To the Brink and Back: India’s 1991 Story (8 page)

The
Katyal and Chawla interviews were quintessential
Narasimha Rao. He philosophized like nobody else could, but got his point through—that there was no alternative to devaluation. He remained emphatic, although I very well knew, as did the finance minister, how deeply uncomfortable he was with the move, and had, in fact, tried hard to stop the 3 July devaluation.

The devaluation decision proved very contentious and criticism did not stop. In Parliament, the finance minister had to face much flak from across the political spectrum. But he took the fight to his critics much to the delight of the prime minister and all of us.

On 16 July 1991, for instance, the Rajya Sabha witnessed this exchange during question hour. It was in response to a question asked jointly by
Gurudas Dasgupta of the
CPI and
Ajit Jogi of the Congress. Dasgupta actually asked the question.

Shri Gurudas Dasgupta (West Bengal; CPI): My question to the hon. Minister is that the balance of payments position cannot be corrected if there is no increase in the export India does. Over the last ten years there have been a number of so-called adjustments in the exchange rate and even then there has been no appreciable improvement in the export of the country. In 1966, devaluation was resorted to. Even then for the first few years export increased by only 4.5%. In this background, I would like to know how the hon. Finance Minister is optimistic that there can be increase in export so that the balance of payments position can be corrected.

[…] Part (b) of my question is this. There is a danger that the increase in export may be over-counter-balanced by the increase in the price of import […]

Part (c) of my question is whether the devaluation was resorted to because the Government of India was under duress from the non-resident Indians and also that it was under duress because of the World Bank conditionalities for getting the
loan.

Dr. Manmohan Singh: I would like to answer the last part of the question first. We were not under any duress from anybody then and we are not [under] duress now. This was a sensible decision to do in the circumstances in which our country was placed and is now. Therefore, I don’t have to bow to the IMF or to anybody else to do what is in the best interest of the country.

Shri
Gurudas Dasgupta: The Prime Minister said yesterday that the banks would have been underrun if devaluation was not done. What have you to comment on that?

Dr. Manmohan Singh: The Prime Minister was mentioning the objective conditions prevailing then and what we did was a response mechanism which stopped those types of destabilising activities becoming a flood. This is not a question of functioning under duress at all. The first part of the question is: will devaluation lead to an increase in export? The hon. Member has referred to several previous instances. Let me say that in this country there seems to be a strange conspiracy between the extreme left and extreme right that there is something immoral or dishonourable about changing the exchange rate. But that is not the tradition. If you look at the whole history of India’s independence struggle before 1947 all our national leaders were fighting against the British against keeping the exchange rate of the Rupee unduly high. Why did the British keep the exchange rate of the Rupee unduly high? It was because they wanted this country to remain backward and they did not want this country to industrialise. They wanted the country to be an exporter of primary products against which all Indian economists protested. If you look at Indian history right from 1900 onwards to 1947, this was a recurring plea of all Indian economists—not to have an exchange rate which is so high that India cannot export, that India cannot industrialise. But I am really surprised that something which is meant to encourage the country’s exports, encourage its industrialisation is now considered as something anti-national.

This was Professor Manmohan Singh at his scholarly best. He was also unusually combative. After all, his doctoral dissertation was on India’s exports and he had challenged the ‘export pessimism’ syndrome of the 1950s. I mentioned this to a couple of colleagues and said that sitting in the Officials Gallery and listening to the finance minister answer questions and make his interventions was a wonderful lesson in real-world macroeconomics.

³⁶
Two insider accounts of that episode are B.K. Nehru,
Nice Guys Finish Second
(New Delhi: Viking, 1997) and I.G. Patel,
Glimpses of Indian Economic Policy
(New Delhi: Oxford University Press, 2002). B.G. Verghese, then the prime minister’s information adviser, writes in his memoirs,
First Draft: Witness to the Making of Modern India
(New Delhi: Tranquebar, 2010) that the night before the devaluation, Indira Gandhi tried to relax by watching
Doctor Zhivago
and
Those Magnificent Men in Their Flying Machines
, but she admitted, ‘I am scared stiff’.

³⁷
The 6 June 1966 decision was taken by the prime minister on the advice of four key officials—L.K. Jha (the prime minister’s secretary), S. Bhoothalingam (the finance secretary), I.G. Patel (the chief economic adviser) and P.C. Bhattacharya (the governor of the RBI)—and ratified by the cabinet the previous day, on a Sunday. ‘The prime minister had agreed more by faith than understanding’; based on the
interviews of the author with S. Bhoothalingam, 14 April 1983, and L.K. Jha, 27 April 1983.

³⁸
The interview appeared in
The Hindu
on 10 July 1991.

othing exemplified the magnitude of India’s financial crisis in the early part of 1991 better than the need to use our gold reserves to raise money to pay for the country’s imports. This showed that we had become totally bankrupt. Of course, under Section 33(5) of the
Reserve Bank of India (RBI) Act, 1934, the RBI had the power to keep 15 per cent of its gold outside India
³⁹
and it could exercise that power on its own. But that power had never been exercised till the early months of 1991.

It was Prime Minister
Chandra Shekhar and Finance Minister
Yashwant Sinha—on the advice of the RBI Governor
S. Venkitaramanan—who first decided to use our gold reserves to raise foreign
loans to keep the wheels of the economy moving. On 16 May 1991, 20 metric tonnes of confiscated gold held by the Government of India was leased to the
State Bank of India (SBI). Two days later, SBI entered into a sale transaction with a repurchase option with the United Bank of Switzerland. This was before the Rao government came to power. This helped raise about US$200 million.

