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

by Vinay Sitapati

  A few hours later, Manmohan Singh, wearing a light Nehru jacket78 and with the red budget briefcase beside him, got up from his seat in the treasury benches in Parliament to deliver the speech of his life.

  The apolitical Manmohan Singh began by confessing that he was ‘overpowered by a strange sense of loneliness’. He missed the ‘handsome, smiling face’ of Rajiv Gandhi.79 The speech would be peppered with other references to the very family whose ideology the budget was reversing. His next rhetorical tactic was to play up the financial crisis, claiming that it was raising prices on the poor. ‘The crisis in the economy is both acute and deep. We have not experienced anything similar in the history of independent India.’80 In the beginning of the speech itself, Manmohan had cited Rajiv Gandhi as well as the poor—sugar-coating meant to mask the bitter medicine in the rest of the budget.

  Over the next few hours, Singh overhauled the import-export policy, pushed for export promotion, slashed import licensing, and reduced tariffs. After another ritual mention of Rajiv’s name, the budget laid the foundation for vibrant capital markets.81 Singh also went ahead and reduced subsidies on fertilizers by 40 per cent. The prices of subsidized sugar and LPG cylinders were also raised.82 He then referred to the changes in industrial policy announced a few hours earlier, taking care to thank Nehru, Indira and Rajiv for a ‘well diversified industrial structure’. Singh warned of difficulties ahead, but ended on a hopeful note: ‘As Victor Hugo once said, “No power on earth can stop an idea whose time has come.”’83

  In a single day, Narasimha Rao and Manmohan Singh had done more than anyone to dismantle the three pillars of the licence raj: monopolies for the public sector, limits on private business, and isolation from the world markets.

  But Rao had learnt from his fiasco as chief minister to neither show exultation nor claim credit, to know when to play lion and when to play mouse. He refused to present his own industrial policy, and throughout Manmohan’s budget speech, pouted next to him without speaking at all. At eight that night, after spending the day orchestrating the biggest change to the economy since Independence, Narasimha Rao hosted a perfunctory dinner for the prime minister of Mauritius.84

  It was to be business as usual.

  The next day, newspapers bought the idea that the main reform was in the budget (not in the industrial policy) and its orchestrator was Manmohan Singh (not Narasimha Rao). The Times of India called the budget ‘Truly Historic’, though it made no mention of Narasimha Rao.85 The Economist termed the reforms ‘an economic revolution’, but headlined the article, ‘Singh’s new song’.86 The fortnightly India Today’s next issue sported a cover with the heading ‘Shock Treatment. Will it Work?’87 On the cover was just one man: Manmohan Singh.

  Narasimha Rao was prescient in disassociating himself from the reforms of 24 July. For, on that day itself, the budget was attacked by opposition politicians. V.P. Singh said that ending subsidies would wreak havoc on farmers. Others reflexively termed the reforms ‘anti-poor’. BJP leader Jaswant Singh claimed it did not contain poverty alleviation programmes.88 In the remaining session of Parliament, the Opposition planned to give Rao’s government a hard time.

  Narasimha Rao responded with a verbal offensive designed both to exaggerate the nature of the crisis that forced his hand, as well as exaggerate links to the Nehruvian past. In his first Independence Day speech on 15 August 1991 from the ramparts of the Red Fort in Old Delhi, surrounded by bulletproof glass and snipers at the turrets, Narasimha Rao gave his audience a lesson in economics. He first spoke about the unprecedented nature of the crisis, and how this would impact the common man with an increase in the price of fertilizers, kerosene and edible oil.89 He made no mention of tariff reduction or delicensing, but only of ‘slightly changing the exchange rate of the Rupee’.90 His speeches to Parliament were also crafty. Sensitive to the Opposition’s accusation that he was imitating the West, Rao cited examples of pro-business policies in Korea, Malaysia, Thailand and Indonesia.91 He defended his new industrial policy in other ways too, arguing that it was a continuation of the logic of Nehru’s 1956 industrial policy resolution.92

  This was less than truthful, given that it was this very industrial policy that Rao had demolished the previous month. But this was a prime minister whose favourite Telugu poem was one which could be interpreted to mean either the Mahabharata or Ramayana. It was not the words that mattered, it was the meaning they were given.

