On 18 June, the election results were announced. The Congress had won 232 of the 521 seats, making it the single largest party in Parliament. But even with around eighteen more seats from coalition partners, it was still short of a majority. The BJP had jumped to 120 seats; more tellingly, its vote share had jumped from 11 per cent in the 1989 elections to 20 per cent in these 1991 elections.51 The third main political grouping was the incumbent National Front, led by V.P. Singh’s Janata Dal, and supported by the communists.
It was clear that a Congressman would be prime minister. It was also clear that the party would not allow that man to be Sharad Pawar. Party elites as well as a majority of MPs supported Rao, as did Sonia Gandhi. The bureaucrat-turned-Congressman R.D. Pradhan—who knew both Rao and Pawar well—arranged a meeting between them.52 Pawar indicated he would withdraw, provided Rao name him deputy prime minister.53 Rao refused, offering only a ‘senior post’ in the Cabinet. The terms of surrender were being negotiated.
The world still thought that the race for prime minister was on. The next morning, 20 June, the headline in the Times of India blared that the Congress leadership was to meet, and Sharad Pawar was ‘very much in the race’.54 On seeing the news, Sanjaya Baru, then editor of the Economic Times, hurried to Rao’s house. The gate was open, unguarded. Baru drove his Fiat car inside, entered the bungalow, drew the living room curtain, and peeked inside. Wearing a white dhoti, white banyan and white slippers, Rao was seated on a sofa talking to a visitor. Rao noticed Baru, whose bureaucrat father he knew from their days in Andhra politics, and beckoned him to enter.
‘Have you seen this morning’s Times of India? What do you think?’ Baru asked.
‘You ask the Maharashtrian editor and bureau chief,’ Rao replied. They all laughed, for the insinuation was clear—that Dileep Padgaonkar and Subhash Kirpekar were from the same state as Sharad Pawar. Baru left, unsure of what the day would bring.
Later that morning, Sharad Pawar announced he was withdrawing from the contest. The newly elected MPs were paraded into Parliament and asked who they wanted as prime minister. One such MP remembers: ‘It was all orchestrated. They had already decided who should win.’ P.V. Narasimha Rao was elected, unanimously, head of the party in Parliament, the precursor to prime ministership. In the time-honoured tradition of Congress ‘consensus’, his name was proposed by rival Arjun Singh.55 The prime minister and his Cabinet would be sworn in the next morning.
It was twilight by the time Sanjaya Baru returned to Rao’s house. Power had electrified the place. The gate was ringed with guards; Congress workers jostled outside, chanting ‘Narasimha Rao ki jai.’
12 Willingdon Crescent housed the Sanjay Gandhi Memorial Trust. Despite a less than cordial relationship with Sanjay, Narasimha Rao had made himself a trustee, giving him access to a large bungalow in the heart of Lutyens Delhi. Rao spent the evening of 20 June there, working with P.C. Alexander. They were deciding who the new Cabinet ministers would be.
Most names suggested themselves. As mere first among equals, Rao had to accommodate party heavyweights, including rivals Arjun Singh and Sharad Pawar. Rao made only two personal decisions. He was determined that S.B. Chavan, fellow devotee of Swami Ramananda Tirtha, be given a senior Cabinet role, ensuring at least one confidant in his inner circle. As we shall examine in detail in the next chapter, he also asked Alexander to suggest, as finance minister, an apolitical economist capable of dealing with the West.
‘I want an internationally credible face,’ Rao told Alexander.56
‘You are in such a deep hole at the moment, you need a banker’s banker,’ Alexander replied.57
He recommended two names—the director of the London School of Economics, I.G. Patel, and the economist Manmohan Singh. At 7.30 p.m., Rao called up his friend President R. Venkataraman—who had been finance minister earlier—with both names. ‘[Rao] said that he would prefer one with some knowledge of the international financial institutions and experience in dealing with them,’ Venkataraman remembered.58 The President of India liked the names of both I.G. Patel and Manmohan Singh.
