Half - Lion: How P.V. Narasimha Rao Transformed India

by Vinay Sitapati

  A second hurdle to economic reform were established business houses, known as the ‘Bombay club’, and represented through various lobbying groups. Many of these groups had grown fat on the licence raj. Others wanted national controls to go but were fearful of international competition. As Manmohan Singh put it, ‘Competition hurts those who are inefficient. And therefore opening up the economy, bringing in domestic competition and competition from abroad does hurt some people, some industries.’10 Montek Singh Ahluwalia remembers that the message from industry was clear. ‘Domestic liberalization today, and external liberalization later.’11

  Left-wing intellectuals, influential in the media and universities, were yet another impediment to pro-market policies. They had skewered prime minister Indira Gandhi over the currency devaluation of 1966. They also had influence over Parliament as well as within the Congress. Narasimha Rao took them seriously. Many of his left-leaning friends (such as Nikhil Chakravartty, the editor of Mainstream) were opposed to opening up the economy. There were also subtler pressures from within the social circles the reformers moved in. Manmohan Singh’s daughter Daman Singh recalls that ‘1991 was the most miserable year of my professional life’. She was working for an NGO, and her colleagues were outraged at her father’s reforms. ‘They rudely cut me off at staff meetings, and refused to have anything to do with me outside them.’12

  But perhaps the tallest fence that had closed off the economy was the party of Jawaharlal Nehru and Indira Gandhi, which could not be seen as abandoning its commitment to socialism.13 The text of the 1991 Congress manifesto gave no hint that the party would pursue radical reform had Rajiv Gandhi lived on to become prime minister again. The manifesto swore to turn the economy around with ‘a dynamic and profit-oriented public sector’.14 It also promised to reduce tax, promote exports, efficiently utilize borrowed funds,15 and improve nationalized banks. These were vows to improve the licence raj, not eliminate it altogether. To underline just how wary of pro-market policies the Congress leadership was, the alternatives for the premiership, Arjun Singh and N.D. Tiwari, were old-style socialists against any tryst with the West. The one exception was Sharad Pawar, from the industrialized state of Maharashtra. But he was close to Bombay businessmen, and might have preferred oligarchic capitalism to genuine liberalization.

  Any attempt to open the economy had to overcome the stodgy Congress party, a divided Parliament, nervous industrialists and shrill intellectuals. Those who benefited from a centrally planned economy—rich farmers, trade unions, business houses, corrupt politicians and bureaucrats—were also powerful.

  The reason why a policy that benefitted the many could be held hostage to the interests of a few was because of a dynamic that the social scientist Mancur Olson had first explained.16 Since liberalization promised only future advantages, it did not yet have a political constituency. Indeed, many beneficiaries were yet unborn. On the other hand, the vested interests benefitting from the status quo were narrow and focussed—because of which they were well organized and formidable. Would Narasimha Rao, like four prime ministers before him, hit these rocks, reefs and shoals while navigating reforms? His first months in power provide the answer.

  19 June 1991, two days before he became prime minister, was the first time Narasimha Rao realized the magnitude of the economic crisis. As we saw in the previous chapter, he spent the evening reading the eight-page document that Cabinet secretary Naresh Chandra had given him on India’s financial predicament.17 When he left his hideout in Willingdon Crescent that night to make the short journey back to his home on Motilal Nehru Marg, he carried the note with him. Subramanian Swamy, a Harvard-trained economist and minister in the previous government, says he spoke to Rao on the phone that evening. ‘I know about the reforms you were working on [as commerce minister]. Send me the documents,’ Rao asked. Swamy replied: ‘I have one Cabinet note. The rest are typewritten sheets which I will get through to you.’ Swamy told Rao what he should do: ‘Focus on the economy.’18

  The next morning, Narasimha Rao was chosen as the leader of the Congress Parliamentary Party, the prelude to becoming prime minister. Rao had grasped by then that his choice of finance minister would signal his intentions to the West.