  Narasimha Rao’s other technique in dealing with Parliament was to tap his extensive networks among opposition leaders, many of whom were former Congressmen who had served with him. Rakesh Mohan remembers: ‘The difference between Manmohan, Sonia, Rajiv and Rao was that he had worked with everyone for ages. The Gandhi family are completely removed from the hurly-burly of politics. They are not friends with others. [But] Rao and Vajpayee were old coots. He [Rao] knew people in other parties very well. He could deal with them as equals.’93 To soothe the National Front leaders, Rao kept stressing that his policies were only continuations of those of prime ministers Chandra Shekhar and V.P. Singh. And when it came to the BJP, he used Sanskrit homilies in Parliament to disarm them.94

  Rao was also pragmatic enough to know the battles which he could not win. When the Opposition was livid that Manmohan Singh had allocated 100 crore rupees—then a considerable sum—to the newly formed Rajiv Gandhi Foundation, Rao swiftly cancelled the grant, but only after Sonia Gandhi had also rejected it.95 When protests over the removal of subsidies threatened to upturn his entire agenda, he ordered Manmohan Singh to decrease the hike in fertilizer prices from 40 to 30 per cent.96 The technique of first increasing the price then rolling it back by a meagre amount, punctured the protests while letting the meat of the policy stay.

  The one group that was resistant to Rao’s charms were the communists. The CPM and CPI had together won around forty-nine seats in the 1991 elections, enough to slow down liberalization policies. On 4 July 1991, right after the second devaluation of the rupee, the CPM government in West Bengal released a document titled ‘Alternate Policy Approach to Resolve BoP [Balance of Payments] Crisis’. It called for increasing taxes and cuts to non-developmental expenditures97—without having to do any delicensing, rupee cuts, and trade reforms. On 13 July, a group of left-leaning economists—many of them close to the communist parties—issued a statement critical of devaluation and cuts to subsidies.98 Left economists also wrote articles arguing that the IMF-suggested response to the crisis was not inevitable.99 This critique was pithily articulated by the Marxist leader E.M.S. Namboodiripad, who compared a loan from the IMF to ‘a thirsty man taking a cup of poison on the plea that there is no alternative with which he can quench his thirst’.100

  Narasimha Rao adopted a multipronged approach with the Left. He realized that public sector workers were organized, and many of them were linked to the communist parties. Any move to fire them would set off a firestorm akin to the riots that followed chief minister Narasimha Rao’s land reforms in 1972. This Narasimha Rao, older and wiser, swore to protect the interests of organized labour. He promised that not a single worker would be fired because of his economic policies.101 His finance minister Manmohan Singh would refer to the successful experience of communist-run West Bengal in pursuing some industrialization, something that flattered the Bengali Marxists while enraging their Delhi counterparts.102 Narasimha Rao also went out of his way to cultivate Jyoti Basu and other communist leaders. His childhood friend Sadashiva Rao was a long-time member of the CPI, and prime minister Rao would often call him on the phone to find out what the Left was thinking.103

  While protests against liberalization from Parliament and the communists were to be expected, more unexpected was opposition from business groups. Part of the problem was that Narasimha Rao had hardly interacted with businessmen before. Tarun Das, the long-time head of the industry lobby, the Confederation of Indian Industry (CII), remembers meeting Rao soon after the budget, in August 1991. ‘He was a man of few words,’ Das rememb
ers. ‘He wasn’t comfortable with business . . . he was from an older generation.’ But the main problem was that local firms were terrified that foreign competition would dislodge them from a cosy existence. A few days after the announcement of the new industrial policy, the business lobbying outfit, the Federation of Indian Chambers of Commerce and Industry (FICCI), expressed apprehensions about foreign companies being allowed entry.104 Jairam Ramesh remembers telling industrialists at the time that they sounded like radical students from Jawaharlal Nehru University.105

