To the Brink and Back: India’s 1991 Story (3 page)

This, then, is how I came to be where I was in that momentous period. The years of revival lay ahead and have been written about extensively. But June-July-August 1991 were early days of survival. The later impressive growth record of the Indian economy lent a certain amount of retrospective coherence to what got done in the initial weeks.

My stint with the prime minister was exceedingly short. But it was not uneventful and not without opportunities to play a small role in a truly landmark undertaking. I must, though, emphasize that this book is not
my
story at all. It is a story of how I saw Narasimha Rao and Manmohan Singh shake up India, and how, incidentally, some Sherpas helped them along the way.

¹
These verbatim proceedings are presently available online, but only from the year 1999.

²
The only other person who worked with Narasimha Rao and who has written about his prime ministership is P.V.R.K. Prasad. However, his book
The Wheels behind the Veil
(Hyderabad: EMESCO Books, 2013) deals with the period following April 1992 after Prasad had joined the Prime Minister’s Office as media adviser.

³
Montek Singh Ahluwalia had been additional secretary to Rajiv Gandhi.
V.P. Singh had retained and promoted him as special secretary.

⁴
This document titled ‘Towards a Restructuring of Industrial, Trade and Fiscal Policies’ was comprehensive in scope and was an agenda for radical reform, most of which was to be accomplished after June 1991. It was prepared in May 1990 and got leaked thereafter, which led to a furore within the V.P. Singh cabinet since neither the Commerce nor Finance Ministries were particularly enthusiastic about the agenda. The Planning Commission was also hostile to it. It has become part of economic folklore as the ‘M’ document, a name given to it by the economist Ashok Desai who was chief consultant in the Ministry of Finance between December 1991 and September 1993. If there is one single document that contains the economic reforms programme of the Rao government and of subsequent ones as well it is this ‘M’ paper.

⁵
Sam Pitroda was a close adviser of Rajiv Gandhi on technology but was entrusted with numerous other assignments as well.

⁶
R.D. Pradhan was union home secretary and governor of Arunachal Pradesh during Rajiv Gandhi’s prime ministership and had started working with the ex-prime minister in 1990 without a formal position as such, when he was also a member of the Maharashtra Legislative Council.

⁷
Suman Dubey, a well-known journalist, was a school and university friend of Rajiv Gandhi and had worked as an adviser in the Ministry of Information and Broadcasting between 1986 and 1989.

⁸
How Narasimha Rao came to be (s)elected as Congress president has been described by K. Natwar Singh in
One Life is Not Enough: An Autobiography
(New Delhi: Rupa Publications, 2014).

⁹
Pranab Mukherjee was a former finance minister and a leading ideologue of the Congress.

¹⁰
N.D. Tiwari was minister of finance and commerce between 1987 and 1988, after which he became the chief minister of Uttar Pradesh for the third time.

¹¹
Margaret Alva was union minister of state, personnel, public grievances and pensions in the Narasimha Rao government.

¹²
The various maneuverings leading up to Narasimha Rao’s election as leader of the
CPP have been described in P.C. Alexander,
Through the Corridors of Power
(New Delhi: HarperCollins, 2004); R.D. Pradhan,
My Years with Rajiv and Sonia
(New Delhi: Hay House, 2014); and B.G. Deshmukh,
A Cabinet Secretary Looks Back
(New Delhi: HarperCollins, 2004).

¹³
Of the 521 seats for which elections had been held in the general elections, the Congress had won 232 seats and along with its allies had a strength of 246 in the 10th Lok Sabha, short by 15 of a majority needed. (Source: Election Commission.)

¹⁴
Mani Shankar Aiyar was Rajiv Gandhi’s close aide and then a newly-elected Congress MP.

¹⁵
M.J. Akbar, now a Bharatiya Janata Party (BJP) MP, was a Congress MP between 1989 and 1991.

¹⁶
R.D. Pradhan in
My Years with Rajiv and Sonia
(New Delhi: Hay House, 2014) recounts how he persuaded Narasimha Rao, after he became prime minister, to induct me into his office, invoking a conversation with Sam Pitroda—a conversation that Pitroda denies ever having taken place!

¹⁷
P.C. Alexander had been principal secretary to two prime ministers, Indira Gandhi and Rajiv Gandhi. He had served as the governor of Tamil Nadu from 1988 to 1990.

¹⁸
A.N. Verma had been secretary in the Ministries of Commerce and Industry and was then appointed secretary of the Planning Commission during the Chandra Shekhar regime, when Naresh Chandra, his ‘junior’ from the 1956 batch of the Indian Administrative Service (IAS), was appointed cabinet secretary.

