African relations are going to improve. Modi is going to give China a chase in Africa. The African leaders will now have a new alternative besides China and the West. Indian businesses are already very active in Africa and Modi is going to push them even more.
Obama - Modi is going to be a frosty relationship. Obama is a terrible President from an Indo-US relationship perspective. He has destroyed everything that Bush and Clinton had built and gives little importance to India. Modi is far right than anyone Obama would have encountered from India. Modi is not that hot on the US either. Thus, Modi might until 2016 and hope to rebuild the relationship when a Republican takes up the reins. Republicans are already learning a lot about Modi. That said, Modi is going to make a lot of friendships with US businesses. Modi is very pragmatic about this.
Not clear of what or how he will work with the UK. While the Congressional party historically had close relationships with the UK, Modi might not care that much about the history. British liberal media had been doing a very vicious propaganda against both Modi and India in the past couple of years (like the racist comments during India's MARS mission) and that has poisoned the climate a bit. That said, Britain has a large Indian diaspora and has traditionally been a launchpad for Indian Multinationals. Thus, Modi might work with the businesses while ignoring the government.
* * *
Chapter 11: Hop, Skip and Jump: The Story of Indian Economy
No power on earth can stop an idea whose time has come.
-- Victor Hugo
July 1991
Prime Minister PV Narasimha Rao was in a sullen mood. He was in fresh, white dhoti and looked at the three visitors to his residence. The bald, boring, 70-year old man was unlike any hero.
Before him, there were only six years where India was not ruled by a direct descendent of Nehru. He didn't have a lot of power in the party. His Finance Minister was the first ever non-political finance minister, chosen solely for academic merit. Together they were administering one of the most closed, major economies in the world.
The three visitors - Finance Minister Manmohan Singh, Commerce Minister P Chidambaram and Commerce Secretary Montek Singh - looked tired, but really insisted on getting the job done. They asked for the Prime Minister's ok in relaxing the chains that were put by various Indian governments of the past. None of them had any political experience and they turned to Rao, like kittens turn to their mother.
Rao had just sworn in two weeks before, following the elections of 1991. He grew up in Congress mold, under the shadows of Jawaharlal Nehru and Indira Gandhi, without much opportunity to speak. He was not a reformer at heart. But, he was a pragmatist. He was not a Deng Xiaoping or Margaret Thatcher. But, he knew what he should do.
With a polite nod, he said "Yes". Just as he finished, monsoons brought the long awaited rains. And thus began India's saga of liberalization. Not with a bang, but with a whimper.
* * *
How Did India Get Into this Position?
It was the worst summer for India. Just before the new Prime Minister was sworn-in, the caretaker government had to take a big chunk of India's official gold reserves to London to get an interim loan from the IMF India needed to buy the essential reserves.
The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and another 20 tons of gold to Union Bank of Switzerland to get an interim loan.
In Indian villages, mothers pledged their ceremonial gold chain as the last resort to usurious moneylenders. Mother India was in the same position.
A combination of factors came attacking at the same time:
1. Loss of Soviet Union as the key trading partner: Most countries in the world depend on the global economy for a wide variety of things. India depends on West Asia for our oil, South Africa for its gold, the US for our technology, South east Asia for vegetable oil, etc. To buy these items from the world market, India needs US dollars - the global currency of trade. The only way to earn dollars is by selling enough of our stuff in the global economy (exports).
Since the 1960s, India depended on the Soviet Union for our exports - as we failed to develop good economic relationships with the US and Western Europe. It was a good going for a while (India and the Soviets) until the proverbial sh*t started to hit the fan. In the late 1980s, the Soviet Union started to crack and by 1991 they were split into 15 nations (Russia, Kazakhstan, Ukraine, etc). Now, India had a major problem because our primary buyer was in turmoil. Exports were down significantly.
2. Oil shock from the gulf war: Meanwhile, there was this guy Saddam Hussein, who had his misadventure into Kuwait in 1990. This led the US to war with Iraq in early 1991. Oil fields started to burn and ships found it hard to reach the Persian gulf. Iraq and Kuwait were our big suppliers of oil. The war led to destruction of India’s oil imports and prices shot up substantially - doubling in a few months.
3. Domestic Trouble: In the late 1980s India's political system was imploding. Prime Minister Rajiv Gandhi was involved in a series of troubles - Bofors scandal, IPKF misadventure, Shah Bano case that eventually led to his ousting in 1989. What followed were two more terrible leaders who were as unstable as they were incompetent. This had a huge effect on the Indian economy that was totally forgotten in the political crisis. In 1991, this stop-gap government crashed. Until Narasimha Rao was sworn as Prime Minister in 1991, the Indian economy was left in gross neglect.
