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

by Vinay Sitapati

  To calm his own party, Rao asked the finance ministry to prepare a simple statement that he could read to the inner Cabinet. The chief economic advisor, Deepak Nayyar, sent him a note, explaining that ‘if we did not act decisively, default was almost certain by mid-July’.43

  Though Rao had not let on, there were rumours of a second round of devaluation. Manmohan Singh remembers this as his day of reckoning. Rao was under intense political pressure. But Manmohan Singh was unyielding that a second round take place, since the quantum of devaluation on 1 July had been minimal. Manmohan scheduled the second round for the next day, 3 July. Taken together, the rupee would lose about 20 per cent of its value.

  In the early hours of the next morning, the prime minister’s feet turned cold. He called Manmohan Singh and ordered him to ‘please don’t do it’.44 It was too late. When Singh called up the Reserve Bank deputy governor C. Rangarajan to ask him not to make the announcement, Rangarajan replied, ‘The horse has bolted. I have already announced.’ Embarrassed, Manmohan Singh offered to resign, saying, ‘Let the responsibility lie with me.’ Rao had always intended his finance minister as a scapegoat, but he did not want to sacrifice him just yet. ‘He backed me,’ says Manmohan Singh.45

  Manmohan used this new-found backing to empower his own team of reformers. He sent Rao a note recommending that C. Rangarajan was the ‘ideal choice for the membership of the Planning Commission’.46 Manmohan also inducted the endearingly irreverent Ashok V. Desai into the finance ministry. Desai had studied with Manmohan in the Cambridge of the 1960s. As ideologically pro-reform as he was outspoken, he would provide the finance minister with the intellectual ballast to take on the licence raj.47

  That would come later. On the afternoon of 3 July, Manmohan Singh met his protégé Montek Singh Ahluwalia to ask him to brief the commerce minister, P. Chidambaram, about export subsidies being abolished.

  Since an expensive rupee made it harder for Indian manufacturers to sell in the foreign market, the Indian government had created a Cash Compensatory Scheme, or CCS, for exporters—yet another example of how subsidy begot subsidy, i.e. how the Indian state first intervened in the market to create a distortion, then intervened again with a distortion in the opposite direction. But with the rupee now closer to its true value after the depreciation, an export subsidy was superfluous, and Manmohan decided to get rid of it.48

  Montek Ahluwalia and his commerce minister, Chidambaram, spent the afternoon of 3 July pondering the implications of what was being asked. A ministry meant to promote exports was being told to eliminate an export subsidy. Ahluwalia explained to Chidambaram that there was logic in what the finance minister was proposing, especially since they needed to save money. Chidambaram agreed to abolish the CCS.

  The removal of the CCS was sure to worry exporters. In order to assuage them, the commerce ministry decided to offer them an immediate sop. The ministry had already been considering major trade policy reforms involving new incentives for exports. This was in the form of an ‘enlarged replenishment licence entitlement’ which could be used to import restricted items. Chidambaram and Ahluwalia wanted this policy to be announced simultaneously with the abolition of export subsidy.

  Since this could only be done with the approval of the finance minister, they sought a meeting with Manmohan Singh to explain the proposal. He readily agreed, despite reservations from his officials. All three of them visited Narasimha Rao at his house that very night for his consent. In less than twelve hours, the policy had moved from farm to fork.49

  Rao was now left to carry the political burden. Opposition leaders complained that they had not been warned of these changes. Officials in Udyog Bhavan, the commerce ministry, were terrified that an entire bureaucratic apparatus grown fat on the economy had been dismantled overnight.

  Rao placated his adversaries by playing up the crisis. ‘Desperate maladies call for drastic remedies,’ he said in a speech on 9 July 1991.50 ‘The Reserve Bank changed the exchange rate of the rupee,’ he added, shifting the blame on to others. He also argued that the additional foreign exchange produced would be used to import everyday items for common people: ‘kerosene and diesel, fertilizers, edible oil and steel’. Finally, he linked this burst of reforms to Rajiv Gandhi’s legacy. ‘What we have done is a continuation of policies initiated by him.’ This was not true. Yet, Rao was hiding behind an icon of the Congress to justify the claim that ‘a bulk of government regulations and controls on economic activity had outlived their utility. They are stifling the creativity and innovativeness of our people.’51

  The speech, drafted by Jairam Ramesh, showcased the rhetorical weapons that Rao had in his armoury. He had alternated between blaming the reforms on the crisis, placing responsibility on others, citing the interests of the poor, and linking reforms to the vision of a deceased leader. Prime minister Narasimha Rao had learnt well from his failures as Andhra chief minister. He was now adept at the politics of reform, able to gauge his own constraints as well as those of his opponents. To avoid the traps set for a lion, he had learnt to tread like a fox.

