Locating Sinha in Patna was not a difficult task. The finance minister was busy campaigning for the SJP, which was hoping to win as many seats as possible in that election. On seeing Verma, Sinha looked a little puzzled. But the puzzled look disappeared soon when he opened the file and quickly signed the papers, and returned them to Verma with the instruction that they be taken back to the prime minister’s office at the earliest.3 Getting back to New Delhi by the next available flight was not a problem and the signed file was soon back in the PMO.
The file that Verma had carried on that flight, in the most dramatic and bizarre way, contained the government’s proposal to sell 20 tonnes of confiscated gold kept with the SBI. Selling gold was the only way the government could have got some precious foreign exchange so that it could meet its international payment obligations. The government of Chandra Shekhar did its best to avoid a situation where India would have to default on its payments to global lenders and the sale of gold was one of those extreme steps taken. And Verma was one of the officials who played an important role of having carried a file in a plane, while standing, to reach Patna and get the finance minister’s approval.
The Big Reform
On 2 July 1991, a minority government led by Prime Minister P.V. Narasimha Rao, assisted by Finance Minister Manmohan Singh, who had just made his ministerial debut and was yet to become a member of Parliament, took one of the boldest steps any government could take. Just ten days had passed by after the Rao government had been sworn in, but its finance minister in consultation with the RBI allowed the Indian rupee— long considered a symbol of India’s economic pride—to depreciate by 9.5 per cent. That took the value of the Indian rupee per dollar down from Rs 21 to Rs 23 in one stroke. The next day, the Indian currency was depreciated by another 12 per cent. India was stunned. The last time such a sharp depreciation of the Indian currency happened was in 1966. Just like the 1966 devaluation was an outcome of a serious economic situation obtaining in the country, the downward adjustment in the value of the Indian rupee, too, resulted from an economic crisis of unprecedented proportions. But the difference in 1991 was that unlike what happened in the wake of the 1966 devaluation, the depreciation of the rupee twenty-five years later was followed by a series of path-breaking reforms. A series of bold measures followed in 1991 to bail the Indian economy out of its worst balance-of-payments crisis and introduce reforms in industrial, trade and fiscal policies. The disruptions these new policies unleashed in a short span of about two months had a long-lasting positive impact on India’s politics and economic management. This was a disruption of a different kind—with an impact that was largely positive for the economy. Proof of that was the nearly irrevocable path of economic reforms rolled out after these measures, pursued by governments led by political parties of different beliefs and hues and resulting in a relatively high and stable growth experienced by the Indian economy in the succeeding years.
Just ten days before that shock decision on depreciating the Indian currency, Narasimha Rao had taken oath as the prime minister of the first Congress government that did not enjoy a majority in the Lok Sabha on its own. The formation of such a government in itself was a reflection of the kind of fraught politics and the crisis-ridden state of the economy that prevailed then. No opposition political party decided to contest the formation of a minority government. All of them realized that on their own they could not form a government and the Congress was indeed the single-largest party at that time in the Lok Sabha.
Another thought that influenced their decision not to create a hurdle in the Congress way was the delicate condition of the Indian economy, made worse by two short-lived governments and the killing of a former prime minister. The death of Rajiv Gandhi, while he was campaigning for the 1991 elections, delayed the process of concluding the poll process and the formation of a government that could take the necessary policy steps, on the basis of which the international multilateral bodies would extend assistance to India. Concerns over the nation’s economic well-being obliged them to support a government that may be short on the requisite majority in the Lok Sabha, but was competent to take the tough measures necessary to rescue the economy out of that crisis. That was also perhaps one of the reasons not too many voices were raised when Narasimha Rao invited Manmohan Singh to be the finance minister of his government.
Before getting a phone call from Narasimha Rao to come for the swearing-in ceremony at Ashoka Hall in Rashtrapati Bhavan, Manmohan Singh had virtually retired at the end of what was certainly a long and successful career as a public servant. He had occupied almost every important position in the government’s economic policy administration—from being a chief economic adviser, economic affairs secretary in the finance ministry and member-secretary of the Planning Commission to the governor of the RBI. Subsequently, he had been invited by the South Commission to be its secretary-general. Completing that assignment coincided with the looming crisis in the Indian economy. As he landed back in his country, Singh found that his services were required in the PMO. Prime Minister Chandra Shekhar invited him to be his economic adviser.
It seemed then that in 1990 Singh began a fresh innings of his life—one that would eventually launch him into a political career. Little did anyone anticipate then, let alone perhaps he himself, that his innings would take him further up—from being a finance minister for five years to the prime minister for ten long years. But during that summer of 1991, there was a short period of time when it seemed Singh’s career in economic administration was coming to an end. As elections were called in 1990, the economic crisis got worse and Rajiv Gandhi was killed in a terrorist attack. At the time, Singh was working in a safe and apolitical position as the chairman of the University Grants Commission. When Singh got that call from Narasimha Rao, he was reconciled to leading a relatively quiet life and doing the work of guiding the fortunes of India’s higher academic institutions.