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. Normally, a safe level at that time was reckoned to be three months of import cover.
Foreign exchange reserves were US$3.11 billion at the end of August 1990. By mid-January 1991 they had fallen sharply to just US$896 million.

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. Exports to Iraq and Kuwait also came to a halt and we lost US$500 million or thereabouts on this account alone.

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). By October 1990, the
V.P. Singh government was tottering. At this time, non-resident Indians (NRIs)—whose deposits were a valuable source of dollar support to the economy—started withdrawing their money from Indian banks. The flight started in October 1990 and about US$200 million went out in just three months. The flight was to accelerate in the April-June 1991 period to almost US$950 million. It started declining slowly thereafter and the flight became an inflow only after the February 1992 budget.

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. Simply put, we could no longer borrow to ‘roll over’ the short-term debt.

Inflation was as much of a serious problem. The average annual rate of inflation during the five-year period 1985/86-89/90 was 6.7 per cent. But in 1990-91 (that is, for the financial year ending 31 March 1991), it had shot up to 10.3 per cent. It kept rising, reaching a peak of 16.7 per cent by the end of August 1991. High inflation in India in relation to the inflation rates in countries that were our major trading partners meant that the real effective exchange rate (that is, the nominal exchange rate adjusted for relative prices) had appreciated after October 1990. This made our exports expensive and non-competitive.

GDP (gross domestic product) growth had averaged 5.6 per cent per year during the tenure of
Rajiv Gandhi and it remained at around that level in 1990-91 as well. It is this that led critics of the
IMF route, taken by Narasimha Rao and
Manmohan Singh, to argue that India was facing not a problem of solvency but really one of liquidity. In reality, however, the two are not distinguishable in a sharp way, and it was certain that the short-term liquidity crisis carried the seeds of medium- and long-term insolvency. The crisis would definitely have impacted growth performance, sooner rather than later.

India’s short-term external debt had ballooned to alarming levels. By end-March 1991, short-term debt, whose original maturity was twelve months or less, had reached over US$8.5 billion, which was about 10 per cent of the country’s total external debt. Worse, short- term debt whose residual maturity was twelve months or less—that is, all principal replacements due under all
loans and credits in twelve months or less—was much higher at around US$13.6 billion. These were staggering amounts, especially given that our foreign exchange reserves (including gold) at the end of March 1991 amounted to no more than US$5.8 billion.

Chandra Shekhar replaced
V.P. Singh as prime minister on 10 November 1990, and
Yashwant Sinha became finance minister. It was a curious arrangement. The Congress, with 195 MPs and as the single largest party in Parliament, was giving outside support to a new party, then with 54 MPs, which formed the government. Nobody expected this peculiar situation to last very long and differences cropped up soon, first over the issue of permitting refuelling by US military aircraft and then over economic policy. In December 1990, the finance minister had announced a slew of measures to cut imports—which soon began to impact, indeed substantially reduce, both industrial production and exports.

By February 1991, when preparations for the budget were in full swing,
Pranab Mukherjee sensed that new taxes would be imposed to raise resources. Along with the Congress president,
Rajiv Gandhi, Mukherjee called on President
R. Venkataraman. Venkataraman writes thus in his memoirs:

On February 13, Rajiv Gandhi again called on me with Pranab Mukherjee, my successor as Finance Minister in 1982. Pranab Mukherjee told me that he had a discussion with
Yashwant Sinha and that he felt a harsh budget would be inappropriate at that time. He was also worried that inflation would be sparked off and bring unpopularity to the Congress if it supported these measures. Since Yashwant Sinha had earlier discussed the economic situation with me, I told Pranab Mukherjee of some of the compulsions of the Finance Minister. As an old colleague of mine, 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.

On February 19, the Prime Minister met me again at 8pm. He said [...] that he was presenting a vote on account to Parliament and not a regular budget. He added that matters had been discussed and settled between his party and the
Congress (I). He hoped to conclude the Parliament session by the end of March.
¹⁹

Earlier, the all-powerful
CWC had met at 10 a.m. on 19 February and the record of that meeting reads thus:

Political Situation

While discussing the political situation, some members pointed out to newspaper reports that Congress (I) wanted to withdraw its support to the
Chandra Shekhar government. Some others said that our party was supporting a minority government which was unable to tackle the economic crisis and other vital issues. In their opinion this government should be changed today itself instead of a few months. However it was general opinion in the meeting that the party stands by its commitment and it was its responsibility to see that the government did not fall during voting in Parliament but it was up to
Janata Dal (S) to be very careful about floor management.

Economic Situation

A study paper as prepared by Shri
Pranab Mukherjee on the economic situation was circulated to the members before discussion started.