  That he had understood what needed to be done within a day of learning of the problem cannot be explained by economic acumen—Rao had none. It can only be explained by raw political instinct, cultivated through decades in government. What this rapid decision-making at such a crucial moment reveals is that—contrary to stereotype—Rao would dither not because he was unable to tell good policy from bad; he vacillated because sometimes the correct policy did not make for good politics. Where the right decision was also politically defensible—which liberalization was in the early days of his government—Rao could act with remarkable speed.

  His first action was to spurn the Congress leaders who wanted the finance ministry for themselves. Pranab Mukherjee had been finance minister from 1982 to ’84, a period referred to as the one that saw the origins of crony capitalism in India. Since he had sided with Rao during the tussle for prime ministership, Pranab was confident he would be made finance minister once again. A few hours after Rao was appointed CPP leader on 20 June 1991, Pranab Mukherjee told Jairam Ramesh, ‘Joyram, you will either be with me in in North Block, or South Block with Pee Vee.’19

  The prime minister-elect had other plans. Rao called up the intelligence bureau that afternoon, says Sanjaya Baru, based on what a senior IB official told him. A few hours later, the official entered Willingdon Crescent carrying the secret file on Pranab Mukherjee.20 There is no evidence of anything incriminating in the file, or if Rao even used it against Pranab. But one thing is certain. By that evening, Pranab was no longer in the running.

  When I.G. Patel had declined to be finance minister, P.C. Alexander had approached Manmohan Singh the same night. The next day, the morning of the swearing-in ceremony, Narasimha Rao called up Manmohan Singh and offered him the unenviable job of the finance minister of India. Twenty-five years later, Manmohan Singh remembers his conversation with Rao: ‘I said I will accept this only if I get his full backing. He replied, only half-jokingly, “You will have a free hand. If the policies succeed, we will all take the credit. If it fails, you will have to go.”’21

  A Cambridge-trained economist who had just served as the secretary general of the South Commission in Geneva, Manmohan Singh was very much the ‘internationally credible face’ that Rao was searching for. Manmohan had also held every significant economic post within the Indian government. The former teacher at Panjab University had risen to become finance secretary and governor of the Reserve Bank. In 1987, he had been awarded the Padma Vibhushan, India’s second-highest civilian honour. Like Narasimha Rao, Manmohan was both reformer as well as dutiful deputy. He had been gently critical of the licence raj, but never in ways that upset his political masters. In 1972, for example, he had reviewed the landmark India: Planning for Industrialization by the economists Jagdish Bhagwati and Padma Desai. The book was the first detailed critique of economic controls in India. Manmohan agreed with the book that ‘the knowledge available to civil servants is not necessarily superior to that of entrepreneurs’. But he was quick to add, ‘It would be much too presumptuous to claim that modern neo-classical economics has answers to all economic problems . . .’22 Manmohan’s balancing act was evident even in the late 1980s. As secretary general of the South Commission in 1987, he had overseen the writing of a startlingly socialist report.23 Yet, once back in Delhi, free to speak his mind, he was once again an advocate of free-market policies.24

  Rao had met Manmohan several times before. In late 1984, defence minister Narasimha Rao was also holding the position of deputy chairman of the planning commission. He met prime minister Rajiv Gandhi and asked to be divested of the post. Rajiv suggested the names of a few politicians as Rao’s replacement. An official working for Rao at the time remembers Rao telling Rajiv, ‘The planning commission head is a technical job, y
ou need a technocrat.’ Rao suggested the name of the governor of the Reserve Bank, Manmohan Singh. The prime minister agreed.25

  Six years later, Rao once again chose that same technocrat to man a technical post. Manmohan must have impressed Rao with the same contradictions he himself possessed. Rao wanted a visibly honest reformer whom the West could trust. He also needed a loyalist who could deflect domestic criticism away from the prime minister.

  Manmohan Singh would prove to be the perfect foil.

