaker government headed by Chandrasekhar, his finance minister, Yashwant Sinha, and officials in the finance ministry, and the RBI in the first few months of 1991 which first helped stave off a default by signing off on a proposal to mortgage 20 tonnes of gold and raise $ 200 million from Switzerland. Overlooked too is the fiscal crisis which had been building up in the later part of the 1980s during the term of the Rajiv Gandhi led government and the warning notes of then RBI Governor R N Malhotra and the report of the Prime Minister’s Economic Advisory Council.
The more things change…
Three decades later, the scaling up of the economy aside, the clean-up of state-owned banks which started in 1991 seems frozen in time. One of the fallouts of liberalisation was the collapse of development finance institutions led by IDBI with the government withdrawing access to cheap long-term funding. The wheel has now been reinvented with a new avatar of that in the making.
In 1992, while in the UK to woo investors, Manmohan Singh tried to assuage their concerns on protection of their investments by promising bilateral agreements.
The first of such agreements known as Bilateral Investment Protection Agreement (BIPA) was signed with the UK and other countries. It is those investment agreements which are being tested today as seen in the Vodafone and Cairns cases.
Political risk entrepreneurs may be better positioned to provide a perspective on these issues. Singh put it aptly in a 2016 interview to mark 25 years of liberalisation. “I think in a crisis we act constructively. When it is over, status quo takes over.”Views are personal and do not represent the stand of this publication.