Prime Minister

Who Took the Less-traveled Road ...

... and that has made all the difference.

Continued from “Leonine Deeds of the Half-Lion”  

Part III

“Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision. Their goals differed, but they all had this in common: that the step was first, the road new, the vision unborrowed, and the response they received — hatred. ....Anesthesia was considered sinful. But the men of unborrowed vision went ahead. They fought, they suffered and they paid. But they won.” – Ayn Rand The Fountainhead

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I —
I took the one less traveled by,
And that has made all the difference – Robert Frost

Today, if India stands at the threshold of being a global industrial hub and an international IT center and, above all, an economic superpower-in-the-making, a very significant part of the credit for this profound transformation goes to Nararasimha Rao whose Prime Ministership has, so far, remained grossly underrated primarily to ensure that the march of time doesn’t chip away the reputation of the First Family. Rao single-handedly exercised perhaps the profoundest influence in shaping the direction and destiny of our polity by having the courage to take the road

      .....less traveled by,
          And that has made all the difference.

In times of crisis - and the year 1991 in Independent India’s history was such a crucial time when we had to pledge our gold reserves to get desperately-needed IMF loan - the person at the helm needs to be visionary to see the opposite side of the risk coin, the one that lands face down after you flip and which represents opportunity, competitiveness and growth. And that man was P V Narasimha Rao.

Vinay Sitapati in his acclaimed study Half-Lion: How P.V Narasimha Rao Transformed Indiaranks Rao with “revolutionary figures” such as Deng Xiaoping, Franklin D. Roosevelt, Ronald Reagan, Margaret Thatcher and Charles de Gaulle. That indeed Rao was. However, he was by no means a popular mass leader as Jawaharlal Nehru and Indira Gandhi were. He presided over a minority government which continued to live on tenterhooks throughout its tenure. He never fully enjoyed the unstinted support of the then Congress stalwarts (like Arjun Singh and Sharad Pawar) who did not unconditionally support him. That real center of power popularly referred to as 10 Janpath kept an eagle eye on him throughout his term.

Nonetheless, up against great odds and with little assured power base, he achieved much that assures him a permanent place in history.

His Finest Hour

Rao’s government inherited an economy literally neck deep in formidable economic problems. The balance of payments situation was precarious. There had been a sharp decline in capital inflows through commercial borrowings and non-resident deposits. There was a great weakening of international confidence in India's economic prospects. Consequently, despite large borrowings from the International Monetary Fund in July 1990 and January 1991, there was a sharp reduction in our foreign exchange reserves. The country had been at the edge of a precipice since April 1991.

The recurrent foreign exchange crises, in fact, constitute a serious threat to the sustainability of growth processes and orderly implementation of our development programmes. Due to the combination of unfavourable internal and external factors, the inflationary pressures on the price levels had increased very substantially since mid-1990. The country had to face double digit inflation which hurts most the poorer sections of society. In sum, the crisis in the economy was at once acute and deep. As a matter of fact, India had not experienced anything similar to it in its post-Independence history.

The situation confronting the country was the result of the Nehruvain socialist growth rate of last three decades. We suffered periodically a balance of payment crisis - unable to pay for essential imports, running a high deficit, borrowings from external sources to finance those deficits and a rising rate. What was all this due to?

India vis-à-vis Others

It would be instructive to have a look at how other countries fared in economic growth front - countries i.e., which became independent in the wake of post WWII political developments.

Since her independence, India had only been able to maintain a growth rate of 3-3.5%; our capital growth rate was even worse, at around 1.3%. There were a lot of reasons for this: the first and the foremost being the financial burden of the partition. In the 1950’s, India adopted centralized economic planning model, popularly referred to as Nehru-Mahalanobis model (inspired by the Soviet style planning). A natural outcome of this was to give rise to extensive bureaucracy, red tape, unnecessary regulations and trade barriers. India’s protectionist policies, Nehru’s five year plans, several failed reform policies like Indira Gandhi’s “Garibi Hatao” program, License Raj driven economic planning and a failure to open up our markets to foreign investments, all contributed to our economy stagnating at dismal growth rates.

Although these socialist reform measures were invoked to alleviate poverty, the opposite was the result. India faced food shortages and there was mass starvation in states like Bihar. Farmers in India struggled to meet their agricultural production needs and industrialists suffered from the death-grip of License Raj.

The “Oil Shock” of 1979, combined with agricultural subsidies and a consumption based strategy pushed the fiscal deficit up even higher. In addition to this, there were several other economic drains like the Indo-Pakistani wars (in 1965 and 1971), the Sino-Indian war (1962), etc, which not only drove up our defense spending, but also alienated India from the foreign aid of certain countries. The current account deficit averaged 2.2 % of GDP.

