To the Brink and Back: India’s 1991 Story (4 page)

The Congress president describing the present economic situation as very grave, informed the meeting that India did not have money to repay the loans, neither could it buy fertilizers, etc. The members also expressed concern on the grim economic situation of the country and called upon the Govt. to take the nation into confidence before asking the people to sacrifice particularly because in this financial year Rs 5890 crore were sought to be raised by taxation and increase in administered prices. The members were of firm view that a “Vote on Account” will be supported if it is presented in accordance with the Congress Economic Policy.

A note prepared by Pranab Mukherjee, which was discussed by the
CWC, influenced the thinking of the party and its top leadership in the first two-three months of 1991 (Annexure 2). As part of the note, Mukherjee had said:

The immediate task before the government is to remove the sense of panic and frustration and to restore confidence in the system. […] In order to generate resources for development, Government must join radical economic reform in line with international trends of de-regulation, competition and decentralization. To achieve national objectives and to tone up the functioning of the Public Sector, the following steps have now become necessary:

1.  The objectives of the public sector should be redefined to include

  a.  Self-reliance

  b.  Return on capital employed

  c.  Essential and infrastructural services.

2.  Financially unviable units with low social responsibility should be privatized through formulated ‘exit policy’.

3.  Greatest importance should be attached to performance, improvement and recruitment of top executives, reward and punishment systems, and performance evaluation systems should be redesigned to achieve these objectives.

It was clear that by mid-February 1991 the Congress had decided that, instead of a regular budget, an interim budget would be presented which would keep the system going till end-July, by which time a regular budget would be placed before Parliament. The expectation, clearly, was that by then there would be some improvement in the economic scenario.

Accordingly, Yashwant Sinha presented an interim budget or technically a vote-on-account on 4 March 1991. Two days later, in response to the furore caused by two Haryana police constables spying on Rajiv Gandhi’s residence,
Chandra Shekhar submitted his resignation and subsequently elections were announced for May 1991.

The crisis of early 1991 has been written about extensively by economists. It was by no means the first macroeconomic crisis that India faced but it was the most serious. There had been crises during 1965-67, 1973-75 and 1979-81 as well. The most comprehensive analysis of these crises is by
Vijay Joshi and
I.M.D. Little. Little, incidentally, was
Manmohan Singh’s doctoral thesis adviser at Oxford University. Joshi and Little write:

The crisis of 1990 had its roots in the policy stance taken in the aftermath of the second oil shock (1979-80). At that stage, exports stagnated due to real exchange rate appreciation. There was little current account adjustment. The fiscal position deteriorated. Both domestic and foreign debt increased rapidly. As a result, the underlying macroeconomic situation in 1985/86 was unsatisfactory.

There were some good policy decisions in the second half of the decade. The exchange rate was managed more flexibly and exports grew rapidly in response. There were moves toward industrial deregulation and trade liberalisation which contributed to rapid industrial growth. The policy environment was also benign. The terms of trade improved and world trade was buoyant.

The major mistake in macroeconomic policy lay in neglecting the danger signs evident in 1985/86 on the fiscal front. Fiscal deterioration was allowed to proceed apace. As a consequence, the current account deficit continued to worsen and domestic and foreign debt continued to increase at a dangerous rate. By the end of the decade, the macroeconomic fundamentals were out of joint. Even strictly a temporary shock like the Gulf War was enough to trigger a full-scale crisis.
²⁰

And what about the man who was to be finance minister very soon? What was his thinking at this time? Manmohan Singh had been economic adviser to
Chandra Shekhar for a very brief while and had become chairman of the University Grants Commission (UGC) in mid-March 1991. This must have given him time to reflect—and reflect he did, publicly, at least on three occasions before being inducted into the cabinet.

In an interview he gave to
Sanjaya Baru of
The Economic Times
on 5 March 1991, when he was still economic adviser to Chandra Shekhar, Manmohan Singh spoke of the dark clouds that had already gathered:

Q: But the foreign exchange bottleneck is still there. We went to the IMF in 1981 and once again now.

Dr. Singh: This was a way of dealing with structural change and responding to the two oil shocks in 1979 and now. In 1981 we needed the support because we had begun to liberalise the trade regime. There was no problem in handling that situation. I think the problems came later. Since the mid-eighties we have borrowed excessively and the
fiscal deficit has gone out of control. We could have avoided this situation if we had attended to the balance-of payments problem much earlier. Then there is the fact that the terms of assistance have hardened […] International interest rates have gone up, our debt profile has worsened and the terms of commercial borrowing have hardened.

Q: Would you then advocate approaching the IMF for even more than what we have already secured?

Dr. Singh: In the short run there is no alternative. We are very vulnerable at the moment. But an IMF
loan is no solution either. Ultimately India has to raise its own resources. We have to step up our exports.

On 6 April 1991, by which time he had become chairman of UGC, Manmohan Singh delivered the convocation address at the Institute of Rural Management, Anand and said:

India is now faced with a severe budgetary crisis and an unsustainable deficit in our balance of payments. A steady decline in public savings rate from about 3.2 per cent of GDP in 1985-86 to 1.4 percent in 1989-90 has been a major contributory factor. We have made an excessive use of borrowing both at home and from abroad to finance public spending. The productivity of public spending has also been far from optimal.

Finally, on 15 April 1991, he delivered the convocation address at the Indian Institute of Management (IIM), Bangalore (now Bengaluru) and had this to say about the economic situation:

India’s twin deficits—fiscal deficit and balance of payments deficit—have reached unsustainable limits. We have over-borrowed both at home and abroad to finance the growth of public spending. Thus, hard decisions are needed to overcome this crisis.