Once the new government came to power, gold transfers continued. This time it was the RBI that transported a total of 46.91 tonnes of gold to the Bank of England over four days—4, 7, 11 and 18 July 1991 (the last of which took Parliament by surprise). This enabled the country to borrow ‘for a period of one month at a time a total sum of about $400 million to help us tide over the serious liquidity problems we were facing.’
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The
SBI transaction involved the sale of confiscated gold at the prevailing market price with the option to repurchase it within six months. The four RBI transactions, on the other hand, did not mean outright
sales but were meant only for ‘parking’ that
gold in the vaults of the Bank of England, permissible by law, against which the Bank of England advanced the RBI some temporary financial assistance.

Right from the start, Parliament was agitated about the gold transfer issue. Members cutting across party lines protested loudly. Congress MPs did not spare their own government. On 12 July, the matter rocked question hour and there were heated exchanges between the finance minister, and
K.P. Unnikrishnan and
Chandrajeet Yadav, both of whom had been leading lights of the Congress in the past.

K.P. Unnikrishnan (Kerala; JD [Janata Dal]): Sir, the distinguished Finance Minister for whom I have high respect, regard and affection […] I would also request him not to quibble around and acquire the habit of politicians and to be straightforward in this House and tell the truth […] There has been another transaction. It is said that it had been taken for safe custody of Bank of England walls, as though our walls are not protected. A former Reserve Bank Governor, his former colleague has called it a national humiliation. I would like to know why the second transaction was necessary.

Dr. Manmohan Singh: […] He has made a reference to the statement of my distinguished predecessor as the Governor of the Reserve Bank,
Dr. I.G. Patel. I had spoken to him this morning […and] he has been grossly misquoted. He had not said that what we have done is dishonourable or a humiliation. What he has said is that all of us should feel very sad that we brought our country to this pass that these transactions have to be done. I share that perception and all of us in this House and our people outside must reflect as to what has gone wrong with this country that we have to do such painful things.

But there were some fine moments of statesmanship, too, when the finance minister defended his predecessor,
Yashwant Sinha, who was being attacked by Congress MPs during question hour in the Rajya Sabha on 16 July:

Dr. Manmohan Singh: Mr. Chairman Sir, there is no relation between the stock of gold held by the Reserve Bank or the Government and the price level of the country. So this decision in regard to gold which was taken by the previous Government—some gold went when they were in power, some gold went when we were in power—if you are asking what impact it will have on prices, my answer is a plain “no”—that there is no relation between what was done and the domestic price level.

The second question that was asked was, was this transaction absolutely necessary and at what level was the decision taken? I am convinced that in both these cases these transactions were very necessary. The former Finance Minister and the former Prime Minister took these decisions. It was not a happy decision. I know that the then Prime Minister was greatly pained by that decision and I share the sense of pain. It is not something of which I am very proud—that I have to sell the country’s gold—but the House must appreciate the situation in which this country stands […] We are not very proud of what we have done but you have my assurance that we considered all options, the pros and the cons, the costs and the benefits. In the circumstances, this was the best possible decision that could be taken.

Shri
Yashwant Sinha (Bihar; SJP [Samajwadi Janata Party]): Sir, I am very grateful to the Finance Minister for the way he has spoken. I must say that it has been a totally non-partisan approach that the Finance Minister has brought to bear upon a question to which unnecessary sentiment is sought to be attached […] I must point it out because the Finance Minister has justified what our Government had done and I must express my gratitude. At the same time, I must also say that I am very glad that he has put the record straight because a junior spokesman of that party called it a national betrayal. He does not agree with that and I am glad about that.

Sadly, that was the first and last time Yashwant Sinha was so magnanimous. After that, he never lost any opportunity to taunt, bait or criticize Manmohan Singh, first as finance minister, and later as prime minister, in the bitterest language possible. I have always believed that this was because he was sore that the credit for ushering in economic reforms was not given to him, but was instead rightly bestowed on Manmohan Singh.

We had thought that all gold transactions had been completed by 16 July 1991. But reports of a fourth transaction hit the headlines on 18 July. Parliament was agog once again. It was then that it was decided that the finance minister would make an authoritative statement on the gold transfers from the RBI to the Bank of England. Accordingly, he made this statement in the Lok Sabha late at 6 p.m. on 18 July itself. He recounted the history of all transfers and why they had become essential. But the two important new points he made were:

1.   The movement of gold had to be done without prior public announcements for security reasons.

2.   No further gold transfers would take place.

The prime minister mused about gold once or twice. This was particularly so after
Atal Bihari Vajpayee, a leading member of the
BJP, who would become India’s eleventh prime minister, had spoken on the budget in the Lok Sabha on 5 August 1991. Vajpayee had said:

[…] There is about 10,000 tonnes of gold in our country, out of which 5,000 tonnes is hoarded and 5,000 tonnes have been brought into the country through smuggling. If we succeed to […] get 2,000 tonnes of gold from the public—I am not talking of 5,000 tonnes of gold but only 2,000 tonnes of gold […] it would be worth 36 billion American dollars […]

If we sell gold worth 25 billion dollars to clear our debts and invest the rest of gold in such a way that it would fetch us 10 percent profit, then it would help us in overcoming the financial crisis.

My view, which I shared with the prime minister, was that what the
BJP leader was suggesting was unrealistic given the role gold plays in our lives; in any case, it was a suggestion for the medium-term. It was no solution for the days and months ahead. For that, the IMF route was the only way out, something that the
V.P. Singh and
Chandra Shekhar governments had recognized.
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