Rao’s decision to ask for an out-of-the-box finance minister was instant brew rather than well-soaked beans. In his twenty years of running ministries in Hyderabad and Delhi, Rao had never once held the finance post. He had said little on the economy, and the few views he proffered were protectionist. Jairam Ramesh says that between 5 and 18 June, he and Pranab Mukherjee had briefed Rao on the economy on three occasions.59 Rao was aware of his own blind spot, telling Jairam: ‘I don’t understand economics . . . Pranab and you have to explain.’60
But that ignorance changed when, a day before he was to select his finance minister on 20 June, the Cabinet secretary Naresh Chandra bought him an eight-page document, prepared by senior bureaucrats of the previous government, laying out just how imperilled the economy was. Rao put it off, but when Chandra told him that India was on the brink of catastrophe, Rao took an hour to read it.
Then he reread the document. He read it again.
It talked of fiscal discipline, dismantling trade barriers, and removing the licences, permits and anti-monopoly laws that bound domestic entrepreneurs.61 In short, it contained the core elements of what would be the ‘big bang’ reforms of the coming months. This blueprint had been prepared before the elections, before Manmohan Singh had even entered the finance ministry.
By the time he had finished absorbing the document, the protectionist Rao had given way to the pragmatic Rao. The first order of business was to choose a finance minister acceptable to the West.
When I.G. Patel declined the job on 20 June, Alexander called up Manmohan Singh at his house that night. A quarter of a century later, Manmohan Singh remembers that he didn’t take the phone call seriously, since politicians make all sorts of commitments.62
The next morning, 21 June 1991, Manmohan woke up early and made his way to the University Grants Commission, of which he was chairman. His office phone rang. Congress president and parliamentary party leader, Narasimha Rao, was on the line. He asked Manmohan to be his finance minister. The swearing-in ceremony for the new government was scheduled around noon,63 and Manmohan was asked to come for a meeting on the economic crisis slated just before the oath. Manmohan returned home, changed into more formal attire, and made his way to North Block. Rao was seated at a long table while the bureaucrats who ran India’s economy gathered around him. The meeting, held just before Rao was sworn in, indicated what the priority of the new government would be.
Montek Singh Ahluwalia, a former World Bank employee who had briskly risen to the post of commerce secretary, was among those invited to this meeting. ‘I felt honoured,’ Ahluwalia remembers, ‘I felt I was in the new prime minister’s inner circle.’64 Ahluwalia was the cheerleader for economic reform within government. His presence indicated which way the new prime minister was planning to move. As Ahluwalia puts it, ‘In the meeting [Rao] knew that economic policies had to change . . . he understood what was going on.’ The presence of Manmohan Singh was also telling. Ahluwalia remembers: ‘That was when I knew that Manmohan would be finance minister. Why would he be at the meeting otherwise?’65
A few hours later, at exactly 12.53 p.m.,66 P.V. Narasimha Rao was sworn in as the tenth prime minister of India by President R. Venkataraman at Rashtrapati Bhavan’s Ashoka Hall. The British-designed room has an elaborate red Persian painting mounted on the ceiling that is from the nineteenth century. Rao and his Cabinet seemed from that same era, 100 years away from the youth and vigour that Rajiv Gandhi symbolized. One magazine termed it ‘Back to the old guard’,67 with an opposition leader sniping about ‘old wine in old bottles’.68 Confirming the impression, a visibly ailing Narasimha Rao drove up to the grand forecourt of Rashtrapati Bhavan in a private vehicle. The man who a month ago was retiring to a life of writing and prayer, left in a cavalcade of cars, emperor of India.
The crown was made of plastic. Though prime minister in name, Narasimha Rao had little real power. His s
urvival depended on the goodwill of other Congressmen who considered him a usurper of the Nehru-Gandhi throne. Rao had no political base within the party and had to rely on the very men out to unseat him.
There were also limits to Congress power. The inheritor of the national movement had been going through a slow decline. The party that once dominated Parliament was now reduced to a minority. It would take just a single vote on the floor of the House, if the Opposition voted together, for the toppling of Rao. And then there was the incapacity of the Indian state, a rope binding even the most powerful of leaders. Undermanned, bankrupt, and for sale, the Indian state machinery had long corroded. The Nehruvian state was no more a vehicle for social transformation. Not only did the latest driver of that vehicle have no legroom, the car was too battered to move.