Manmohan Singh had offered a pointed diagnosis. Little did he realize that he would soon be called upon to administer the bitter medicine as well.

Interestingly, back in the early 1970s, Manmohan Singh had articulated equally intrepid views. The first intellectually solid and empirical assault on the economic policies of the 1950s and 1960s (more of the latter actually) came from
Jagdish Bhagwati and
Padma Desai in their classic
India: Planning for Industrialization
(London: Oxford University Press, 1970). Manmohan Singh reviewed this book in 1972 in
The Indian Economic and Social History Review
when he was chief economic adviser in the Ministry of Finance, and concluded by writing:

In view of the growing complexity of the Indian economic structure, the planning instruments have to be continually kept under review. It would be tragic if we were to become prisoners of instruments which, howsoever suitable at one stage of development, turn out later to be fetters on further development. Professor Bhagwati and Mrs Desai’s book is a welcome contribution to the debate on the efficiency of Indian planning techniques and should help stimulate some fresh thinking on instruments of controls. There is certainly a need to recognise that the knowledge available to civil servants is not necessarily superior to that of entrepreneurs and that the fact that some direct controls are good does not mean that more controls are better than less controls. At the same time, it would be much too presumptuous to claim that modern neo-classical economics has answers to all the economic problems in all parts of the world and that an efficient framework is always one based on the principles of economic liberalism.

Clearly, the man who would become finance minister in June 1991 was no prisoner of dogma and certainly no idealogue!

¹⁹
R. Venkataraman,
My Presidential Years
(New Delhi: HarperCollins, 1994).

²⁰
Vijay Joshi and I.M.D. Little,
India: Macroeconomics and Political Economy:1964-91
(New Delhi: Oxford University Press, 1994).

21 June 1991 dawned, and I was up earlier than usual. Knowing that the prime minister-designate,
Narasimha Rao, was an early riser, I called him up at around 6.30 a.m. and asked him whether he had any instructions for me, since in a couple of hours he would be sworn in as prime minister. He asked me to reach 12, Willingdon Crescent by 8.30 a.m. Upon reaching, in the adjoining waiting room, I found
S.K. Mishra, the then principal secretary to the prime minister;
Naresh Chandra; and
M.K. Narayanan, the director of the Intelligence Bureau. We were told that Rao was closeted with
P.C. Alexander and that it would take some time. I guessed that the two were discussing the names of those to be invited for the swearing-in in about four hours.

The four of us were engaged in some general chit-chat when the buzzer of
Khandekar’s telephone was pressed from inside. R.K. Khandekar was
Narasimha Rao’s Man Friday, and when he put the receiver down, I asked whether I should go inside. His reply was: ‘
Nahin thoda aur wait kijiye. Abhi Manmohan Singh se milane ko kaha hai
. (No, wait for a bit. For now, he has asked to be connected to Manmohan Singh.)’ I immediately understood that Manmohan Singh was to be invited as minister in the new cabinet, and that in all probability he would be given the finance portfolio.

P.C. Alexander has written with authoritative and, at times, hilarious detail in his memoirs on how Manmohan Singh came to be appointed:

I met Rao on 20 June immediately after his election as CPP leader and showed him my draft proposals. He spent quite some time with me dissecting them and specified to me the additions and deletions he wished to make. The next step was to match the man to the ministry.

Narasimha Rao had earlier hinted [to me] that he was thinking of choosing a professional economist as the finance minister. During his discussions with me on 20 June he had mentioned the name of Dr. Manmohan Singh and that of
Dr. I.G. Patel, another well-known and experienced economic administrator who had been recommended to him by a few influential individuals. I told him, without any hesitation, that my personal choice would be Dr. Manmohan Singh and I briefly explained why. I could see that Rao was very happy at my wholehearted endorsement of Manmohan Singh. He then said that since the Finance Minister’s post was a political one, he hoped that Manmohan Singh would not hesitate to join politics. I asserted that I was confident that Manmohan Singh would accept the offer. Being a good friend, I would be able to persuade him even if he expressed reservations about acceptance and I would tie up the loose ends, if any, quickly.

On 20 June when I telephoned Manmohan Singh’s house his butler informed me that he was on a trip to Europe and was expected to reach Delhi only much later that night. I left word that I would call again early in the morning the next day. When I telephoned his house at 5 a.m. on 21 June his butler told me that he was fast asleep and could not be disturbed. However, I insisted that I had to meet him without any delay and told him my name again hoping that my identity would make a difference. But it made no impression upon the man. Upon insisting that I had to talk to Dr. Manmohan Singh very urgently, he came on the line. I just told him that I had to meet him immediately, without giving any reason and that I would be reaching his house within a few minutes. When I arrived there, he had gone back to sleep as he was obviously jet-lagged. He could not have possibly guessed that I was on a very important mission—not only to him but also to the nation as a whole. He was hurriedly woken up again and I straight away conveyed to him my message. His immediate question was: What is your reaction? My response was that, if I had any other view, except to support his appointment
as finance minister, I would not have met him at that unusual hour. He was happy upon hearing this view but asked me whether I thought Rao would stand by him even if some of his own cabinet or party colleagues were to oppose his proposals and plans as finance minister at a later stage. I assured him on behalf of Rao that he would have the latter’s full trust and support. Manmohan was delighted at this assurance and gladly accepted the offer and requested me to convey his thanks to Rao. He reminded me with great warmth how he felt especially happy that I was again becoming an instrument in a major change in his official career. I told him that he was Narasimha Rao’s choice and my role in his appointment was mainly because I happened to be his friend as well as Rao’s.