Thus, 1991 was the year of perfect storm. This triple crisis brought India on its knees. On the one end, India’s primary buyer was gone. On the other hand, its primary sellers were in war. In the middle, its production was effectively stopped by political crisis. India was running out of dollars to buy essential items like crude oil and food from the rest of the world. This is termed a Balance of Payments Crisis - meaning India was not able to balance its accounts - exports were significantly less than imports.
* * *
On that eventful night in July 1991, Indian leaders had no choice but to turn volte-face on Nehruvian economics and Indira Gandhi's nationalization drives.
On July 24, 1991, the Finance Minister announced the landmark budget. I was an eight-year-old in a small village, 2,000 kilometers from the Indian capital. However, I could sense people's excitement. Everyone was glued to their television sets. It was more tense than a hypothetical World Cup cricket final between India and Pakistan. History was being made, just as Nehru's.
A new India was born. It was messy, ugly, and little. But, it held a lot of promise!
I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, "no power on earth can stop an idea whose time has come". I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.
— Budget Speech, July 24, 1991
Companies were allowed to issue stocks and set prices without the government's approval. Thereby heralding the rise of the Bombay Stock Exchange as a serious institution in charge of helping companies raise money from the public.
India did away with many of the import restrictions. Until 1991, it imposed a 400% customs duty on many products. Industries had to beg to get an essential ingredient imported. By 1991, the duties on many products were reduced substantially. This brought new growth in our industries.
Import licensing was abolished. Until 1991, you needed a license to import anything and this license was very hard to get.
The government did away with the production, licensing in many industries. Until 1991, you needed government's permission in what to produce and how much to produce. In one stroke, the restriction was removed in many industries.
Manmohan abolished gold smuggling (a key feature of 1970s & 80s era Bollywood movies) in one go. He effectively allowed Indian expats to bring back five kilos of gold with them with no duty. Now, very few had a reason to smuggle gold
and electronics.
Singh and Rao allowed foreign investors to come. Until then India was living in the paranoia of the East India company. Many sectors were opened for foreign investment and collaboration. Now, companies like Coke and Microsoft could come in. Suddenly, the Bombay Stock Exchange found a life.
The government started selling some of its businesses to the private. This brought cash and a new round of efficiency.
Immediate Euphoria
One of the biggest credits that the Prime Minister should be given is in his assembly of a star team. His team had little experience in politics, but lots in economics and finance. The team was shielded and shepherded by the expert tactician, Rao. The Prime Minister protected his team from external attacks and let them create India's destiny.
Communications were opened up. Star TV entered India and suddenly the Dish revolution caught on to India in no time. We found a new way to see the world, besides what Doordarshan gave us.
New airlines came up. Until that time we had only Indian Airlines serving the local routes. In 1992, Jet Airways and other private airlines came up. Some of these new airlines (like the East West airlines, Damania, Modiluft) were very good in customer service. In three years from then, they would all be gone though.
Stock market freed up. In those times, people used to say "there is only one thing you must always do in the stock market. Buy Reliance." IPO (called the initial issue back then) fever caught on. Suddenly, my parents and all my friends' parents started playing this new game. I found a new interest in this new kind of sports scores. The year 1994 was the peak (when Harshad Mehta ruled the market).
Indian entrepreneurs began to dream. People found new ways to deal with the world. One of my uncles got on the cover of Fortune about the rise of Indian executives.
Real estate shot up. In the early 1990s, real estate started getting giddy. The market peaked around 1995.
Narasimha Rao was an unlikely hero; but he was a hero!
* * *
Mothers and Stocks
Maybe the winds of optimisim caught my dad's bosses too. Just as India was changing, my childhood life was also drastically changing. In the summer of 1993, my family moved from a tiny village in the deep south to the national capital. It was a massive shift for me. New language, new culture, new attitudes.
I had never seen so many cars and computers. My neighbor's dad was talking about computer programming and I had no idea that we could buy computers at home. I had touched the computer only once before - in my primary school in 1989 - and at that time it was tightly protected. We touched as though we would touch an idol in a Hindu temple - too sacred, too powerful, too enigmatic.
I dreamed of sitting in front of it someday. But, had to wait two more years to start programming in that gizmo. We didn't even have the resources to buy even a typewriter and my school was quite poor too.
More than the money, it was the pure optimism that was infectious. At about 10, I got quite interested in the stock market. Sachin and stocks seemed to excite the most.
I helped my father invest in the new IPOs of that time - Oriental Bank of Commerce and an another company that I'm having trouble recalling. Some of the investments we did were souring. The mutual funds that my dad's bank forced him to buy - Ind Ratna and Ind Jyoti - went to their heights.
It was a time, the neighborhood aunties would all be busy chatting about the stock market and what to buy. Reliance was a stock that my mom dreamed of buying someday. Some of my father's friends made 100x returns in some of their investments.
The Bubble Burst
By 1994, India's drive for liberalization started dipping. As mentioned earlier, the liberalization didn't come out of a very enthusiastic public display, but came more out of a sullen Prime Minister's pragmatism. As the economy grew, the pressure was no more.