The road ahead was also potholed. A suicide bomber had just blown up Rao’s Congress predecessor. Violence in the states of Assam, Kashmir and Punjab threatened to blow up the nation. With the slow collapse of its patron the Soviet Union, India was being orphaned on the world stage. Its defence forces were teetering; bereft of Soviet-made spare parts, many of India’s combat aircraft could not take off. Mass mobilizations around Mandal and Mandir, the demands for reservations for backward castes and a Ram temple in Ayodhya, threatened more violence. Most urgent of all, there were just weeks left before India would default on repaying its foreign loans.
Indians with options began to migrate, and those who remained, resigned themselves to an India destined to be second-rate. It was an acceptance of mediocrity symbolized by the Ambassador car, a 1950s British Oxford Morris knock-off that had survived into the India of the 1990s, courtesy the regulation limiting competition. Outdated yet ubiquitous, the Ambassador crashed into the myth that an ancient civilization had taken its rightful place in the modern world. India was living in the past.
In his first speech to the nation on 22 June, delivered a day after being sworn in, prime minister Narasimha Rao reflected the national gloom. ‘The dangers posed to the country by problems in Punjab, Kashmir and Assam are very real,’ he warned. He spoke of the threats of communal violence, the failure of social schemes. But he dwelt most on the immediate challenge: the economy. A combination of factors had plunged the government into external debt, and India lacked the dollars to repay. Foreign lenders, the International Monetary Fund (IMF) amongst them, were withholding new loans. India was about to default and lose face in front of the world.
In his broadcast, Rao warned, ‘There is no time to lose. The government and the country cannot keep living beyond their means and there are no soft options left.’ He then laid out his vision of what reforms entailed. ‘We will work towards making India internationally competitive,’ he said, promising to remove ‘the cobwebs that come in the way of rapid industrialisation’. He challenged the system of controls that had caged the economy, vowing ‘to streamline our industrial policies and programmes’. He also broached the unthinkable. ‘We welcome foreign direct investment, so as to accelerate the tempo of our development, upgrade our technologies and to promote our exports.’69
The speech was drafted by the man himself, with help from bureaucrats chosen by the previous regime.70 Manmohan Singh, sworn into the Cabinet just a day ago, had yet to get a grip on the finance ministry. The rhetoric was Rao’s, Rao’s alone.
But India is a land resonating in rhetoric, where blueprints seldom leave the drawing board. Images of economic reform had been conjured up by politicians and bureaucrats before, most forcefully by prime minister Rajiv Gandhi in 1985. But after revving starts, they had sputtered to a stop, stuck in the swamp of licence-grabbing businessmen, permit-withholding bureaucrats, Left intellectuals quoting Marx, politicians worried about vote banks, and unions threatening strikes. With little power to wield and other crises to handle, how was Rao going to manage the vested interests that had sunk reforms in the past? What was Narasimha Rao going to do?
7
Rescuing the Economy, 1991–92
Two weeks after Narasimha Rao became prime minister, a convoy of vans left the vaults of Reserve Bank in south Bombay. The security around the armoured vans was worthy of a head of state, for inside was India’s honour, around twenty-one tonnes of pure gold. The convoy travelled thirty-five kilometres north to Sahar airport, where a plane from Heavy Lift Cargo Airlines stood waiting.1 The gold flew by plane to London, into the vaults of the Bank of England. In return, the Narasimha Rao government received dollars that allowed it to delay default on its outstanding loans. Gold is wrought with sentiment in India, and when news of the deal leaked,2 the public uproar was accompanied by private shame. The economy was now so wrecked that India was pawning its family jewellery.
The economic crisis of 1991 was hurtling India towards ruin. But even before imminent catastrophe, the India that prime minister Rao inherited was in disrepair. An elaborate system of government controls gave state-run firms a free run over vast stretches of the economy, stymied private entrepreneurs, and isolated India from international markets. The results were low growth, endemic poverty, a small middle class, broken infrastructure, and few consumer choices. This regime was innately unstable and every once in a while, the system tottered. There had been crises in 1965–67, 1973–75 and 1979–81.3 None, however, was more alarming than what India faced in 1991.
