Article

P.V. Narasimha Rao: Indian Journal of Public

Administration
The Precursor of the 63(4) 616–630
© 2017 IIPA
SAGE Publications
Era of Economic sagepub.in/home.nav
DOI: 10.1177/0019556117726824
Reforms in India http://journals.sagepub.com/home/ipa

Shashi Bhushan Kumar1

Abstract
Pamulaparti Venkata (P.V.) Narasimha Rao ascended to the office of the Prime
Minister (PM) of India at a time when India was stuck at its worst phase of
economic turmoil. His keen foresight had initiated India to a path of economic
liberalisation, the ripples of which are felt by the country to date. This is a narrative
of the policy of a master planner of economic reforms in India, who along with
his economist Foreign Minister Manmohan Singh, lifted it out of the economic
morass consequent upon the Nehruvian policy of mixed economy of about four
decades by initiating the economic reforms in 1991. What India has achieved as
an economic power, P.V. Narasimha Rao as PM deserves credit for, along with
his team of ministers, especially Manmohan Singh and P. Chidambaram.

Keywords
Economic reform, liberalisation, high command, License-Permit raj

Pamulaparti Venkata (P.V.) Narasimha Rao had almost retired from politics, but
the assassination of Rajiv Gandhi on 21 May 1991 paved the way for his come-
back. In early 1990, Rajiv Gandhi denied him even a Rajya Sabha seat. This
saddened him, but being a reticent person, he did not create a ruckus and made
arrangements to go back to his hometown, Hyderabad (Singh, 2014). On 29 May,
the Congress Working Committee (CWC) met the second time after denial of
Sonia Gandhi to be the Congress President. With H.K.L. Bhagat presiding, Rao
was unanimously elected as Congress President (Ramesh, 2015). Later events

1
Head, Department of Political Science, Lakshmi Narayan (L. N.) College, AT+PO- Bhagwanpur,
Distt. Vaishali (Bihar), India.

Corresponding author:
Shashi Bhushan Kumar, Head, Department of Political Science, Lakshmi Narayan (L. N.) College,
AT+PO- Bhagwanpur, Distt. Vaishali (Bihar) 844114, India.
E-mail: shashibhushan911@gmail.com
Kumar 617

proved that Rao had been the only Congress leader who kept at bay the dominant
Nehru–Gandhi family from the hegemonic position of the decision-maker of the
party and took important decisions himself as the Congress President and the
Prime Minister (PM).
Like Deng Xiaoping of China, succeeding great Mao Zedong, who took a
U-turn from the theoretical position of his predecessor in pursuing the Western
line of development initiating the economic reforms in China in 1978 with his
unique plea that ‘it doesn’t matter whether the cat is black or white, as long as it
catches mice’, quoted in Li (1977), Rao took a bold decision of economic reforms
in 1991 when India was staring at a balance of payments crisis-led economic
disaster. Rao was, in fact, the author of the most radical shift in India’s economic
policy since Jawaharlal Nehru’s famous Industrial Policy Resolution of 1956.
Nehru’s resolution had declared that India would strive to establish a ‘socialis-
tic pattern of society’. In 1991, Rao moved away from that pattern to unleash
private enterprise (Baru, 2016). Both these precursors of economic reforms of
their respective countries will be remembered for their pragmatism, boldness and
far-sightedness in their paradigm shifts which brought radical economic transfor-
mation and turned their countries into fastest developing economies. This is why
Rao is regarded as the Father of Indian Economic Reforms.
During 1950–1980, India’s annual rate of growth was so low and slow that
it was mocked as the ‘Hindu rate of growth’1 (economist Raj Krishna coined
this term) which remained less than 3.5 per cent or so. The nation was on the
verge of bankruptcy. Due to high fiscal deficit as a result of closed economy
for four decades, higher defence expenditure, unnecessary subsidies (mainly for
vote-bank politics), rising debt payments and other factors, India began to rely on
external funds which led to a cycle of vicious borrowing from foreign banks. In
1991, all hell broke loose and India had run out of forex, that is when Rao became
the PM, India was in a pathetic economic condition where it could sustain only
for 2 weeks before it had to be declared bankrupt. India had to airlift its 47 tonnes
of gold reserves as a pledge to the International Monetary Fund (IMF) for a loan
which had led to Indians hanging their heads in shame. However, the pledging
of gold to the IMF had started with Rao’s predecessor, Chandra Shekhar. It was
PM Chandra Shekhar and Finance Minister Yashwant Sinha—on the advice of the
Reserve Bank of India (RBI) Governor S. Venkitaramanan—who first decided to
use our gold reserves to raise foreign loans to keep the wheels of the economy
moving. On 16 May 1991, 20 metric tonnes of confiscated gold, worth US$200
million, was leased to the State Bank of India (SBI) for sale, with a repurchase
option, to the Union Bank of Switzerland (Ramesh, 2015, p. 44). This was the first
time India was selling gold to avoid default and to ensure that its external payment
obligation were met. Though the final shipments began only in July, after the Rao
government took charge. After becoming the PM, Rao addressed the nation for
the first time (22 June 1991) and told his people:

The economy is in a crisis. The balance of payments situation is exceedingly difficult.

