Scattered through the Arthashastra are a range of upayas (techniques) to prevail upon the enemy.2 These are sama, dana, bheda, maya, upeksa, danda—concessions, bribery, division, trickery, indifference, and finally, punishment.3 The ruler had to attempt conciliation when success was unlikely. Gifts were a way to win over inferior kings and discontented people without shedding blood. Creating confusion among enemies would neutralize their threat. Pretending moral probity would lull the enemy, as would feigning disinterest. It was only when these failed that the king should punish or resort to war.
Scholars from Max Weber to Henry Kissinger have drawn a link between the fourth-century BCE Mauryan diplomat and the better-known Florentine diplomat of the sixteenth century4—like Niccolò Machiavelli, Chanakya was a moralist, though in a complicated sense of the term. As the philosopher Roger Boesche puts it, ‘Machiavelli and Kautilya shared the ethical conviction that a leader may, and sometimes must, use morally dubious means to obtain a good end . . .’5
In his first year as prime minister, Narasimha Rao had implemented his economic goals by deft use of looming catastrophe. With the crisis over by 1992, he needed new upayas. The ‘big bang’ reforms of 1991—devaluation, delicensing, trade liberalization—had formally opened up the economy. But industry still needed government help to navigate the hurdles that remained.
The licence raj had also created distinct vested interests in different sectors of the economy. For example, any attempt to privatize banks would symbolically overturn Indira Gandhi’s bank nationalization drive. Ideological critics would see red, while bank unions would organize to protect their sinecure. Deepening the capital markets, on the other hand, would be opposed by unscrupulous brokers prospering from the status quo. The same variation in adversaries existed in infrastructure. Road-building had fewer opponents, while electricity reforms would be contested by powerful interest groups—the coal mafia, state power boards and customers. A whole new set of critics would protest the opening up of television and consumer goods, worried that traditional India was being westernized.
The BJP, communists and the Congress had their own complaints against liberalization. The BJP’s trader base welcomed delicensing, but was wary of foreign competition. The communists opposed both, while the Congress party was sensitive to charges of elitism that went against the grain of Nehruvian socialism.
On economic reforms, Narasimha Rao and Manmohan Singh had proved exquisite opening batsmen. By 1992, however, liberalization was entering the middle overs. A range of subtler, incremental techniques were needed to deal with concerns unique to each sector, unique to each party. Would Rao be able to play spin as well as pace?
In April of that year, 1992, Narasimha Rao was preparing for the seventy-ninth session of the Congress party, to be held in the temple town of Tirupati in Andhra Pradesh. He was eager to make an impression. It would be the first session addressed by a Congress prime minister who was neither a Nehru nor a Gandhi. Rao was also expected to explain his liberalization policies to uneasy party workers, and he did not have the excuse of crisis any more. The previous session had taken place in 1985 in Bombay, to celebrate 100 years of the Congress. As we saw in an earlier chapter, prime minister Rajiv Gandhi had wanted to use that occasion to argue in favour of liberalization. But party leaders were so aghast at this abandonment of socialism that Rajiv—the man with the largest electoral mandate in Indian history—had deleted any reference to economic reforms from his speech.6 Seven years hence, would Narasimha Rao, much less in control of party and Parliament, beat a similar retreat?
