To the Brink and Back: India’s 1991 Story (11 page)

That
Jyoti Basu enjoyed a close friendship with and the esteem of the finance minister was evident by the latter’s almost instantaneous response to the former’s letter. What later became clear was that the prime minister also had enormous respect for the West Bengal chief minister. He was not satisfied that his finance minister had responded; he told his principal secretary and me that he, too, would like to reply. Hence, on 10 August, he wrote to
Jyoti Basu. The prime minister’s letter was more political than that of Manmohan Singh. He lauded West Bengal’s record in land reforms and democratic decentralization as worthy of emulation by other states. To placate the Left parties, he promised that the letter of intent to be signed with the
IMF would be tabled in Parliament.
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The prime minister saw no contradiction in what
Jyoti Basu and the thirty-five economists (in the previous chapter) were advocating and wrote that, in fact, the 24 July 1991 budget had implemented many of the suggestions being made.
Dr Asim Dasgupta, the West Bengal finance minister, released the prime minister’s reply in Kolkata on 20 August. I was happy that he had done so—not the least because now, I would not be accused of orchestrating the leak!

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Balance of payments.

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My best efforts to locate this letter failed. Consequently, I have used excerpts of the letter that appeared in
The Hindu
, 10 July 1991, p. 4. I can confidently assert that this was an authoritative leak!

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The finance minister’s letter to the managing director of the IMF dated 27 August 1991 was tabled in the Rajya Sabha on 16 December 1991, by which time much of the sting of having gone to the IMF had been lost. There were some hilarious moments while finalizing the letter of intent. An early draft shared by IMF officials spelt ‘labour’ as ‘labor’ and ‘programme’ as ‘program’ and I had to point to the principal secretary that such obvious slips-ups would demonstrate the real authorship of the letter of intent!

ith the urgent need to arrest declining exports immediately and boost them in the medium-term, it was obvious that trade policy changes were a matter of priority. The PMO did not take any direct interest in designing these changes, despite the fact that
A.N. Verma, the prime minister’s principal secretary, had been commerce secretary. This was because in
Montek Ahluwalia, the secretary of commerce, we had a man who knew exactly what needed to be done; and in P. Chidambaram we had a super-efficient, ‘hands on’ commerce minister.

My only side-role in this area was on the night of 3 July 1991
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when I was summoned by the prime minister at about 9 p.m. On entering his drawing room, I found the finance and commerce ministers in his company. After a brief discussion, a decision was taken to abolish the export subsidy in the form of
cash compensatory system—or CCS, as it was popularly known—that was given to exporters. Indeed, after the two-step devaluation, it made little sense to continue with this subsidy.

The finance minister wanted an immediate announcement of this decision, but I told the trio that it was rather late to give out the news for it to have any impact in the papers the next day. Nonetheless, I did some quick thinking and decided on my own that I would inform
The Economic Times
since the CCS issue was of interest to the exporters who read that daily. Accordingly,
The Economic Times
the next day had a front page box news-item that read thus:

As soon as I reached office on 4 July,
A.N. Verma conveyed to me the prime minister’s unhappiness that only one paper had carried the news. Obviously, some of his friends in the media who felt left out had complained to him. I told the principal secretary that it was around 11 p.m. or so that I was told to communicate this decision and that given the late hour I had tried to get it out in the best way possible. But my explanation did not wash and I was told to be more careful in future.

As far as the substantive trade policy reforms themselves were concerned, P. Chidambaram announced them officially on the morning of 4 July. After the devaluations of 1 and 3 July, this was the third major move of the Rao government. The commerce minister was in his element and handled the press meet with his characteristic aplomb and dexterity. But as soon as the package was announced—and the fact that the office of the
Chief Controller of Imports and Exports (CCI&E) would be abolished—there were howls of protest within Udyog Bhavan which housed the Ministry of Commerce. The protests continued even as the minister, in his defence, took recourse to the Congress’ 1991 manifesto and its commitment to abolish five regulatory agencies in the first 730 days in office. A compromise was struck a little later and the CCI&E took on a new avatar, Indian-style, as the
DGFT (Directorate General of Foreign Trade).

It took less than ten hours, as
Ahluwalia writes, to get the
4 July trade policy reforms approved by the prime minister and the finance minister. The reforms themselves—anchored in removal of discretionary controls in the form of licensing, and in the linkage of all non-essential imports to exports (other than in the case of petroleum, fertilisers, steel and other essential purchases)—were widely welcomed by industry. They vastly simplified the procedures for imports while giving a huge boost to exports. Besides, they granted a large degree of automaticity in the issue of replenishment licenses which were being renamed
exim (for export-import) scrips.