The simplest way to explain the financial mess that prime minister Narasimha Rao faced was that, by June 1991, India had enough foreign exchange reserves to pay for just two weeks of imports,4 while a minimum safe level was considered six times that amount—enough for at least three months’ worth of imports. Manmohan Singh, a former professor of international trade, knew what awaited India. He would say that in 1982, Mexico defaulted on its external debt obligations. For the next six years it was crippled by capital flight, inflation and unemployment. By the time the crisis ended in 1989, real wages had been halved.5
Three proximate causes had dwindled India’s dollar reserves. The Gulf War of 1990 had trebled the price of oil which India was buying from the world market, and had also diminished remittances from Indians working in the Middle East. The second reason was that Indians living abroad had withdrawn 900 million dollars’ worth of deposits from Indian banks between April and June 1991,6 panicking at political uncertainty in Lutyens Delhi. A third form of pressure on India’s foreign exchange reserves was due to reckless borrowing during the Rajiv years. Many of these were short-duration loans, and by 1991, they were due.
To avoid a default, Rao’s predecessor as prime minister, Chandra Shekhar, had taken a loan from the IMF in early 1991. So low was the trust in India’s ability to repay that the IMF had wanted India to pledge her gold. That loan had not been enough to solve India’s balance of payments crisis. By mid-1991, India was in need of a second tranche. The IMF refused. As Narasimha Rao put it, ‘ . . . in April 1991 . . . consultations were held with both the IMF and World Bank. The report of the discussions was that no fresh commitments of aid would be forthcoming until basic reforms were undertaken.’7 India’s executive director to the IMF, Gopi Arora, told Jairam Ramesh, ‘Our credibility was rock bottom.’8
The Gulf War, withdrawal of foreign deposits, and short-term borrowings were the immediate sources of the crisis. The deeper problem of the Indian economy was a weak foundation that left it vulnerable to periodic tremors. The state-controlled economy was persistently inefficient, with scant returns on investment.9 Anaemic industrial growth, low export levels, and bloated inflation were all symptoms of this chronic malaise. These symptoms, in turn, ensured measly taxation revenue, leading to stingy public spending. As we shall see in a later chapter, the irony was that in Indian-style socialism, there was precious little money spent on education, health and food for the poor.
The argument for reducing state control over the economy would convince the formerly protectionist Narasimha Rao in a single day in June 1991. But that argument had been evident for a decade at least. Despite this, opposition from powerful interest group
s vested in the licence raj had thwarted prime minister Indira Gandhi and her three successors from opening up the economy. As Narasimha Rao envisioned the economic changes essential for his country, he also contemplated the barricades he would have to climb over.
The first obstacle was that Rao’s party was a minority in Parliament. Unlike Indira Gandhi in 1980 or Rajiv in 1984, Rao did not have the numbers to impose his legislative writ. His very survival was contingent on the opposition BJP and the National Front not voting together to convey their lack of confidence. Some of his adversaries might have privately agreed with him. The National Front leader, V.P. Singh, was Rajiv’s finance minister when some liberalizing reforms had been attempted in 1985. And the other opposition, the right-wing BJP, was largely supported by north Indian traders who wanted the government off their backs. These parties also knew that with perestroika in the Soviet Union, India too needed to change.
The problem was that the V.P. Singh of 1991—by now a messiah of the backward castes—was not the reformer of 1985. And the BJP’s base of traders and small manufacturers was opposed to competition from foreign companies. The Marxist Left had also done relatively well in the 1991 elections, winning around forty-nine seats. They were against pro-market policies they felt would injure the poor.
This legislative handicap made Narasimha Rao politically feebler than any global leader who had embarked on reforms. Once Deng Xiaoping was in control of the Communist Party of China, he had few checks on his power. The same was true of the East Asian strongmen, from Singapore’s Lee Kuan Yew to South Korea’s Park Chung-hee. And while Margaret Thatcher and Ronald Reagan had to operate within a democratic system of checks and balances, they had come to power with clear majorities. Narasimha Rao, leading a minority government in a fractious democracy full of veto players, had none of these luxuries.
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