In the days before the session, Kalyani Shankar saw him consulting assorted drafts before writing his own speech.7 These remain in Rao’s archives. One such draft was from P.C. Alexander, who had guided Rao through the Congress maze during the race for prime ministership. Alexander’s note contained the sentence ‘Nehruvian socialism did not mean keeping the economy shackled to controls and regulations even after they had outlived their usefulness.’ After a year as prime minister, Rao could play this game as well. He struck out the sentence with a red pen and rewrote to exaggerate the point: ‘It is a gross distortion to say that Nehruvian socialism meant keeping the economy shackled to controls and regulations even after they had outlived their usefulness.’8
The other notes the prime minister drew on while drafting his speech were from the Andhra bureaucrat B.P.R. Vithal and Congressman V.N. Gadgil. Rao read Gadgil’s draft and was irritated by jargon that even he barely understood. On the front of the document, he wrote: ‘Explain in simple language, words and expressions like—Capital goods, Fiscal management, Balance of payments, Indicative planning, GDP . . . The expressions are used often, but many Congress workers do not fully understand them, including several who pretend to do so. The explanation could be given in the notes at the end of the paper or in the footnote in the text.’9
The master of ten tongues was searching for language to explain economic reforms. He complained to Montek Ahluwalia, ‘The trouble with you people is you have not found good Hindi words for liberalization. Somebody says that word is ‘chhoott’. This sounds like licence. But liberalization means freedom. We should link it to something inherently positive such as freedom.’10
The Tirupati session began on 14 April 1992. Narasimha Rao spent the first days silent on stage, leaving his finance minister to do the explaining. ‘Liberalisation was a new thing,’ Manmohan Singh later remembered. ‘There is always fear of the unknown. There was a feeling that we were departing from the Congress party’s philosophy.’11 On the final day, 16 April, the prime minister finally spoke. He used Jawaharlal Nehru to justify changes to the economy,12 and likened India’s fiscal position to a person using a small blanket to cover himself. When the head was covered, the feet were naked; when the feet were shielded the head was bare. ‘It is only to meet that extra length, so to say and to fill the gap that we are taking the help of private sector.’13
The party resolution at the end endorsed the prime minister’s liberalization policies. Narasimha Rao had done something even Rajiv Gandhi had not been able to. He had sold economic reforms to his doubting party.
The next day’s Times of India explained how he had done it. ‘The party is quite obviously committed to the package of programmes announced by the government in the last few months, marking a major departure from past postures. This has, however, been shrouded in the ritual invocation of the Nehru-Indira-Rajiv vision. Indeed a substantial part of the resolution is devoted to re-interpreting the political-economic thought of Jawaharlal Nehru in a bid to justify the present thrust of government policies.’14
When it came to the Congress party, Rao was able to defend reforms with trickery—using Nehru as a shield and Manmohan as a mask. Where reforms concerned technical issues beyond the comprehension of the seventy-year old prime minister, he feigned indifference, relying on those he trusted.
An example of this mellower approach was the reformation of the capital markets that began in April 1992, the very month that Rao spoke at Tirupati.
One of the myriad ways through which companies were pygmied during the licence raj was by making it hard for them to raise money through the stock markets and debt instruments. Insider trading was rife, and brokers were allowed to self-regulate. Since foreign capital was barred, companies had to compete for scarce Indian money. And the Controller of Capital Issues, or CCI, had final say over a company’s ability to issue shares and debentures. A bureaucrat remembers comic scenes at the finance ministry: ‘At the CCI, someone would come and say, “Birlas, etc. want three crores for capital issue.” The person heading [CCI] would say, “Why three, why not two crores?”’15
Recognizing these shortcomings, the market regulator, the Securities Exchange Bureau of India, or SEBI, got statutory backing in April 1992. Neither the prime minister nor Manmohan Singh had selected the man running it at the time. But G.V. Ramakrishna, the man who was P.C. Alexander’s first choice for principal secretary to the prime minister, wou
ld turn out to be a crucial reformer in the Rao era.
The financial journalist Sucheta Dalal terms Ramakrishna SEBI’s ‘best chairman yet’.16 Even the best need luck, what Machiavelli called ‘fortuna’.17 Like with Rao in June 1991, what helped Ramakrishna cleanse the stock exchanges was a scandal, the like India had never seen before.
Days after the creation of SEBI as a statutory regulator, the stockbroker Harshad Mehta was accused of fraud.18 Mehta was the face of the liberalization stock market, gracing the covers of finance as well as style magazines. The market followed his mantra, until investigations revealed that his investments were made with money obtained by bribing officials from state-run banks. This ‘banking’ fraud (wrongly described as a ‘stock market’ scam) was estimated at a billion dollars.19 The stock market crashed. Liberalization had produced—or so they said—its first casualty.
