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Reuters/Kamal Kishore
Right time, right man.
25 YEARS

Memories of 1991: The final months before the Indian economy was finally unshackled

Shankkar Aiyar
By Shankkar Aiyar

Ten years after the 1991 turnaround, Deepak Nayyar, then finance secretary, confirmed that “a blueprint for the change that in fact came in June-July 1991 was not a bolt from the blue; the plans were laid out in detail during Mr [Yashwant] Sinha’s tenure. The first step towards some fiscal adjustment was taken in December 1990 after consultations with the IMF when a supplementary budget was presented to raise revenues.”

Which is why Yashwant Sinha claims paternity for the liberalization of 1991, although unfortunately for him the government he was part of couldn’t pull it off.

With just fifty-two MPs, Chandra Shekhar needed the support of the Congress to survive. Within the Congress, there was considerable disquiet over the moves being made by the Chandra Shekhar government…

What the Congress was actually afraid of was Chandra Shekhar’s ability to turn disastrous situations to his advantage. As The Financial Times of London observed, the Congress was trying to pull the rug out from under Chandra Shekhar because he was turning out to be an “uncomfortably successful” prime minister.

By mid-February it was clear that the days of the Chandra Shekhar regime were numbered. The spin doctors of the Congress had zeroed in on the issue of foreign policy to stoke public anger. On 16 February, the Congress Party threatened to withdraw its support and topple the Chandra Shekhar regime unless it withdrew the refuelling rights granted to US warplanes…

Congress now needed an excuse to topple the government. And it was duly provided on 2 March. Prem Singh and Raj Singh, two constables of the Haryana Police, were arrested outside 10 Janpath, the residence of Rajiv Gandhi. The Congress preferred to assume the worst—the two constables had been spying on Rajiv Gandhi at the behest of Om Prakash Chautala, then chief minister of Haryana and, more importantly, son of Devi Lal, who was deputy prime minister in the Chandra Shekhar government.

On 3 March, Congress demanded the ouster of the Haryana government. On 4 March, Finance Minister Sinha wanted to present an interim budget but the Congress refused to let him. That marked the end of the Chandra Shekhar regime…

The economy was starved of money and credit was not just hard to come by but was also expensive. Interest rates had shot up and government was borrowing abroad at a shocking 2 per cent over the London Inter-Bank Offered Rate, the benchmark to pay creditors. NRIs were pulling out their deposits, adding pressure to the foreign exchange balance. India continued to beg for aid from the US, Japan and Germany…

The RBI governor explained to the prime minister the statute that allowed reserves to be deployed at times of crisis. India could raise money from international banks by offering gold as collateral. Chandra Shekhar agreed that it was a practical step…

The pawning of the nation’s gold reserves still remained a hugely contentious issue and the government didn’t want to access the reserves unless absolutely necessary. So, in May 1991, smuggled gold confiscated by customs was leased to the State Bank of India which, in turn, sold it to a Swiss bank to raise $200 million. The RBI then negotiated with the Bank of England and the Bank of Japan for an additional loan of $400 million, which would be secured by the gold collateral…

India bought itself time to deal with the crisis in the economy but disaster struck on the political front. On 21 May, Rajiv Gandhi, while campaigning in Sriperumbudur near Chennai in Tamil Nadu, was assassinated by terrorists of the Liberation Tigers of Tamil Eelam (LTTE)… The objective of the terrorists was not only to seek revenge but also trigger chaos.

However, the political class rallied to ensure that the election process was not interrupted. It is a tribute to India that the attempt to disrupt democracy was countered with courage and equanimity. When the results were declared, it became clear that Congress had barely scraped through.

Political instability fuelled economic uncertainty. Between April and June 1991, NRIs withdrew over $900 million from their bank accounts… The installation of P. V. Narasimha Rao on 20 June 1991 as prime minister brought some order to the chaos… the situation was tailor-made for Rao’s kind of politics… And, for a man who was making a comeback from retirement, there were no downsides.

At 9.50 p.m. on 22 June, in a late night televised address, Rao presented the plan to revive the economy. “There is no time to lose. The government and the country cannot keep living beyond their means year after year. There are no soft options left. We are determined to address the problems of the economy in a decisive manner. This government is committed to removing the cobwebs that come in the way of rapid industrialization. We will work towards making India internationally competitive.”

He declared that foreign direct investment would be welcome to accelerate development, upgrade technologies and promote exports…

There is no question that the credit for the reforms of 1991 goes to Rao. Among the first decisions he took as prime minister was to retain the ministry of industries portfolio. Having chosen Manmohan Singh as minister for finance, Rao brought in P. Chidambaram as minister for commerce.

It was decided that the budget would be presented on 24 July, which left the team less than a month to get everything ready. In Bombay, the RBI was faced with the twin challenges of managing the foreign exchange balance and restructuring exchange rates…

The two-step devaluation of the rupee, for instance, was not only hastened but also pushed through by executive fiat…

Even as all this was going on, the RBI had to manage a unique logistical challenge. It had to ship 47 tons of gold to the Bank of England. The earlier shipment of confiscated gold had been sent in tranches on commercial flights. However, the airlines, worried about the risk, objected. So the RBI chartered Heavy Lift Cargo Airlines for four flights to ship the gold in stages. The gold had to be shifted from the vaults of the RBI in South Bombay and first transported 35 kilometres by road to the airport before being loaded on to the aircraft…

The policy change would result in the dismantling of the Nehruvian way that the Congress had worshipped for decades.

On 24 July 1991, India finally honoured the promissory note it had presented to the lenders who had bailed the country out. The new industrial policy was unveiled by Prime Minister Rao, dismantling the licence-permit-quota raj of four decades.

The Indian economy was finally unshackled.

This excerpt from Accidental India: A History of the Nation’s Passage through Crisis and Change by Shankkar Aiyar is reprinted with permission from Aleph Book Company. We welcome your comments at ideas.india@qz.com.