India dealt with this in the worst possible way, namely, to borrow from external sources to finance the deficit. From 1980-1985, half of our external financing needs were met with outside assistance. External debt grew to as much as 38.7% of the GDP in 1991-1992. Finally, we reached a balance of payments crisis and Prime Minister Chandra Shekhar pawned gold (airlifted to London), as collateral for IMF bailouts.

This was the legacy that Narasimha Rao inherited.

The Day That Was

July 24, 1991, therefore, was a momentous day for India. It was on this day that Rao’s Government introduced a series of ongoing economic reforms, which bold policy initiatives are collectively known as the Economic Liberalization of 1991. This thrust in general refers to a government applying a series of deregulation measures, reducing the amount of government control, allowing foreign capital in, allowing greater privatization, lowering taxes (and other economic barriers), to allow room for private players to enter its market. That was the essence of liberalization.

Both in India and in China, the term liberalization is used mainly in context of opening up the economy to foreign investments, capital, service providers, and, more importantly, allowing room for international players to invest in their economies.

Measures Taken

The following steps were taken:

  • In a brilliant political move, Rao appointed Dr. Manmohan Singh (an economist rather than a politician) as Finance Minister, who began India’s Economic Reform by first devaluing the Rupee

  • Industrial de-licensing followed shortly thereafter. Industrialists could finally breathe free of the much dreaded License Raj. Narasimha Rao announced the de-licensing on the same day that Manmohan Singh presented his budget. In fact, before anyone knew it, industrial licensing was abolished in one fell stroke.

  • The MRTP Act (that protected businesses from monopolies) was reformed and India could finally be on the path to producing competitive and productive industries.

  • Gradual reduction of import duties followed, allowing foreign investments to slowly start flowing in. Clearance was given for capital goods imports.

  • Slowly, both income tax and corporate tax were reduced. Gradually, foreign technology agreements started getting signed.

  • In cities where the population was less than a million didn’t even need Government permits for industries.

  • The threats of massive layoffs were carefully avoided by legislating judiciously and exercising regulations carefully.

The result of all this was that licensing gradually became the exception rather than the rule. Every industry (except two) was opened to private sector. Foreign technology was welcomed liberally and foreign investment was allowed in a large number of industries. The monopoly laws were revised and there were no more restrictions on companies wanting to grow big.

Narasimha Rao and Manmohan Singh, continually assured that there wouldn’t be layoffs and that workers would be protected. These reforms were both revolutionary and incremental.

The result of this was that the Indian economy grew to 7.5% of GDP (from USD 130 million in 1992, to USD 5 billion, in 1996).

Reform Highlights

Reforms, particularly in economic and political fields, are as compelling a need as they’re an on-going process. But for the acceptance of the compulsions of reforms and facilitating the process thereof, institutions atrophy. No wonder therefore almost all aspects of economic liberalization process started in 1991 have since been progressively reshaping the Indian economy. It must be noted that not all steps were taken in 1991 itself or within a couple of years thereafter. The year is symbolic for the paradigm shift in economic outlook of India. The reforms are still going on and will continue. Here are a few examples.

1. Market determined Rupee value:

The years following the symbolic year 1991 saw partial freeing of exchange rates. This was an obligation to be fulfilled for the IMF (balance of payment crisis) bailout. Even today, Rupee is not fully market determined. When necessary, RBI does intervene occasionally to control the Rupee value. Largely, however the Rupee value is market determined today. This has helped India to be more closely integrated to the world economy through trade and foreign investments due to inherent transparency and confidence it brought about. No wonder, India today has become the largest recipient of FDI in world.

2. End of Licence Raj:

Before 1991, the Government controlled most of the Industries by issuing permits and licenses to produce goods. Earlier, how much to be produced, how to produce and how to distribute was all regulated by the Government. Any capacity expansion required Government permission. This made Government officials super powerful and brewed wide scale corruption earning the infamous title of License Raj. These restrictions were reduced gradually and today there are almost no restrictions except for the safety, health, environmental and town planning concerns. So, we have now a full-fledged thriving private sector fully capable to competing globally.

3. End of the Monopoly of Public Sector:

Before 1991, almost all the industries were fully or partially the responsibility of the Public sector. This bred inefficiency, technological backwardness and incompetence. The spheres reserved for public sector have been gradually been reducing since then and in year 2016 only three industries of strategic importance are under Public Sector monopoly: Atomic Energy, Railways and Defense. But as per new policy even the latter two have been partially open to private participation and even foreign investors are being encouraged. The extent of private participation is so deep today that almost all of government projects including the social infrastructures are being either outsourced or being developed in PPP modes.