  Devaluation done, the prime minister and his team turned to the next set of reforms. The need to change industrial policy—the red tape that so tightly bound private manufacturers—had been first acknowledged a decade earlier. Even during Indira Gandhi’s second term in office, there had been talk of a floating exchange rate, elimination of licensing and the removal of anti-monopoly laws. Rajiv Gandhi had begun his own stint as prime minister determined to make life easier for domestic firms. But the changes had been piecemeal, and by 1987, besieged by scandal, Rajiv lost his appetite for risk.

  In 1988, a year after Rajiv abandoned reforms, Rakesh Mohan, a Princeton-trained economist, joined the ministry of industry as economic advisor and began sketching the skeleton of a new industrial policy.52 The government changed, and Mohan’s attention was diverted elsewhere. In 1990, the new industry minister, Ajit Singh, ordered Mohan to work along with Amar Nath Varma (then industry secretary) to write a policy that would end the licence raj.53 The draft was ready in a few months, and it was revolutionary.54 In a significant reversal of policy presumptions, the private sector could operate freely in almost any industry, without prior government permission. But the recommendations gathered dust, mired in political infighting.

  Now, in July 1991, Prime Minister Rao—in his avatar as the new industry minister—gave Amar Nath Varma (now principal secretary) the mandate to convert that draft into policy. Varma called his friend, the then industry secretary, Suresh Mathur, for a discussion, along with Rakesh Mohan and Jairam Ramesh. He told them this was the chance they had been waiting for, since ‘the prime minister had deliberately kept the industry portfolio to himself’.55 By 7 July, Rakesh Mohan’s original draft had been polished into what would become the new industrial policy.

  Among Rao’s papers lies a copy of that draft, heavily annotated and underlined by the prime minister. The economics dilettante was taking the trouble to master the details himself. He would later say that freeing domestic entrepreneurs from state control was the single most important economic decision he would make.56

  Rao asked Jairam Ramesh for a summary of the changes so that he could brief his party. A five-page note reached the prime minister around 8 July. The next day, Rao met the CPP and informed it that he would announce comprehensive changes to the industrial policy soon. Rao was careful not to go into the details; he did not want the Opposition to pre-empt him.57

  A few days later, on 12 July, Rao confidante Kalyani Shankar—who had by now joined the Hindustan Times—published an article titled ‘Industrial Licensing to Go’. She wrote that ‘all industrial licences except for a short negative list’ would be removed soon. She even listed the significant features: automatic permission for foreign investment up to 51 per cent; an increase in the exempt threshold under the anti-monopoly law; the removal of phased manufacturing; and an end to other manufacturing limits.58 Jairam, terrified that he would be blamed for the leak,
rushed to the prime minister’s office, only to be informally told that the leak had come from the boss himself.59 Rao was testing reactions to the policy before formally announcing it.

  Three days later, Narasimha Rao stood up in Parliament during the vote of confidence in his government. As before, he made use of the threat to the prestige of the nation, urging the Opposition to give up their maximalist ideologies in the face of calamity. He quoted a Sanskrit verse to make his point: ‘Sarvanashe samutpanne ardham tyajati panditah.’60 (‘Faced with total ruin, the wise settle for half.’)

  That same day, 15 July 1991, Narasimha Rao asked for the note on industrial policy to be presented before the Cabinet—the final step before a policy is put into effect. Narasimha Rao’s appointment diary, maintained by his secretary, R.K. Khandekar, shows the following entry for 16 July: ‘10–11am: Meeting on industrial policy’.61 The Cabinet meeting was scheduled for 19 July, and a few days before, Rakesh Mohan (along with the bureaucrat N. Krishnan) was instructed to meet Arjun Singh in private to convince him of the merits of the policy. That meeting did not go well.62 When the Cabinet met some days later, ministers opposed both the style and substance of the draft policy. Arjun Singh and M.L. Fotedar, in particular, were outspoken in their hostility.63 Rao remained silent, leaving his finance minister to face the fury.