Narasimha Rao ordered a special court to try the accused; Harshad Mehta was arrested and made to sleep on the cement floor of a Bombay police station.20 On the morning of 29 June 1992, Rao asked Ahluwalia for a note on the scam. That very evening, Ahluwalia replied, ‘As desired by PM in this morning’s meeting, briefing notes on the Banking Scam are placed below for PM’s perusal.’ The note included a ‘list of persons arrested’ and police complaints filed.21 Rao’s private papers contain other reports on the scam. Clearly, the prime minister realized that reforming the stock market was essential to the credibility of his liberalization policies.
So did G.V. Ramakrishna. He told the New York Times, ‘Most players in the capital markets felt they were beyond regulation. We are now trying to bring about some sensible regulations of the market in line with other developing countries’ capital markets.’22 He ordered brokers to register themselves and pay a fee, and ‘ruthlessly brought order to a rag-tag community of brokers, 20 stock exchanges and a variety of intermediaries . . .’23 Ramakrishna is now old and gaunt. But his eyes brighten as he remembers those months in 1992. ‘I got threatening calls. The police were worried for my safety. They said there was a plot against you.’24 Ramakrishna was undeterred, even withstanding pressure from a bureaucrat close to Narasimha Rao. The new rules stayed and the stock markets began to be run professionally.
The exchanges were improved in other ways too. Share pricing was made ‘free’ from generalist bureaucrats in CCI, and companies were soon allowed to borrow from international markets using financial instruments such as the ‘global depository receipt’. Entrepreneurs could also list their companies in the national stock exchange, set up that very year. To make the transformation of markets complete, Ramakrishna wrote a letter to the finance minister, asking for foreign institutional investors to be allowed in.25 Manmohan Singh checked with his prime minister.
Narasimha Rao was indifferent to the details. A friend of his remembers: ‘He used to ask me about [the] stock market; he never invested in it.’ But the prime minister trusted his people. And so it was that in September 1992, foreign institutional investors were permitted to enter.26 In the next twelve years, foreign investors bought a net amount of 163 billion dollars to the Indian equity markets; in just one year, 2014, they invested more than 16 billion dollars—one lakh crore rupees.27
While foreign investors were embraced by Rao, he was only half a lion. The government continued to impose restrictions that prevented dollars from flowing out too quickly. Much criticized by financiers at the time, this cautiousness helped India emerge unscathed from the East Asian financial crisis of the late 1990s.
Incorruptibles like G.V. Ramakrishna and Manmohan Singh were necessary to make liberalization credible. Narasimha Rao backed them even when they disobeyed his commands—like Manmohan on devaluation, and Ramakrishna on the broker’s strike. It is even possible, though there is no way to tell, that Rao wanted his instructions ignored. The academic V.R. Mehta’s son remembers what prime minister Rao told his father when the latter was appointed vice chancellor of Delhi University. ‘Sometimes you will get messages from me. Don’t listen . . . You do whatever you think is right. But I have to call because there will be someone sitting with me who wants that.’28
While Rao would support those doing their jobs, he could be unforgiving when he felt that lines were being crossed. This was true of Rao’s later treatment of his Cabinet colleagues Arjun Singh, M.L. Fotedar and Madhavrao Scindia. It was also true of his punishment of some fellow reformers—as this story shows.
The wife of commerce minister P. Chidambaram had bought shares in a company subsequently named in the Harshad Mehta scam. The amount was trivial, paid by cheque, and there was no evidence of favours exchanged. But the commerce minister was one of Rao’s prominent liberalizers, and the opposition parties had found the perfect target. In response to the clamour, Chidambaram told the press that he would resign if his guilt was proved. In July 1992, he sent his prime minister a letter of resignation. The letter ended thus: ‘It is my sincere hope that these small investments will not cause any embarrassment to the government. If they do, I would have no hesitation in stepping down from the office of minister. I leave the matter to your judgment. I also place below a formal letter of resignation.’29
It is clear from the text that the letter was only a formality. But that very evening, the prime minister took it to President R. Venkataraman, a mentor to Chidambaram. ‘He sent me this letter, and held a press conference before,’ Rao told the President.
‘Did he take your permission before the press conference?’ Venkataraman asked.
‘No,’ replied Rao.