4. Foreign Investments:

Foreign investments were almost barred till 1991. Inward flow was even allowed in chosen industries but outward flow totally disallowed. In fact, India had once the infamous FERA or Foreign Exchange Regulation Act whose violation was a criminal offence. This was changed to more pragmatic FEMA or Foreign Exchange Management Act. Today, India has full Current Account Convertibility and partial Capital Account Convertibility. Almost all the sectors today allow FDI with many allowing up to 100 % under automatic route.

Although investments by Indians abroad is still regulated but there is substantial freedom in that regard. In fact, India is one the highest investors in the USA not to mention our immediate neighbors like Bangladesh and Sri Lanka.

5. Socialist Economy to Mixed Economy:

Post 1991 and after the fall of Soviet Russia, India shifted its economic outlook from being socialist economy to being a mixed one in the real sense. Strategic and basic industries still have Public sector’s participation but now they compete with private players on purely market terms. With most of the business aspects taken care of by private sector, the government is able to focus on public welfare and social sector. The recent focus on inclusive growth, welfare state, poverty reduction has been made possible by the process started way back in 1991 by the then Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh.

The term LPG is often used to describe the Rao era far-reaching reforms which eventually led to Liberalization, Privatization and Globalization.

Master Strategist

Rao has been referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government. He was indeed a master strategist. Admirable indeed is the way he went about introducing the reform package. For example, on the crucial budget day in 1991, just before lunch he asked P.J. Kurien, the Minister of State for Industry (now the Deputy Chairman of the Rajya Sabha) get up in the Lok Sabha to read out a brief statement: “Sir, I beg to lay on the table a statement (Hindi and English versions) on Industrial Policy”. That was it: a statement as bland as welcome-friends-to dinner to usher in a profoundly radical transformation of Indian enterprise and open up a whole new future for Indian entrepreneurs. The statement made a bonfire of all licensing controls. Most importantly, on the budget day it went unnoticed and un-debated as everyone was making up his mind on Manmohan Singh’s historic budget.

And Manmohan Singh was well-tutored to make it a point to quote chapter and verse from the Congress Party’s 1991 Lok Sabha election manifesto to demonstrate that he, though as the Finance Minister under Rao, was only implementing what might be considered Rajiv Gandhi’s last will and testament. No wonder therefore as Dr. Singh was coming out of the CWC meeting, the Congress stalwart Arjun Singh, otherwise Rao’s bête noir, had to tell him: “Doctor Saab, you have read the manifesto more thoroughly than all Congressmen”.

Other Areas

Narasimha Rao had the courage to introduce reforms in other spheres as well. For instance, he changed the name of the Congress Party from Congress (Indira) to Bharatiya Rashtriya Congress (Indian National Congress), a symbolic but significant departure from one person owning up the party and to bring it back to its historic roots. That Rao’s successors undid this bold move is our national misfortune.

A. P. J. Abdul Kalam a career scientist and later the 11th President of India from 2002 to 2007, had been overseeing India’s efforts to become a nuclear power acknowledged that Rao had asked him to get ready for nuclear tests in 1996 but they were not carried out as his government did not win the 1996 elections. (The tests were later conducted by Vajpayee-led NDA government. In fact, Rao briefed Vajpayee on his government’s nuclear plans.)

Rao also dared to loosen the stranglehold of The First Family on the Indian polity. In a high level Congress party meeting PV, a staunch believer in merit, shot back saying: “Why should the Congress party be hitched to the Nehru-Gandhi family like train compartments to the engine? Senior party stalwarts were shocked at this statement of PV and called him arrogant but could not defend their stand of why only a Nehru-Gandhi family member had to be made the party chief when there were already seasoned veterans around.

Seamy Side

However, the five controversies during Narasimha Rao’s tenure don’t show his Prime Ministership in a flattering light. These, which I plan to deal with in the next installment, were:

  1. The Babri Masjid demolition in December 1992

  2. Cash for votes scam in July 1993

  3. Many splits within Congress

  4. The 1992 stock market scam and

  5. Hawala, St Kitts and Lakhubhai Pathak cheating cases

Indeed, Rao had his share of human frailties and he made many costly mistakes. But his record as a reformer, transforming both the economy and foreign policy, is surely enough to place this scholar, polyglot and “political genius” in the national pantheon of heroes.

Continued to “Dark Side of the Moon: Who Demolished Babri Masjid?”


More by :  H.N. Bali

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