  Manmohan was only one of several reformers that Narasimha Rao chose to surround himself with. He wanted a principal secretary who could guide reforms from within the prime minister’s office. Alexander suggested G.V. Ramakrishna, a bureaucrat who had worked in finance before, and was at the time the chief regulator of India’s capital markets. But Narasimha Rao, whose failure as Andhra chief minister had taught him to be conscious of caste combinations, rejected the name, saying, ‘The principal secretary and prime minister should not both be south Indian Brahmins . . . that would send out the wrong message.’26

  Rao eventually chose Amar Nath Varma, a UP Kayastha who would go on to play as central a role as Manmohan Singh in Narasimha Rao’s liberalization reforms. Varma was then in the planning commission after having served as industry secretary. He had acquired a reputation for being a ruthless operator who could get things done, no matter what the cost in bruised egos. A Delhi-based lobbyist remembers the ‘Amarnath Yatra’ that he took a businessman on. When they entered the room, Varma was reading a file, his face at a downward angle. The businessman explained that he wanted to set up a factory. Varma replied, ‘Kal tak approval mil jaayega.’ (‘You will get the approval by tomorrow.’) Unused to a bureaucratic decision being made so quickly, the businessman turned ingratiating, referring to his ties with Narasimha Rao. Varma cut him short, face still lowered, but eyeballs raised upwards. ‘I told you, it will be done.’

  The project was approved the next morning.

  Also assisting Rao was Cabinet secretary Naresh Chandra. Selected by the previous government, Chandra was a career bureaucrat who knew how to speak his mind without causing offence. He combined the gravitas of Henry Kissinger along with Kissinger’s girth. Chandra had shepherded the fleeting economic reforms of the Chandra Shekhar government. A bachelor, Chandra considered the bureaucracy his true home and brought with him an encyclopaedic knowledge of government procedure. He would play a critical role in closing down the administrative tentacles of the licence raj with minimum fuss.

  Prime minister Rao had a soft spot for Chandra, and years later explained to an aide why. It was early 1991 and Narasimha Rao, then an opposition MP contemplating retirement, was strolling inside Parliament. He noticed commerce secretary Montek Singh Ahluwalia walking into the building, along with Cabinet secretary Naresh Chandra. Rao saw the security guard at the entrance beckon to only Ahluwalia to move aside for frisking. Chandra, standing behind Ahluwalia, discreetly signalled to the guard that he too wanted to be frisked so that the commerce secretary would not feel singled out. It was a simple gesture, but one that stayed imprinted in Rao’s mind.

  Montek Singh Ahluwalia was, in fact, the other official whom Rao drew into his inner circle.27 A Rhodes scholar, Ahluwalia had spent a decade with the World Bank in Washington D.C., before moving laterally to the ministry of finance as an advisor in 1979. This unusual move into the ranks of career bureaucrats had been supported by family friend and finance secretary, Manmohan Singh. Often wearing a reverse-folded blue turban (also Manmohan’s favoured turban colour), Ahluwalia was as animated an advocate of reforms inside the closed doors of government as he was sleep-inducing in public. It was a skill that ensured he outlived Rao and became the torchbearer of reform in later governments. Years later, in 1998, when the BJP finance minister, Yashwant Sinha, visited the United States and faced investors worried about reverses to Rao’s reforms, Sinha would reassure them that ‘Montek represented continuity while I represented change . . . that was how our system worked.’28

  Rao also recruited Jairam Ramesh as officer on special duty. Ramesh was a liberalizing policy wonk who would change garb in 2004 to become the left-leaning architect of the UPA’s welfare state. In 1991, he was Rajiv Gandhi’s point man on the economy. In the words of the economist Rakesh Mohan, ‘Jairam was the flag bearer for Rajiv’s policy inside Rao’s PMO [prime minister’s office].”29

  For commerce minister, the prime minister selected P. Chidambaram, a young lawyer from Tamil Nadu. Chidambaram, who combined a reputation for efficiency with a reputation for arrogance, was an unashamed liberalizer. He would work with Manmohan Singh to pilot trade reforms. But Chidambaram was livid that Rao had made him only minister of state, not a full Cabinet minister. When Jairam Ramesh conveyed this discontent to Rao, the prime minister replied, ‘Tell Mr Chidambaram that he will get a post commensurate with his capability.’30

  Rao also tried to poach liberalizers from other parties. He offered the previous commerce minister, Subramanian Swamy, a Cabinet position. Swamy says he refused to join the Congress. Instead, Rao gave him a post that was ‘Cabinet-rank’. The prime minister also wanted the reformist former finance minister—and Subramanian Swamy baiter—Yashwant Sinha to join the Congress, even meeting with him. But, in Sinha’s words, ‘these meetings did not yield any result’.31