‘Then accept the resignation.’30
Chidambaram was shocked. Even twenty-five years later, both Manmohan Singh and Montek Singh Ahluwalia are puzzled as to why Rao rid himself of a reformer.31 Rao’s youngest son, Prabhakara, provides the answer. ‘My father told me that Chidambaram should have taken his permission before giving a press conference.’32 When Prabhakara told his father that Chidambaram was ‘well known in economic circles . . . dropping him will send the wrong message,’ Rao replied, ‘Let the dust settle, he will be back again.’
While Rao could let pettiness dictate personnel decisions, he never let Chanakya’s methods affect the substance of his reform agenda. He ensured this by keeping the engine of reforms where he could see it, in the prime minister’s office. The chief engineer was Amar Nath Varma, Rao’s feared principal secretary. Varma would chair consultations on reforms every Thursday, as well as regular meetings of the Foreign Investment Promotion Board (FIPB). The journalist Sanjaya Baru calls these meetings the ‘cockpit’ of economic reforms.33 As Manmohan Singh put it, ‘Varma was a power centre in reforms. I encouraged him. The fact that the PMO was associated with reform gave it lot of weight.’34
Not everyone thought this was a good idea. When the FIPB was brought into the PMO, the Cabinet secretary advised that it might be better to locate it elsewhere (as was the past practice) to keep the prime minister at a safe distance from decisions that might result in controversy.
But Rao chose to listen to Varma, whose disposition matched his own. Like Rao, Varma was less bound by rules and protocols. Like Rao, he could get the job done. Prabhakar Menon, then a junior diplomat in the prime minister’s office, remembers: ‘Rao could be short with people who spoke nonsense, but he always listened to Varma’s considered views. I have known five–six outstanding civil servants. He comes to mind. He had a very keen political antenna. He was also very focused in meetings. [He] had a clear agenda, and knew how to achieve it.’35
While Varma coordinated with ministers, officials and his prime minister to keep reforms oiled throughout Rao’s five years in office, there were moments when the electricity was switched off, and the engine sat idle. One such moment was in December 1992.
As we shall explore in detail in a later chapter, the Babri mosque was demolished by Hindu militants on the sixth of that month. The riots that followed killed over 2000, most of whom were Muslims.36 Apart from the inexcusable loss of human life, the violence scared external inve
stors and caused internal financial damage. In a speech to students at the Indian Institute of Management Ahmedabad, the prime minister estimated that ‘within one month, we have lost what is equivalent to say some two to three hundred million dollars. This is something we cannot afford.’37 Judging his position to be weak, Rao ordered that no reforms be announced that December. ‘If we had let the cat amongst the pigeons in that atmosphere,’ Manmohan explained later, ‘it would have been misused by our opponents to strengthen themselves.’38 For any other politician, the demolition of Babri Masjid would have ended any possibility of risky reforms.
Narasimha Rao was not any other politician. He sensed that collective outrage at the symbolic destruction of secularism was an opportunity to manipulate divisions in the opposition ranks. The National Front and the Left were so worried by the BJP that their main enemy changed from economic reforms to religious fundamentalism. As the political scientist Zoya Hasan puts it, ‘The primacy of secular politics and the need to contain BJP’s further expansion was one important reason why economic liberalisation did not face significant hurdles, even though the Congress lacked a majority in Parliament.’39 Narasimha Rao was quick to exploit this. A senior CPM member remembers: ‘When I used to talk to prime minister [Rao] about liberalization policy, he would talk about Babri and secularism . . . He always did [it].’
In January 1993, just a month after the flattening of Babri Masjid, the Narasimha Rao government unveiled a reform that would have normally infuriated the Left. The Reserve Bank of India—with a nod and a wink from the government—announced licences for private banks.40 Ten new banks—HDFC, ICICI and Axis Bank among them—were eventually formed. This was the first such approval after the nationalization of banks by Indira Gandhi in 1969. It was risky—something Chanakya advised kings to avoid—to allow this symbolic shift from the socialist past. But Rao was by now adept at knowing just how far he could go. Afraid that the left-backed bank unions would turn on him, he decided against restructuring state banks, sacking inefficient employees, closing down poorly performing branches, and removing priority sector lending. It could even be that he turned to the private sector precisely because he deemed state-run banks to be untameable.41
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