Singh’s meeting with Rao was short. By then Singh had already become famous for sporting a look that could be compared only to a Sthitaprajna or the Enlightened, as enunciated by Krishna in the Mahabharata. Singh sported a look of one who was unperturbed by sorrow or unmoved in joy. When Rao asked Singh if he would become the finance minister, three questions came in Singh’s mind.4 Why was Narasimha Rao taking him on board to tackle the economic crisis? Will the government agree to take the tough measures needed to bail the economy out of the crisis? And if there was political resistance to his moves, would he be made a political scapegoat? Narasimha Rao’s replies were highly reassuring.
Narasimha Rao told Singh that having spent his entire life in politics, he thought that it was time now to do something fundamentally reformist and transformational for the country. Rao wanted to be in the history books with whatever can be done to rescue the country from that crisis. He also reiterated that the government was fully committed to backing the new finance minister in the steps that he planned to take. And if there was any political pushback or resistance, Singh would not be made the scapegoat. ‘You take the steps needed, I will take the political flak, if necessary,’ Rao was reported to have told Singh.5
At the end of that short meeting, Rao told Singh that after the swearing-in, he should start functioning from North Block, the headquarters of the finance ministry. It was only a couple of days after the swearing-in that the presidential communique allocating the finance ministry to Manmohan Singh had been issued. But Singh had already begun his damage repair work from North Block. One of the first letters Singh wrote after assuming charge as the finance minister of a government that could soon go bankrupt was to Michel Camdessus, the managing director of the IMF, seeking its financial help for India.
The seriousness of the Indian economy’s crisis could be gauged from the key data on the government’s own finances and the economy’s performance. The Union government’s fiscal deficit (not including those of the states) had widened to a record high of 8.4 per cent of the GDP. Worse, the balance-of-payments situation was
sending alarm signals—the country’s foreign-exchange reserves were ruling at around $1.3 billion to $1.5 billion, not adequate to meet its import needs for even three weeks. The total external debt was over $70 billion. Though only a small portion of this amount—an estimated $4 billion—could be classified as short-term debt, the risks arising out of such exposure could not be underestimated. The burden was huge for an economy whose size was just about $290 billion.
How It All Happened
The crisis for India did not erupt in one day. It had been brewing for quite some time. The formation of the National Front government, led by Vishwanath Pratap Singh as its prime minister, was a political victory for the Opposition parties in the country, but eventually turned out to be a recipe for economic disaster. Rajiv Gandhi had led the Congress party in the 1984 elections to an unprecedented victory, with 404 seats won out of the 514 that had gone to polls. However, by the time Gandhi was readying to face the electorate in 1989, his popularity among voters had taken a hit. His government’s decision to purchase guns from Bofors, a Swedish arms manufacturer, became controversial as there were charges that the company had paid bribes to some Indian leaders to facilitate the deal. For buying 400 Bofors field guns at a price of Rs 1700 crore, the Rajiv Gandhi government faced its worst political crisis. A Joint Parliamentary Committee, set up by the government to probe the charges of bribery and the gun deal, submitted a report in May 1988 that concluded that there was no evidence that any Indian was involved in receiving the ‘winding-up charges’, which Bofors had paid to three companies based in England, Switzerland and Panama. A dissent note submitted by one of the members of the committee (Aladi Aruna, who was then with the AIADMK) revealed gaping holes in the clean chit issued by the JPC to the Bofors gun deal. Aruna said: ‘The conclusions of the report conceal the facts of the deal and cover up the connivance of our government with Bofors and refuse to identify the recipients, who could be none other than Indians or Indian associates, or both.’6
In the run-up to the 1989 general elections, V.P. Singh had used to the hilt the sentiment that Aruna had expressed in his dissent note. Singh was one of Gandhi’s favourite and trusted ministers when the Congress government was formed after the landslide victory in 1984. He was the finance minister in the Rajiv Gandhi government and presented two successive Budgets. But even as Singh was preparing to present his third successive Budget in 1987, differences between him and Gandhi had widened to reach a point where just about a month before the Budget (which used to be presented to Parliament on the last working day of February) was to be out, Gandhi divested Singh of his finance portfolio and transferred him to the defence ministry. This shift was attributed to Gandhi’s increasing discomfort with Singh’s crusade against many top business leaders by conducting raids at their residences and office premises as well as his keenness to launch an inquiry into charges of bribery levelled against the government’s arms purchases, including Bofors field guns and HDW submarines.
Soon after his transfer to the defence ministry, Singh quit the government and even the Congress before the year came to an end. In the process, Singh had cemented his persona as an honest crusading political leader against corruption. And when he formed a party by the name of Janata Dal and built a nation-wide coalition of parties opposed to the Congress, in particular, it was clear that Singh had secured his victory in his political battle against Gandhi.
Singh’s election campaign against Rajiv Gandhi on the question of Bofors corruption did yield handsome results for the Janata Dal leader. Gandhi tried to dismiss those charges, but the popular mood had turned in favour of Singh. Even Gandhi’s attempts to woo the Hindu voter by launching his campaign from Ayodhya and blessing the foundation ceremony for building a Ram temple there failed to reap the kind of electoral benefits he had hoped to garner for his party. Instead, the nature of Gandhi’s campaign led to the Congress losing the sympathy of the Muslim community, till then a safe constituency for the party. The election results did not give the Congress the requisite number of Lok Sabha seats to allow Gandhi to form a government at the Centre. Singh, on the other hand, managed to cobble together a coalition government with support from different political parties—some supported by being part of the coalition and others from outside.