Inflationary pressure on the price-level is considerable. There is no time to lose.
The government and the country cannot keep living beyond their means and there are
no soft options left. We must tighten our belts and be prepared to make the necessary
618 Indian Journal of Public Administration 63(4)

sacrifice to preserve our economic independence which is an integral part of our vision
for a strong nation. (Baru, 2016, pp. 87–88)

To get rid of this crisis, Rao took the decision to initiate economic reforms which
resulted in far reaching consequences. The main focus of this article is to present
a narrative of Rao’s acumen to initiate radical reforms in 1991 to a mark to be
called ‘initiator of economic reforms in India’. It is worth mentioning that
economic liberalisation means privatisation, globalisation and marketisation.

Post-Independence Economic Reforms

Indian economic policy after Independence in 1947 was influenced by the
colonial experience (which was seen by Indian leaders as exploitative in nature)
and by those leaders’ exposure to Fabian socialism. Policy tended towards protec-
tionism with a strong emphasis on import substitution, industrialisation under
state monitoring, state intervention at the micro level in all businesses especially
in labour and financial markets—a large public sector, business regulation and
central planning (Kelegama & Parikh, 2000). Elaborate licenses, regulations and
the accompanying red-tapism, commonly referred to as License-Permit-Quota
Raj, were required to set up business in India between 1947 and 1990 (The Times
of India, 2001).
After Independence, India adhered to the Nehruvian model of ‘socialistic
pattern of society’. It is well known that from 1951 to 1991, Indian policymak-
ers stuck to the path of centralised economic planning accompanied by extensive
regulatory controls over the economy. The strategy was based on an ‘inward-
looking import substitution’ model of development. This was evident from the
design of the country’s Second Five-Year Plan (1956–1961), which had been
heavily influenced by the Soviet model of development (Government of India,
1956). Several official and expert reviews undertaken by the government recom-
mended incremental liberalisation of the economy in different areas, but these did
not address the fundamental issues facing the economy.2 As the BBC presented it:

Before the process of reform began in 1991, the government attempted to close the
Indian economy to the outside world. The Indian currency, the rupee, was inconvertible
and high tariffs and import licensing prevented foreign goods reaching the market.
India also operated a system of central planning for the economy in which firms
required licenses to invest and develop. The labyrinthine bureaucracy often led to
absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted
a license to produce and the state would decide what was produced, how much, at what
price and what sources of capital were used. The government also prevented firms from
laying off workers or closing factories. The central pillar of the policy was import
substitution, the belief that India needed to rely on internal markets for development,
not international trade, a belief generated by a mixture of socialism and the experience
of colonial exploitation. Planning and the state, rather than markets, would determine
how much investment was needed in which sectors. (BBC, 1998)