  In order to allay the fears of Indian businessmen, Narasimha Rao opened his schedule to prominent industrialists, something that the strait-laced Manmohan Singh was loathe to do. Rao’s diary shows that he met Dhirubhai Ambani at 7 a.m. on 26 July—two days after the budget—and again on 16 August 1991. Rao would send emissaries—his press secretary, P.V.R.K. Prasad, and principal secretary, Amar Nath Varma—to meet influential businessmen and soothe their immediate anxieties.106 He also conferred India’s highest civilian honour, the Bharat Ratna, on the businessman J.R.D. Tata. This was the first time an industrialist had been recognized as a jewel of India, and the prime minister was well aware of the message being sent. While ignoring the long-term worries of big business, Rao was going out of the way to accommodate their proximate demands.

  When Rao was chief minister of Andhra Pradesh, his own Congress had proved the fiercest opponent to his land reforms. Now as prime minister, Rao noted again that the most trenchant criticisms of liberalization emanated from his own party.

  Soon after the budget, the party newspaper, the Herald, criticized liberalisation for giving ‘the middle-class Indian crispier cornflakes or fizzier aerated drinks . . . That could never have been the vision of the founding fathers of our nation.’107 At a party meeting on 1 August 1991, there was insurrection in the ranks. Narasimha Rao said little, leaving Manmohan Singh, who ‘cut a lonely figure’ to defend the new policies.108 In the next party meeting held days later, only two Congressmen got up to defend Manmohan Singh—one of them being Mani Shankar Aiyar,109 who would later become a visceral critic of the liberalization policies. Once again, Narasimha Rao said little, leaving Manmohan to face the heat.

  The apolitical Manmohan Singh was learning tricks of his own. He used Rajiv Gandhi to defend the policies, and in the discussion in Parliament on 6 August, he referred to Jawaharlal Nehru’s legacy.110 When fifty Congress MPs signed a letter critical of the budget, Rao chose not to respond, letting his finance minister do the explaining. When the government later climbed down on subsidies somewhat, the protests dissipated, leaving Rao unscathed and unchallenged.

  Behind these pretexts and ploys lay a shrewd political operator, unafraid to use any tool at his disposal. Perhaps the best evidence of just how devious Narasimha Rao was prepared to be to sell economic reforms lies in the existence of a clandestine document that the intelligence bureau sent to the prime minister around late 1991.

  This document—which has never been made public—begins by listing the four major kinds of economic reforms that the Rao government had unveiled:

  ‘i. Liberalization of trade and commerce, decontrol of industry, exit policy and IMF/World Bank conditionalities; ii. liberal entry of multinationals, foreign investment, GATT proposals and intellectual property rights; iii. privatisation/dilution of public sector; iv. reduction of fertilizer subsidy and agricultural policy.’

  It then lists the names of all the Congress MPs—in the Rajya and Lok Sabha—who were against each of these four measures. There were fifty-five MPs against the liberalization of trade policies, including seven ministers such as Balram Jakhar and Madhavrao Scindia. Six Congress MPs opposed the entry of multinationals, including K.K. Birla. Privatization of public sector firms faced opposition from eighteen MPs, twenty MPs resisted the reduction of fertilizer subsidy, and there were twenty-two MPs against a Congress–BJP understanding on reforms, including Arjun Singh and Digvijay Singh.

  This is a remarkable document. The job of the intelligence bureau is to protect the nation against domestic enemies. But Narasimha Rao was using it to spy on his own Congressmen, ensuring that they would not do to him now what they had done in 1973. More than any other single piece of evidence, this report shows how serious—not to mention ruthless—Rao was in pushing through economic reforms.

