To the Brink and Back: India’s 1991 Story (7 page)

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Jamaica’s prime minister, Michael Manley, saddled with an ailing economy, approached the IMF for balance-of-payments support. The terms of the May 1978 agreement— which made the government devalue its currency, impose new taxes on consumer goods, and reduce expenditure—aggravated political and social tension within Jamaica, and led to unrest, violence, and opposition protests.

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Many of Manmohan Singh’s critics would write and say that he had worked in the IMF and/or the World Bank. The truth, however, is that he never had.

ight from the beginning, the prospect of devaluation horrified the prime minister. It was not surprising. He belonged to a generation that believed that the 6 June 1966 devaluation forced upon Indira Gandhi was a political and economic disaster. Little did he realize that almost exactly a quarter of a century later, he would be in the hot seat. Of course, numerologically, 6.6.66 couldn’t be matched!

While the truth of the
devaluation episode under Indira Gandhi
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is considerably more complex than is popularly held, it is also a fact that the US and other Western donors did not keep their side of the bargain and the international support promised to India as a quid pro quo for devaluation did not materialize. This could well have been for the political stances India took on issues of concern to the Americans, especially Vietnam.

Even before he became prime minister,
Narasimha Rao had quizzed
Pranab Mukherjee and me on the pros and cons of devaluation. Two or three days after he assumed office, Rao informed me that
Nikhil Chakravartty, the respected editor of
Mainstream
, had met him and told him that devaluation should be avoided at all costs. He further informed the prime minister that Dr
Arjun Sengupta, the noted economist who had worked with Indira Gandhi during 1981-84 and had subsequently been India’s executive director at the
IMF, was firmly of the view that devaluation was unnecessary and that if given an opportunity he could help negotiate an IMF package without its dreaded conditionalities. The prime minister respected Nikhil Chakravartty and wanted me to speak directly to Arjun Sengupta, who was in Delhi then.

I met Sengupta, who I knew well, and he reiterated what he had told Chakravartty. He was keen to come back to India from Brussels, where he was our ambassador, and in keeping with his seniority, wanted to be designated principal finance secretary; this, he felt, would grant him clout with the IMF. Sengupta asked me to convey to the prime minister that he had also served as an adviser to
Michel Camdessus, the managing director of the IMF, which gave him a unique position vis-a-vis the organization. I transmitted whatever Sengupta told me faithfully to
Narasimha Rao. Nothing happened further on that front.

But then, on 30 June 1991, the prime minister asked me to meet him late in the evening at Hyderabad House, the official meeting place maintained by the Ministry of External Affairs, where he was hosting an Iftar dinner. When I met him after the banquet, he appeared very perturbed and said that he did not fully accept the business of ‘two-step devaluation’ which was being forcefully advocated by the finance minister. Later, I was to learn that Manmohan Singh had sent the prime minister a top-secret handwritten note suggesting devaluation—but in two phases. One devaluation was bad enough, but two in quick succession seemed to have shaken Rao. President
R. Venkataraman, who had been finance minister under
Indira Gandhi, had cautioned the prime minister and finance minister about a radical step like devaluation. While Venkataraman was against the very idea, that it was proposed to be carried out by a ‘minority government’ made it even more unacceptable!

I did not know what the finance minister had written to the prime minister. But I took the prime minister through the arguments for a two-step devaluation—that the first step was needed to test the waters and establish our credibility, and the second would be the real change. I told him that the markets were expecting a two-step devaluation. I also recall having told the prime minister that it was high time that we acknowledged that the exchange rate was a matter of, not pride, but a price. I reminded him that there was scholarly evidence to suggest that the 1966 devaluation was not such an economic disaster as it was made out to be. But I could see that
Narasimha Rao was completely unconvinced. He let me go after about ninety minutes. That was the first time I got to know that devaluation was on the cards.

As it turned out, the first
devaluation of the rupee—against major currencies (the dollar, pound, yen, mark and franc)—of between 7 per cent and 9 per cent took place on 1 July 1991. Within forty-eight hours, on the morning of 3 July, the second devaluation of about 11 per cent against the major global currencies was carried out. Thus the rupee had depreciated by something like 18 per cent in just two days.

The prime minister was certainly not amused. In fact, a little after the first devaluation, in the early hours of 3 July, he called up Manmohan Singh asking for the second devaluation to be halted. The finance minister argued with him but to no avail. Thereafter, Manmohan Singh called
Dr C. Rangarajan, the deputy governor of the RBI, at around 9.30 a.m., to ask him to hold back the second stage devaluation—only to be told that it had already been carried out that very morning at 9 a.m. The finance minister was, of course, delighted that this had been done, but conveyed the news to the prime minister less enthusiastically.

The two-step devaluation decision was taken purely between the prime minister and the finance minister, and was conveyed to the governor and deputy governor of the RBI. The finance minister had wanted it that way because he felt that given the 1966 experience, the cabinet would never give its consent.
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Of course, financial markets had expected the devaluation, although there were varying expectations regarding the exact quantum of change.