  The policy was sent back to the drawing board, but crucially, Rao ensured that the substance remained untouched. Jairam Ramesh worked, instead, to add a longish preamble which linked the new ideas to the fundamental ideals of the Congress, Nehru and Indira Gandhi. It worked. When the Union Cabinet met again, on the morning of 23 July, those who had opposed the policy earlier were reassured by the addition of the preamble.

  That afternoon, Rao convened a meeting of the CWC at his house. He began by saying that all that the new policy did was to reverse Indira Gandhi’s sharp leftward tilt in 1969, and take the country back to the more flexible 1956 policy resolution of Nehru. The Congress, Rao added, continued to believe in the ‘commanding heights of the public sector’.64 Having played one Nehru-Gandhi against another, Rao now let his finance minister speak. Learning from his political master, Manmohan invoked the 1991 manifesto to show that within it lay the seeds of the new industrial policy. This was far from the truth, but as Manmohan Singh came out of the meeting, Arjun Singh told him: ‘Dr Singh, you have read the manifesto more carefully than we have.’65

  The ploy had worked. Narasimha Rao, assisted by Manmohan Singh, had been able to take a policy that was in cold storage, make surface changes, and seamlessly link it to a Nehruvian past—all to drag his party behind the most revolutionary economic reform in the history of independent India. As Rakesh Mohan put it, “We had authored this policy before. Hum to likhte rahte hain [We keep writing]. But it would not have gone anywhere without a clear political mandate. I would give credit to Rao for his unwavering political backing.’66

  In parallel to the manoeuvring over industrial policy, was the manoeuvring over the budget, scheduled to be presented to Parliament on 24 July 1991. The budget consists of a report on expenditure, new schemes, taxation plans, and the budget speech itself.67 The budget is the financial statement of the government, a simple accounting exercise. Most countries do not consider it important. But over the years in India, it has become one of the few occasions when Parliament actually deliberates on policy. In 1991, it was the ideal platform for the government of the day to announce its vision.

  Preparations for the 1991 budget were coordinated by finance minister Manmohan Singh. He consulted at length with the ministries of industry, commerce, as well as the prime minister’s office. Holding the fort at the PMO was Amar Nath Varma, who had fast established himself as Narasimha Rao’s point man on economic reforms.

  Early in July, Varma instituted the Thursday afternoon meeting on economic policy in his office in South Block, near the prime minister’s room. Varma would lay out an opulent lunch, often with kebabs and cutlets,68 and ask the chief bureaucrats of various departments a simple question: What was this week’s reform? The fruits of the Thursday meeting would then be sent to the Cabinet for final approval. ‘Varma Thursdays’ would be the engine of reforms for five unbroken years. For the month of July 1991, these meetings were used to discuss budget minutiae, which would then make their way to a super draft, stored in the finance ministry.

  Since the budget was a sensitive document that businessmen would pay money to know in advance, its preparation was shrouded in secrecy. In the weeks before 24 July, everyone working on the budget lived locked-down in a basement in North Block. They had to eat and sleep there, with no telephones to connect them to the world.69 Only a select few, such as the finance minister, were allowed in and out of the basement. The draft would remain secret until it was read out by Manmohan in Parliament on 24 July.

  In his speech to the nation on 9 July, Narasimha Rao had hinted that the budget would pursue a reform agenda.70 But it is possible that the scale of what the prime minister wanted was not known to the mandarins in the finance ministry—some of whom were opposed to concessions to the West.

  A few days after, in mid-July, Manmohan Singh visited the prime minister’s office with the top-secret draft budget. A senior bureaucrat and visiting Indian diplomat say they were both present in the room when Manmohan Singh gave the prime minister a one-page summary of the draft. They remember Rao sitting in his chair and reading through the page, while Manmohan stood with them, waiting. Then, Rao looked up at Manmohan and said, ‘If this is what I wanted, why would I have selected you?’