  Narasimha Rao and Manmohan Singh followed up the big bangs of July 1991 with short bursts that were kept muffled from the media. As the political scientist Robert Jenkins explains, the aim in each sector was ‘Gradual reform . . . using less transparent means of initiating change in an effort to avoid direct political confrontation as long as possible.’111

  The foreign investment promotion board was set up soon after the budget.112 Run directly from the prime minister’s office, it facilitated the flow of foreign investment. The months that followed saw further changes to anti-monopoly laws and reduction in tariffs. The government also shut down many of the Kafkaesque instruments of economic control, such as the secretariat of industrial approvals, the directorate-general of technical development, and controllers of various commodities. Cabinet secretary Naresh Chandra remembers being tasked with closing down offices and asking babus to leave: ‘The buildings were locked. We used to order them to shut down and disband staff by a specific date.’113

  The 1992 budget, presented by Manmohan Singh in February, made foreign investment in India even easier. In that same month, Rao met the political scientist James Manor. The conversation gave Manor insights into the political logic for these economic reforms. ‘[Rao] knew that the issues of growth and development were more mundane and less emotive than caste, religious or regional issues. But he welcomed this because . . . the more heated politics became, the less able a centrist party like Congress would be to compete with parties to its left . . . and its right . . .’114

  The stock market response was euphoric.115 Within a single month, the Sensex doubled,116 and the stockbroker Harshad Mehta became a national icon. He would drive around Bombay in an imported maroon Toyota Lexus. A herd of investors would follow his every move on Dalal Street.

  By the middle of 1992, foreign exchange reserves—the depletion of which had been the excuse for reforms—were limping back to normal. By April, India’s foreign exchange reserves were now enough to buy three months’ worth of imports—the ‘safe level’ that economists agreed upon.117 S. Rajgopal, who succeeded Naresh Chandra as Cabinet secretary in August 1992, remembers: ‘By the time I took over, the economic crisis had abated. Forex situation was improving.’118 In a speech to the industry lobby FIICI a month after, Rao said, ‘The balance of payments crisis is now under control and we have been reasonably successful in reducing the fiscal deficit . . .’119

  The crisis was over.

  The reforms of 1991 are thought of as purely IMF-induced, an inevitable response to what the economist A.O. Hirschman described as an ‘optimal crisis’—‘deep enough to provoke change but not so deep that it wiped out the means to make it’.120 This narrative is incomplete for a number of reasons.

  India had leaned on the IMF earlier. It had borrowed SDR 3.9 billion in 1981-82, the largest arrangement in IMF history at the time.121 That optimal crisis had not induced the then prime minister to open up the economy. The ideas behind the reforms of 1991—devaluation, delicensing, trade liberalization—had been agreed upon for at least a decade within government circles. What the IMF did was to provide Narasimha Rao and Manmohan Singh an external political excuse to implement home-grown ideas. It is certainly true that politicians recognized that with India facing a crisis, and with the Soviet Union in slow collapse, some change was inevitable. But Narasimha Rao’s response was one of several possible—as the Left parties and intellectuals so correctly pointed out. The fact that opposition parties, as well as sections of the Congress, opposed liberalization shows that they were far from inevitable.

  Without Narasimha Rao’s political skill in playing up the crisis, disguising change as continuity, and deployi
ng the incorruptible Manmohan Singh’s technocratic image, reforms may well not have happened. As Tarun Das puts it, ‘Rao was both strategic and shrewd. He knew the difference between what needed to be done, and how it has to be done.’122

  Perhaps the best evidence that economic reform was not just a straightforward response to calamity is what happened after the crisis ended. Narasimha Rao did not have the excuse of a looming catastrophe after mid-1992. Big business, opposition parties, the Congress, and Left intellectuals could now force the Rao government to declare mission accomplished, and pedal back to the failed policies of the past—until the next financial crisis.

  Without further liberalization, the reforms made so far would also be meaningless. While formal restrictions on Indian and foreign entrepreneurs had been eased, the complexity of doing business in India meant that government hand-holding was still necessary. The revolutions in transport, communications and consumer goods were yet to take place, and the first private airline yet to take off. But with no crisis to justify his reforms after 1992, Narasimha Rao could well have chosen to abandon liberalization midway.

  8

  Growing the Economy, 1992–96

  The rule of Chandragupta Maurya stretched from northern India to Persia in the fourth century BCE.1 In running this unwieldy empire, the king was advised by Chanakya—also known as Kautilya—whose book on the science of politics is titled Arthashastra.