India’s economy went through episodes of economic liberalisation in the 1960s,

1970s and the 1980s under PM Indira Gandhi and later PM Rajiv Gandhi.
Kumar 619

Indira Gandhi had announced devaluation of rupees in 1966 to attract foreign

capital, but it created huge controversy and was finally reversed in 1967. In the
late 1960s, the Indian economy was in serious trouble. To encounter them, she had
to launch a series of radical economic policies. Though those policies accelerated
economic growth up to 5.5–6 per cent, it is not feasible to regard her policy initia-
tives as economic reforms in neoliberal terms. She resorted to policies which were
an amalgamation of neoliberalism and political populism. Indira Gandhi her-
self had cautiously begun the process of giving a new direction to regulations
when she set up the Economic Administration Reforms Commission under the
Chairmanship of L.K. Jha: a committee to examine the principles of a possible
shift away from physical to financial control under the Chairmanship of
M. Narsimham and a committee for restructuring the public sector with Arjun
Sengupta as its head. India’s first major reform that partially decontrolled the
cement industry took place in 1982 (Ramesh, 2015, p. 2). Besides, it was Indira
Gandhi’s regime in 1982 and 1983 that encouraged foreign investment in auto-
mobiles (Maruti Udyog Ltd) and consumer electronics.3
However, Indira Gandhi was defensive and tentative in the policy reform; she
chose to undertake after 1980. An IMF loan had been negotiated in 1981–1982,
but that had not jolted PM Indira Gandhi into liberalising the economy. Her
modest attempt to change course would always be viewed against the radicalism
of many of her earlier policies. In fact, the License-Permit-Quota raj and many
restrictions on business enterprises were post-Nehruvian and the contributions of
Indira Gandhi.
Earlier in May 1979, the Committee on Controls and Subsidies set up by the
Morarji Desai government under the chairmanship of Vadilal Dagli submitted its
report. The Committee felt the need to restructure the trade policy of the country
in favour of export promotion measures (Dagli, 1979). But premature fall of the
Morarji Desai government could not add any significant economic reforms.
The second major attempt was made in 1985 by PM Rajiv Gandhi. What
Rajiv Gandhi began in January 1985 was very important; the process of system-
atic unshackling undoubtedly started with him. The first 2 years of Rajiv Gandhi’s
tenure (1985–1987) as PM saw a flurry of initiatives to give greater incentives
to the private sector to expand. In September 1986, he had asked the Planning
Commission to prepare a detailed agenda for industrial policy reforms. A compre-
hensive action plan titled ‘New Industrial Policy Initiatives’ had been prepared.
It had advocated, among other things, a more liberal policy towards foreign invest-
ment, a loosening of restrictions on the growth of private companies, and the crea-
tion of a regulator for capital markets that was later incarnated as the Securities
and Exchange Board of India (SEBI). But for some strange reasons, that note did
not go further (Ramesh, 2015, p. 2). The process came to a halt in 1987, though
1966-style reversal did not take place (Sharma, 2011). However, these attempts
at economic liberalisation were half-hearted, self-contradictory and often self-
reversing in parts (Harris, 1987).
Rajiv Gandhi too was defensive in his liberalisation moves, not wanting to be
viewed as pro-business. At the time of the All India Congress Committee (AICC)
session in 1985 in Mumbai, Rajiv Gandhi had wanted to argue in favour of liber-
alisation, but party leaders were so aghast at this abandonment of socialism that
620 Indian Journal of Public Administration 63(4)

Rajiv deleted any reference to economic reforms from his speech (Sitapati, 2016).
Even with an overwhelming majority in Parliament, Rajiv Gandhi was unable to
steer the economy away from fiscal mismanagement and crisis. Summing up their
sharp indictment of the macroeconomic policies of the Rajiv Gandhi government,
Joshi and Little concluded:

The major mistake of macroeconomic policy lay in neglecting the danger signs evident
in 1985–86 on the fiscal front. Fiscal deterioration was allowed to proceed apace. As a
consequence, the current account deficit continued to worsen and domestic and foreign
debts continued to increase at a dangerous rate. By the end of the decade, the macroeco-
nomic fundamentals were out of joints. Even a strictly temporary shock like the Gulf
War was enough to trigger a full-scale crisis. (Joshi & Little, 1994)

The Janata Dal-led National Front government of Vishwanath Pratap Singh

(1989–1990) did not add any significant reforms. In March 1990, PM V.P. Singh
had gone to Kuala Lumpur, and impressed with what he saw, directed his key
economic aide, Montek Singh Ahluwalia, to do some fresh thinking on reforms.
This resulted in a truly radical agenda for reforms, but this also never saw the light
of the day. This document titled ‘Towards a Restructuring of Industrial, Trade and
Fiscal Policies’ was comprehensive in scope and was an agenda for radical reform,
most of which was to be accomplished after June 1991 (Ramesh, 2015, p. 3).
However, the V.P. Singh government fell prematurely and so could not execute
those intended reforms.
The Samajwadi Janata Party minority government led by Chandra Shekhar
(1990–1991) tried to arrest the slide and clean up the financial mess. Unlike V.P.
Singh, Chandra Shekhar was willing to take political risks. The credit for under-
standing the seriousness of the situation and acting on time must go to the Chandra
Shekhar and Rao. Chandra Shekhar too could have been India’s man of destiny,
but destiny chose Rao. In December 1990, Chandra Shekhar’s Finance Minister,
Yashwant Sinha, recalled he had two immediate priorities: First, to secure what-
ever assistance we could have from the IMF on an emergency basis and, second,
to prepare a path-breaking budget that would address the accumulated problems
of the Indian economy (Sinha, 2007). But the Congress had decided that instead
of regular budget, an interim budget would be presented. The Chandra Shekhar
government had wanted to do something on economic front but it was toppled by
the Congress supporting it from outside.
The Finance Minister of the Chandra Shekhar government, Yashwant Sinha,
claimed that he was the initiator of economic reforms in India. Sinha had prepared
a budget speech that was on the similar lines as the one presented by Manmohan
Singh, the Finance Minister of Rao later. Sinha wrote in his memoirs Confessions
of a Swadeshi Reformer: My Years as Finance Minister (Sinha, 2017) with
a chapter entitled ‘The Original Reformer?’ that (a) he was the first to intro-
duce the concept of a fiscal deficit as opposed to a conventional budget deficit;
(b) the first to talk about public-sector disinvestment; (c) he talked about rational-
ising expenditure on subsidies, reducing allocations on major subsidies and better
targeting of subsidies for the poor and (d) he stated his commitments to fiscal
discipline in an unambiguous manner.
Kumar 621