The commerce minister, for the first time ever, unambiguously declared that the rupee would be made fully convertible on the trade account in three to five years. This meant that Indian currency could be freely exchanged for dollars to import goods. This was actually accomplished in less than two years.

But the former prime minister,
Chandra Shekhar, was most unhappy and very biting in his criticism in Parliament. He accused the government of becoming a slave of the World Bank and said that the
4 July package had been prepared by that organization. The commerce minister issued a pointed rejoinder on 19 July giving the long lineage of the 4 July package. In his defence, the commerce minister pointed out that the basic blueprint for trade policy reforms was prepared by the
Abid Hussain Committee,
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which had submitted its report way back in December 1984, and this blueprint was further expanded in June 1990 when
V.P. Singh (a former commerce minister himself) was prime minister. But the most telling riposte was the revelation of the commerce minister that
Chandra Shekhar’s
Cabinet Committee on Trade and Investment (CCTI) itself had on 11 March 1991 approved a new export strategy which contained the main elements of the 4 July package; the commerce minister at that time was
Dr Subramanian Swamy.

The 4 July package was only the first step. Much remained to be done. This was but natural since a highly complex system built over a period of more than four decades was being dismantled. The system was so convoluted and opaque that I used to joke that the most eagerly awaited import-export document every year was not the one on trade policy, but rather,
Takht Ram’s commentary on it.
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Besides, the name of the organization itself—the Office of the
Chief Controller of Imports & Exports—betrayed a particular mindset, where a case could be made for controlling imports, but controls on exports were to be pioneered at one’s peril.

Finally, on 13 August 1991, the commerce minister made a detailed statement on trade policy in the
Lok Sabha, going beyond the 4 July initiatives. A new package for 100 per cent export-oriented units and for units in the export-processing zone was announced. Public sector monopoly on the import and export of items was considerably curtailed. Details of how the new exim scrip instrument would operate were made explicit, as were those for the system of advance licenses to provide exporters with duty-free access to imports. The statement demonstrated that the Rao government was determined to push through both policy and institutional reform in support of accelerating exports. The commerce minister conveyed this in so many words.

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The events of 3 July 1991 have been discussed in greater detail by Montek Ahluwalia in a festschrift, published in honour of
P. Chidambaram, titled
An Agenda for India’s Growth
, edited by Sameer Kochhar (New Delhi: Academic Foundation, 2013).

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The Abid Hussain Committee on Trade Policies (1984) contained recommendations regarding import policies and export-promotion strategies—including the exemption of CCS.

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Takht Ram was a retired officer of the CCI&E who had spent years in that organization.

he prime minister addressed the nation again on Doordarshan and over All India Radio on 9 July.
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He may have felt that with Parliament about to begin the next day he needed to send political signals regarding his overall approach. Like in the past, he asked me for a draft. Having learnt my lessons well, I gave it to him in the full expectation that it would not be used one bit at all.

I was pleasantly surprised. The speech the prime minister delivered was entirely in keeping with the draft I had given him. He said:

When I spoke to you last, I promised quick and bold measures to restore our sick economy to health. We have taken the first step to fulfil that promise. This is the beginning. A further set of far-reaching changes and reforms is on the way.

For the last eighteen months, there has been paralysis on the economic front. The last two governments postponed taking vital decisions. The fiscal position was allowed to deteriorate. The balance-of-payments crisis became unmanageable. Non-resident Indians and foreign leaders became more and more reluctant to lend money to India.

Consequently, India’s external reserves declined steeply and we had no foreign exchange to import even such essential commodities as diesel, kerosene, edible oil and fertilizer. The net result was that when we came to power, we found the financial position of the country in a terrible mess.

Desperate maladies call for drastic remedies. And that is what we have done. And that is what we will continue to do.

Exchange Rate Adjustment

The Reserve Bank changed the exchange rate of the rupee. This was done so that we can export more. More garments, more leather products, more gems and jewellery, more agricultural products made in India will be sold abroad. This will not only earn us foreign exchange but also create new employment at home.

And why do we need to earn foreign exchange so badly? Not to import luxury items but to buy commodities like kerosene and diesel, fertilizers, edible oil and steel. We produce these commodities, but what we produce is not enough. We are stepping up our production, but for some time, we have to import.

The adjustment in the
exchange rate will discourage the import of non-essential goods. And will therefore save foreign exchange for the import of essential goods of mass consumption. It will also end uncertainty about the future of our currency and will encourage non-resident Indians to send more money to be deposited in their accounts in India.

After changing the value of the rupee we undertook a major overhaul of the trade policy. Our message was simple—you cannot import if you do not export. We cut down on export licenses so that our exporters do not face hurdles. We eliminated subsidies so that the money saved could be better deployed in welfare and employment programmes.