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To the brink and back

When the history of post independent India is written, the year 1991 would be considered a watershed year.  The economic reforms that were launched that year transformed the economic trajectory of the nation. You get some idea of the change when you realize that in 1991 there were 1.5 million telephone connections in India as opposed to one billion today. India made 60,000 cars annually that year as opposed to 20 lakh today.

To The Brink And Back: India’s 1991 Story is an insider’s account of the 100 days, from July to October of 1991, when the unlikely duo of P V Narasimha Rao and Dr Manmohan Singh unleashed the animal spirit on the economy. The author Jairam Ramesh had a ringside view as an officer on special duty in the Prime Minister’s Office.

In July 1991, the Indian economy was in a shambles and the country had less than 1 billion dollars in reserves. She had a short-term external debt of 8.5 billion dollars due within a year. The calamitous Gulf War, created a spike in crude oil prices, and consequential spike in import outgo. The high real exchange rates made her exports uncompetitive adding pressure to the balance of payments. Further, we had an unsustainable deficit and the wholesale price inflation rose to 17 per cent.

On the advice of former president, R Venkataraman, the prime minister appointed Dr Manmohan Singh as finance minister. Interestingly, the then troika of finance secretary, chief economic adviser and the foreign secretary were against the reform policies unleashed by the government!

The solutions proposed were to be implemented in four steps: The first three were executed even before the vote of confidence was secured in the parliament!

1. Sale of gold and IMF assistance:
Before the Congress came to power, the Chandrasekhar government had sold 20 tons of gold confiscated by customs, through the State Bank of India to raise 200 million dollars. In order to meet emergency liquidity requirements, the new government pledged 46.4 tons of gold. To raise 400 million dollars of foreign exchange, the government borrowed 1.9 billion dollars from the IMF. The same Dr Singh bought 200 tons of gold from the IMF when it required liquidity to meet the 2008 financial crisis thus becoming the only leader who steered a country from being a borrower from IMF to a lender to the same  IMF.

2. Devaluation: The rupee was sharply devalued in two steps and the total devaluation amounted to 18 per cent. The prime minister, singed by the negative reactions of the Parliament, called the finance minister on the morning of 9 July and asked him to call off the second devaluation. By the time Dr Singh could speak to the deputy governor of RBI, Dr C Rangarajan, to stop the devaluation, the press release had already gone out! The industry bodies welcomed the move and the markets rallied. These two positive developments strengthened the confidence of the Prime Minister.

3. Trade reforms: Commerce Minister P Chidambaram and Commerce Secretary Montek Singh Ahluwalia announced a comprehensive reform of trade policies and replaced the cash compensation scheme for exporters with EXIM scrips. Within two years, the rupee was made freely convertible on the trade account. The office of the Chief Controller of Imports and Exports was abolished

4. New industry policy: Along with the budget of 1991, a new industry policy was laid on the table. The policy diluted the powers of the MRTP Act, freed industrial production from the clutches of licensing, thereby ending the draconian licence permit raj and allowed foreign direct investment into manufacturing.

Ramesh says reforms began well before 1991. There is a ring of truth to it. “To be sure, there had been earlier attempts to reform. The first two years of Rajiv Gandhi’s tenure (1985-87) as prime minister saw a flurry of initiatives to give greater incentives to the private sector to expand.”

Dr. Singh said it best at the conclusion of his 1991 budget speech: “I do not minimize the difficulties that lie ahead on a long and arduous journey 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 emergence of India as a major economic power in the world is one such idea.”

The book is well-written, simple and racy. It’s a must read for all those who want to understand what happened during those dramatic 90 odd days.


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