Greece in India

By Sanjaya Baru June 20, 2011 Twenty summers ago India also teetered on the brink of default. Our readers who turn 20 this year should track the news coming out of Greece to get a feel of what India was like in the year of their birth. It all started in the autumn of 1990, like most 20year-olds this summer! Iraqs invasion of Kuwait in August 1990 sent oil prices spiralling, adding to Indias foreign exchange outgo. The crisis in West Asia hit dollar remittances to India and Indias exports westwards. In September 1990, India drew $660 million from its reserves with the International Monetary Fund (IMF) to bolster its foreign currency holdings. By October 1990, western credit rating agencies Standard & Poors and Moodys started downgrading Indias sovereign rating, contributing to reduced capital inflows and higher cost of external funds. In November 1990, the then prime minister Vishwanath Pratap Singh lost power. Chandra Shekhar took charge and appointed Dr Manmohan Singh as economic advisor in the Prime Ministers Office. The finance minister of the day, Yashwant Sinha, dispatched the then deputy governor of the Reserve Bank of India (RBI), C Rangarajan, and Government of Indias Chief Economic Advisor Deepak Nayyar on a secret mission to see if the IMF would lend.

I happened to be in Washington DC in the second week of December and went to the IMF office. I chanced upon Indias executive director at the IMF, Gopi Arora, in the company of Dr Rangarajan and Dr Nayyar. The three of them swore me to secrecy and extracted a promise that I would not report what I saw! Mr Arora was a friend of my fathers, Dr Rangarajan was my father-in-laws friend and Dr Nayyar was a former colleague from our teaching days at the Jawaharlal Nehru University! A front page story got killed! The negotiations helped India secure $1.03 billion under the IMFs Compensatory and Contingency Financing Facility (CCFF) and $789 million as the first tranche of a standby arrangement. A decade later, on the 10th anniversary of the reforms in 2001, all three of them made public the nature of this secret mission. In his autobiography, former finance minister Yashwant Sinha also finally confessed that the economic liberalisation package of July 1991 that the then finance minister Manmohan Singh presented to Parliament had indeed been readied by December 1990, but the Chandra Shekhar government failed to unveil it because days before Mr Sinha could present his Budget, the Congress party decided to withdraw support to the Chandra Shekhar government. Six months of political uncertainty between December 1990 and June 1991 saw the economic situation turn even graver. Nonresident Indians were the first to panic. Over a billion dollars went out of their accounts in India. In May 1991, the government leased 20 tonnes of confiscated gold to State Bank of India, which, in turn, sold it to an international bank and raised $200 million. The RBI then physically moved 46.9 tonnes

of gold by air cargo from its vaults in Mumbai to the vaults of the Bank of England in London to raise a loan of $405 million that was jointly financed by the Bank of England and the Bank of Japan. In June 1991, the RBIs foreign currency assets stood at $1.12 billion, equivalent to less than three weeks of imports at the time. India was on the verge of default as a new government, under the leadership of Prime Minister P V Narasimha Rao, took charge. The first and the most important policy step that India took to regain credibility with its creditors and rating agencies was to go in for a massive devaluation of the rupee. In a two-stage operation code named hop, skip and jump by the architects of the move then finance minister Manmohan Singh and RBIs C Rangarajan the rupee was devalued by 9 per cent on July 1, 1991 and by another 11 per cent on July 3. The hop on July 1 was meant to test the waters. The political reaction at home was strongly negative. Congress party leaders rushed to Prime Minister Rao and warned him that devaluation had cost even the mighty Indira Gandhi dearly in June 1966, and it would unseat him. Barely a month in office, Mr Rao panicked. He called Dr Singh and asked him to stop further action. Both Dr Singh and Dr Rangarajan knew that a half-hearted move would make matters worse. Global financial markets and the IMF expected more. Dr Singh pretended to get in touch with the deputy governor in Mumbai and claimed he was unable to get him. Mercifully, those were not the days of cell phones and SMS. Good old MTNL could be depended upon not to put a call through! A night of failed communication between North Block and Mint Road enabled the jump after the intervening skip.

The rupee devaluation was followed by trade liberalisation. This improved Indias sovereign rating and its ability to borrow more from the IMF and attract funds back home. On July 24, 1991 Dr Singh presented his first Union Budget. The rest, as they say, is history. Many mocked the reforms of the day. For months on end, the Left parties organised protests, much like what one sees on the streets of Athens these days. By December 1991, Indias staunchest ally and strategic partner, the Soviet Union, disappeared. Greece has Germany, India had nobody. In that difficult, dark and lonely world, India rebuilt its economy, its credibility, its credit rating and its reputation. Todays teenagers were born in a different India. They know not the humiliation of a nation that mortgaged gold, much like any poor farmer or weaver, in exchange for cash to buy fuel.
The delicensing and decontrol, and the end of the licence permit raj that followed, destroyed an entire edifice of corruption as sector after sector saw entrepreneurs and consumers participating in more open markets. The Indian economy demonstrated incredible resilience and emerged Phoenix- like. Even Bollywood has made a film about it all!