  This explosive sentence has been vouched for by both officials independently. They had not, however, seen the page themselves, and there is no way to verify whether Manmohan Singh’s first draft was indeed less reformist than finally revealed. It was suspected, though, that two finance ministry officials tasked with helping Manmohan prepare the budget did not share his ideas.71 At the very least, however, the story shows that Narasimha Rao had a sharp sense of the kind of message he wanted to send on 24 July.

  In the lead-up to budget day, the prime minister met industrialists—many of whom supported internal liberalization but were worried that opening up to external competition would hurt their firms. Rao’s appointment diary shows that on 20 July, he met the long-established industrialist K.K. Birla.72 He also met the poster boy of the new entrepreneurs of the 1980s, Dhirubhai Ambani.

  In Rao’s archives lies a printed letter bound in light brown paper. While unsigned, on the top right corner, in Rao’s precise handwriting, is the word ‘Dhirubhai’.73 The letter begins by referring to the fiscal deficit and balance of payment crisis that India was facing. It does not suggest delicensing or external liberalization as the solution. Instead, it proposes that India raise 16,000 crore rupees by selling the government’s stake in public sector units.

  Such a suggestion would be soon implemented elsewhere. After the disintegration of the Soviet Union in 1991, the newly formed Russian republic would opt for the large-scale privatization of public sector enterprises. Many of these state assets were purchased at throwaway prices by businessmen with connections to the new government. This Russian-style privatization was more crony capitalism than genuine liberalization, and Narasimha Rao was being pressured to adopt a similar approach.

  The final draft of the budget, ready by 21 July, was groundbreaking. It overhauled the import-export policy, better connecting India to the world market. It also slashed subsidies, and made foreign investment easier. The budget was going to shatter the third pillar of the licence-permit-quota raj: isolation of India from the global economy.

  A day before the budget, bickering broke out between the ministries of industries and finance. Manmohan Singh wanted the budget speech to include the new industrial policy. This would send out a clear signal that the government was committed to both external and internal liberalization. But the bureaucrats at the industry ministry, recent converts to reforms, wanted glory of their own. They demanded a separate announcemen
t by the industry minister. The fact that the normally protectionist officials were falling over each other to take credit for reform shows how quickly the Narasimha Rao government was changing attitudes.

  The PM brokered a compromise. He sided with his industry ministry and ensured that delicensing was announced separately from the budget. At the same time, agreeing with Manmohan’s suggestion that a single signal be sent to the world, Rao ordered that it be announced on 24 July, the day of the budget.74

  Some commentators question this narrative, since the world was less interested in the internal reforms the industrial policy heralded, preferring the trade reforms that Manmohan’s budget contained. They claim that the decision to announce industrial policy on the morning of the budget was entirely Rao’s, and entirely Machiavellian.75 This was before the days of twenty-four-hour news and the Internet, and the day’s reforms would first be reported only in the next morning’s newspapers. Rao deliberately kept his industrial policy announcement for the morning of the budget, the theory goes, so that newspapers would focus on the evening budget, rather than the more politically sensitive overhaul of industrial policy.

  24 July 1991 was a hot day, and as parliamentarians streamed into the sandstone Parliament, they expected an evening of fireworks.

  The show began even sooner. At around 12.50 p.m., the minister of state for industry, P.J. Kurien, got up to make a bland announcement in the Lok Sabha.76 Given the weight of what he was going to table, the industry minister should have presented the document. But Rao wanted no part in it. Instead, his deputy got up and said, ‘Sir, I beg to lay on the table a statement (Hindi and English versions) on Industrial Policy.’77

  This innocuous declaration masked the profoundly radical policy he had just announced. Its most famous sentence was that ‘industrial licensing will henceforth be abolished for all industries, except those specified, irrespective of levels of investment’. The exceptions were just eighteen industries mentioned in the annex to the policy (which have since been whittled down even further). It also limited public sector monopolies to eight sectors. The second change was to end the official phobia towards large companies by easing anti-monopoly restrictions. The third change was to raise the permitted level of foreign investment from 40 per cent after government approval to unto 51 per cent in thirty-four industries with ‘automatic approval’. This was the single most radical economic document in independent India’s history, and it was announced without fanfare.