Even as Singh took oath as prime minister on 2 December 1989, the precarious situation of the Indian economy started becoming clearer to him. His finance minister, Madhu Dandavate, announced at a crowded news conference soon after the formation of the National Front government, that the nation’s coffers were empty. After such an alarming statement, the challenges for rescuing the economy from its perils became even more onerous. Madhu Dandavate’s Budget presented in March 1990 outlined tough fiscal measures to mobilize more revenues to address the problem of growing fiscal indiscipline. But the state of the Indian economy was nowhere near a path of recovery. On top of that, the balance-of-payments situation was getting worse, even as the global situation got adverse with international crude oil prices seeing a spike, imposing greater foreign exchange burden on the Singh government. Having won a political battle against Gandhi, Singh was now facing a more difficult battle on the economic front.
In its attempts to rescue the economy, the National Front government decided to seek support from the IMF, even though ideologically it was opposed to the idea. In September 1990, the government borrowed about $550 million from the IMF under the gold tranche facility. It was a loan obtained without making any public disclosure at that time. It was a quiet operation, and only about a year after the loan was obtained that the P.V. Narasimha Rao government, formed in the second half of 1991, made this public. That secrecy perhaps also explained why the National Front government obtained the loan, but got away without taking any significant corrective steps to bolster the economy. Singh’s woes got worse when he was faced with political uncertainty and a worsening economic situation. Rebellion within the Janata Dal surfaced all of a sudden. As many as sixty-four members of Parliament belonging to the Janata Dal broke away from Singh and joined the Samajwadi Janata Party (SJP), which Chandra Shekhar had set up in 1990. The defection of so many MPs also meant the fall of the V.P. Singh government and this paved the way for a minority government to be formed in November 1990, led by Chandra Shekhar, with the support of Rajiv Gandhi’s Congress from outside. That government with Chandra Shekhar as the prime minister appointed Sinha as its finance minister.
The Chandra Shekhar government’s tenure, however, was almost equally short-lived. It had, nevertheless, begun preparing a plan for reviving the economy in earnest. One of those key steps was to convince the IMF by January 1991 that it must sanction two loans to India—for an amount of $775 million under the first credit tranche facility and for $1.02 billion under the compensatory and contingency financing facility. The government had promised to the IMF that in return for those loans, needed to keep India’s record of meeting international payments obligations intact, the government would introduce a series of economic policy reforms. The Budget that the government was expected to announce in February 1991 would contain a list of those measures. However, by the middle of February that year, Rajiv Gandhi’s Congress withdrew its support to the Chandra Shekhar government on a specious issue and that left President R. Venkataraman with no other choice than calling for fresh elections and asking Chandra Shekhar to continue as the head of a caretaker government till a new government was elected. This also meant that the IMF loans that could have come to help the Indian economy could not be cleared till an elected government was in place and the country’s economic crisis worsened.
After having short stints as cabinet secretary in 1989 and as a member of the Planning Commission in 1990, T.N. Seshan, a 1955-batch IAS officer, found himself in Nirvachan Sadan, headquarters of the Election Commission of India, as Chief Election Commissioner, a post he would hold for five years, conducting two general elections—one would see the formation of a minority government led by P.V. Narasimha Rao in 1991 and the other wo
uld see the defeat of the same government and the formation of a series of unstable coalition governments for the next two years. As soon as the Chandra Shekhar government fell, Seshan swung into action, putting in place a schedule for holding the general elections in the month of May so that a new government could be formed soon enough to prevent any further deterioration in the state of the economy.
On Raisina Hill, at the Cabinet Secretariat, there was at around the same time a new occupant of the post of cabinet secretary—Naresh Chandra, a 1956-batch IAS officer. He had succeeded Vinod C. Pande, another IAS officer, whose tenure ended just as V.P. Singh exited from the PMO. Pande was the revenue secretary in the finance ministry when V.P. Singh was the finance minister and helped the latter carry out the many raids and investigations against allegedly corrupt business leaders and controversial government deals.
In many ways, Chandra Shekhar’s appointment as prime minister was closely linked to the positioning of both Seshan and Chandra at these two crucial jobs. Seshan, who in 1989 was the cabinet secretary under the Rajiv Gandhi government, was sent to the Planning Commission by V. P. Singh to make way for Vinod Pande. Soon after Chandra Shekhar formed his government in November 1990, he brought in Chandra, who was then the home secretary, as the cabinet secretary and shifted Seshan from the Planning Commission to head the Election Commission. While Seshan was busy taking steps to hold the crucial elections in May, Chandra was busy providing guidance to a caretaker government on how important decisions could be taken to prevent the crisis from escalating but without violating the Constitutional niceties that would bar a caretaker government from taking any policy decision.
The Rise of Goliath Page 20