Once the second devaluation was announced, markets reacted positively and industry circles also welcomed the move. But predictably, the news caused a furore in Parliament and great sullenness within the Congress itself. The finance minister and the RBI governor, on their part, took great care never to use the word ‘devaluation’, always referring to it as ‘an adjustment of the exchange rate of the rupee’.

The finance minister called an unscheduled press conference on 3 July after his conversation with the prime minister, and defended the two-step devaluation, enumerating in detail the benefits that would accrue to the economy. But more importantly, he emphatically ruled out further downward revisions and gave a firm assurance that no further devaluations would take place.

In an interview with the journalist
Paranjoy Guha Thakurta (Annexure 4), when asked why he had opted for devaluation, and a two-step one at that, he said:

We, in this country, live under certain illusions—economists have been responsible for it—that devaluation is something immoral, anti-national. You look around the world. Over the past year, both the Soviet Union and China have gone in for massive devaluation of their currencies. Our people—the economists, the journalists, the politicians—somehow believe that devaluation is sinful and dishonourable. It is nothing of that sort.

The exchange rate is just a price. If you are in the business of selling,
your
price has to be competitive. And who are our competitors? They include South Korea, the countries of south and south-east Asia, and Pakistan. Look at what they have done. I think their exchange rate policies have been aggressive and designed to enhance their competitiveness. Now, if in this situation, we do nothing, our balance of payments, which is already precarious, would worsen further.

[…Regarding why devaluation was in two stages] to be honest, I had to test the reaction of the market, test the political reaction and prepare the country for a bigger devaluation. That was why we launched a trial balloon. The initial reaction was favourable, the market took it calmly. […]

Q: Did you go in for a sudden devaluation instead of a gradual one—say, spread out over a month—because time was running out?

A: A gradual kind of devaluation could not have been done in the present situation. Normally, you have creeping devaluation which is not noticed. If I allowed a gradual slide, the rupee could have suddenly slumped. In this country and abroad, people were saying that the
rupee was so weak that no government would be able to sustain its value. The ideal thing to do would have been to devalue at one go, but I had to prepare domestic public opinion. I’m grateful that the Prime Minister has understood the gravity of the problems.

The prime minister, on his part, was clearly a reluctant protagonist in the two-step devaluation drama. But once it happened, he defended it aggressively, both in Parliament and outside. On 7 July, he spoke to
K.K. Katyal of
The Hindu
and answered questions on devaluation thus:
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Q: The thrust now will be on economic reforms, structural adjustments as the Finance Minister has been saying. Somehow the assurance that, in this process, the independence of judgement would be preserved is missing. Would you like to say something?

PM: It is not missing. We have been emphasising it time and again. In fact he has been saying that the main request for all these reforms would be to see that we do not lose our economic independence. If we go on drifting we would certainly have lost it, if not now, after six months. In the next one week or two, we would have been defaulters. And once you become a defaulter, a country of India’s size, what will happen is something that you can easily imagine. Then what happens? Can you keep your economic independence after that? Therefore what the Finance Minister said is absolutely correct and what I say is this is the only way of keeping our economic independence in the long run. We had to take hard decisions so that we don’t go into a situation where it becomes irretrievable. Then you lose economic independence. So it is in order to prevent that horrendous situation that these decisions were taken.

Q: What haunts both experts and non-experts is the experience of 1966. The rupee was devalued but exports did not pick up. Could there be assurance that 1966 would not be repeated?

PM: We will have to carefully weigh the steps which need to be taken hereafter and we are at it. We have not really left anything for test and I am sure that whatever might have happened at that time, I am not quite sure what to say about that because I was at least personally not fully aware of the details—so without making any comment about what happened in 1966 this time I may say that we will not leave anything to drift. We will take all the consequential actions that are needed and we are already taking those steps.

On 8 July 1991, the prime minister’s interview with
Prabhu Chawla of
The Indian Express
appeared, and here, too, the prime minister was unapologetic and anything but defensive.

Q: Given the minority character of your government, do you feel confident as Prime Minister?

A: Yes, I do feel more confident now. Although the responsibility is very heavy, the Congress party can discharge this very effectively. And the kind of response which the Government has got from the people during the last three weeks has provided us greater confidence.

Q: Is it due to this that you have resorted to strong economic measures like steep depreciation of the rupee?

A: We mean business now. The country could not wait any longer. These decisions should have been taken long ago.

Q: But is it not improper to push through such strong measures without proving your majority on the floor of the House?

A: These steps were so urgent that I could not have waited. Both from the point of view of time and substance I had to do what I did.

Q. Was it done under IMF pressure?

A: No, it was done because it was more or less in the pipeline. It was done because much time was lost in not taking these decisions earlier. I am glad we have done it. If we had not done it, the alternatives would have been disastrous.