Pragmatism is not a good replacement for a full-blooded positive push. Rao was still a socialist at heart and took care not to hurt the sentiments of Nehruvian loyalists. The ministers carefully kept the Nehruvian language and worked at the corners. But, they could only go so far.
As the pressure from the Prime Minister reduced, the bureaucratic monkey was back on the trees. Indian stock markets and real estate markets collapsed. A number of scams were unearthed.
A number of non-banking financial instruments that mushroomed in the 1992-94 timeframe had disappeared and bam went all the investor money with it. I still remember all the crazy investment schemes on primetime TV that promised extraordinary interest rates (40% and above). They asked their gullible investors to invest into their teak farms, car dealerships, and so on.
1996 Elections
It was a surprise that Rao was able to survive five years with his slim majority. But, he did. What he didn't do was to tout the heroic things he did in 1991-93. The socialist in him took an apologetic tone to his liberalization policies. It was like apologizing for saving a million lives. He literally changed the lives of millions of poor people. I could see it right in front of me in my village.
But, the Prime Minister didn't. And that was the tragedy. In the 1996 elections, economic reform was no longer talked about. The government was on the defensive.
My dad and I were anxiously rooting for the right-wing BJP in the 1996 elections and I even convinced my grandad (a die-hard Congress supporter since Mahatma's times) to vote the same. We were expecting a restart of the engine. However, Vajpayee's government didn't last long.
At that time, my school was quite good at organizing debate contests among students. One of the topics was on the importance of economics. I was furious - should the importance of economics even be a question. In any case, that was the prevailing attitude in India.
Dream Budget 1997
On February 28, 1997, my dad called me to view the budget. I stopped the Cricket game I was playing on the streets in the twilight and joined my dad. It was another historic budget.
Finance Minister P Chidambaram announced a slew of measures to jumpstart the ailing Indian economy. The Asian economic crisis was already taking a toll on India. The reform processes were slowed down. The baby of 1991 still remained a baby. It refused to grow up and join school.
Chidambaram's budget drastically cut down the tax rates and enabled trade and investments to flow. The policies arrested the slide and prevented India from getting on to the Asian Financial Crisis.
In this note, I also want to mention the works of the Reserve Bank of India - one of the most respected institutions in India. The bank was always led by incorruptible, honorable men and while the bank could be accused of excessive conservatism, they can never be accused of recklessness. In the past 20 years, they helped India survive many financial crises around the world.
India Shining
In 1999, Vajpayee would finally get a shot at running a stable government. In the next five years, he would bring further reforms, such as new highways connecting the major cities of India - the Golden Quadrilateral - a major highway system connection the 4 major metropolitan centers of India.
In 2004, Vajpayee looked all but certain of winning the elections. He campaigned on his record of economic reforms. However, his managers probably overdid the jubilation and that ticked the poor people off. Out of nowhere, the opposition Congress party won the race.
In its first iteration (2004-09) it did well in continuing the reforms of BJP. However, just like 1991-96, the government started slowly decaying over time. In the second term, 2009-14 they were hit by a slew of massive scandals (on allocating telecom spectrum and coal fields) that wrecked them just like it did in 1996.
This time, BJP had a much better answer than it had in 1996. Before we get on to Modi, I will briefly walk you through the economic history of the rupee.
Rupee's History
There were a few major events that changed the currency rates. Rupee has a long history dating back to the 6th century BC when Indian kings were issuing coins for trade - among the first in the world to do so. In the classic treat
ise of Arthasastra (3rd century BC) Chanakya mentions of Rupyarupa (silver coins) and the ways to govern it.
In 1540, the Afghan king Sher Shah Suri brought a great degree of standardization by introducing 178 gram silver coins called the Rupiyah. This was then followed by the Maratha empire and later by the East India Company.
The standard spread to the rest of Asia, and by the 20th century, Indian Rupee became the most important currency in Asia. The Indian rupee was the official currency of Dubai, Iraq, Kuwait, Oman, Kenya, Mauritius, Bahrain, Qatar and a few other countries.
However, after the Independence and end of colonization in the rest of Asia and Africa, the rupee's importance diminished. The protectionist attitudes of Indian governments didn't help either. Rs 1 equaled USD $0.33 in 1947. In 2014, it equaled $0.016 - falling over 20 times in the past 67 years. Here is how it happened.
June 4, 1966. First major devaluation. For the first two decades, India had almost a constant peg against the dollar at Rs.4.75/$. Then things changed in 1966. India had just fought two major wars (with China and Pakistan) and had three prime ministers in three years (Nehru, Shastri, and Indira) after 17 years of one man rule. Then a major drought shook the country. Perfect storm. With nowhere to go and no more dollars, the Indian government announced a 57% depreciation of the rupee overnight from Rs.4.75/$ to Rs.7.5/$.