  Narasimha Rao had chosen to give the finance and commerce ministries to known liberalizers, and selected a principal secretary with pro-market views. To make his intentions even clearer, Rao appointed himself as industry minister. His Cabinet secretary remembers why: ‘He was persuaded that if you are not minister for industry, then you cannot implement [industrial policy] reforms.’32

  The team, all political appointments directly made by Narasimha Rao, was in place. Now, they had to act.

  On 24 June 1991, four days after becoming finance minister, Manmohan Singh called twelve senior bureaucrats for a meeting in a small room in the finance ministry. Many were resistant to liberalization, but Singh left them in no doubt as to what their new role was. ‘This is what needs to be done,’ he ended, ‘and the PM has given me full authority to get it done. If any one of you have any difficulty with this, speak up now and we can find you other things to do.’33

  That same day, Narasimha Rao met opposition leaders one-on-one. When it came to the former prime minister Chandra Shekhar, it was Rao who called on him.34 The following day, opposition leaders, including V.P. Singh of the National Front and Jaswant Singh of the BJP, were briefed by the new finance minister. Rao was present but chose to say little. At the meeting, Manmohan Singh gave details of the crisis: ‘I told them all the things that were necessary to control the fiscal deficit, to change the thinking on industrial policy, to liberalise the economy.’35 Manmohan remembers that the Opposition was stunned; they had not realized the gravity of the situation.36

  Confiding in political opponents was both magnanimous as well as sagacious for a prime minister who did not have a majority in Parliament. Rao, however, chose not to tell the opposition leaders two things. That he would devalue the rupee soon. And that India’s gold was being mortgaged in return for foreign loans. Had they known, they would not have allowed these actions, regardless of how serious the crisis was. Rao later defended this deception. ‘About those two decisions, it was not fair, it would not be fair on their part to ask and it would not be fair at all on my part to divulge at that stage.’37

  Having bought some political capital, the new prime minister contemplated whether he should expend it on a symbolic first move. The Indian rupee was artificially valued against the dollar. This discouraged foreign investors and depressed exports. Before committing more funds, the IMF wanted the rupee devalued as proof that the new Indian government was serious. But Rao knew there would be a domestic backlash since the value of the rupee was linked to national vanity. Devaluation would hit imports as well as foreign debt. He also remembered Indira Gandhi’s devaluation of the rupee in 1966. Not only was that decision denoun
ced in Parliament and the media as a sell-out to Washington, the World Bank fell short on its promise of aid.38

  Rao was also under pressure from left intellectuals to not lower the value of the rupee. Nikhil Chakravartty asked him to avoid the move.39 But Manmohan Singh was adamant that devaluation was necessary, and the prime minister decided to back him. To take the opponents by surprise, they decided to first lower the worth of the rupee and then announce it as fait accompli. Manmohan did not even want the Cabinet to know, and planned to announce it in two phases. Rao agreed.

  On 1 July 1991, India lowered the value of the rupee. The change itself was minor, between 7 to 9 per cent against major currencies. In contrast, Indira had devalued the currency by 57.4 per cent in 1966. The next day, 2 July, Manmohan Singh sent Rao a note typed on green paper. The note suggested that Rao should spin the devaluation of the previous day in a way that sounded routine:

  ‘We are living in a world of floating currencies. Most currencies of the world are floating on a daily basis. Some days exchange rates go up next day they come down. India is no exception to this rule . . . we shall do everything in our power to restore the health of our economy and of the balance of payments.’40

  This dissembling had little effect. While the media cheered Rao, opposition members were furious. The Communist Party of India (Marxist) termed the downward revision of the rupee as a ‘very dangerous precedent’, while the BJP spokesperson K.R. Malkani said it would compound the already critical economic situation.41 Atal Bihari Vajpayee claimed that these were ‘drastic steps’ and that the government ‘should have taken the people into confidence’.42 Congress ministers, who had also been kept in the dark, were uneasy.