It is true that he was the first to suggest public sector disinvestment, which
was to be implemented by later administrations, but the Rao–Manmohan Singh
claim to fame is based on much firmer and larger grounds. The Chandra Shekhar
government wanted to introduce trade policy reforms but did not. The Rao–Singh–
Chidambaram troika did that and earned a permanent place in history for the
accomplishment. Yashwant Sinha never even mentions industrial policy reforms;
actually during a debate in the Rajya Sabha on 7 August 1991, he was very critical
of the industrial policy reforms announced on 24 July 1991 (Ramesh, 2015, p. 147).
In contrast, the economic reforms launched in the 1990s (by PM Rao and
Manmohan Singh as his Finance Minister) were ‘much wider and deeper’ (Sachs,
Varshney, & Bajpai, 1991) and decidedly marked a ‘U-turn’ in the direction
of economic policy followed by India during the last 40 years of centralised
economic planning (Wadhwa, 1977). On economic reforms, Rao and Manmohan
Singh had proved exquisite opening batsmen. June–July 1991 presented a funda-
mental paradigm shift in economic policy. All that had been done prior to 1991
had aimed to make the system more flexible and responsive. But 1991 marked
a whole new beginning. Both Rao and his Finance Minister, Manmohan Singh,
were pillars of the ancien regime (the Licence-Permit-Quota raj), stalwarts of the
very system they set out to replace. The ultimate insiders became the instruments
of a profound change—a change that was initially resisted but that came to be
embraced subsequently by all political parties. The fundamentals did not undergo
a shift even after Rao and Manmohan Singh left office in May 1996. In fact,
economic reform of 1991 was a team work. Apart from Rao–Singh, there were so
many officials behind this success story.

Manmohan Singh’s Valuable Contribution as

Finance Minister
After Rao was elected the leader of the Congress Parliamentary Party (CPP) on
20 June, he settled down to the business of constituting the council of ministers of
his Congress minority government. Like Chandra Shekhar in November 1990,
Rao too first approached I.G. Patel and invited him to be the Finance Minister, but
Patel declined. Rao was keen to ward off political aspirants for the job. He had
earlier hinted that he was thinking of choosing a professional economist with an
international reputation as the Finance Minister. Once Patel declined the first
invitation, Rao asked P.C. Alexander to suggest an alternative; he mentioned the
name of Manmohan Singh. Rao approved the name and Alexander was asked to
call Singh (Baru, 2016, p. 80). Manmohan Singh was delighted to hear the
proposal and gladly accepted the offer. Alexander elaborates it as follows:

I went to Rao’s house directly after taking Singh’s leave and informed him about the
latter’s positive response and that I had conveyed the assurance that Rao would fully
back Manmohan Singh in the discharge of his duties as Finance Minister. Rao felt very
happy that he had succeeded in selecting the right man for this vital post when the coun-
try’s financial position was at its nadir. (Alexander, 2004; see also, Ramesh, 2015, p. 22)
622 Indian Journal of Public Administration 63(4)

R.D. Pradhan, the then Union Home Secretary, has also stated the inevitability of
Manmohan Singh as Finance Minister in his remembrances:

On June 20, 1991, as soon as it became clear that Rao would become the next Prime
Minister I briefed him on a range of important matters that we were dealing with prior
to Rajiv Gandhi’s death. I particularly pointed out that Rajiv Gandhi had cleared the
name of Manmohan Singh as the next Union Finance Minister in case IG Patel was not
available. (Pradhan, 2014; see also, Ramesh, 2015, p. 24)

Clearly, Manmohan Singh, as Finance Minister, was ‘an idea whose time had
come’. Singh’s sobriety and quiet dignity were his hallmarks, just as his experi-
ence as an economic administrator was unmatched. There had been noted ‘profes-
sionals’ as Finance Ministers before, such as Shanmukham Chetty, John Mathai
and C.D. Deshmukh. But none matched the combination of academic brilliance
and wide administrative experience of Manmohan Singh (Ramesh, 2015, p. 25).
Singh was officially given the finance portfolio on 22 June 1991. Three days
later (25 June 1991), he held his first formal press conference and was asked about
inflation. What he said first was unexceptionable:

It would be wrong to say that I have a magic wand to bring down prices. What I can
promise is that in three years’ time prices could be made stable if a strategy of macro-
economic management is pursued now. (ibid., p. 29)

The PM expressed some frustrations with economists not being sensitive to

politics. At a meeting of the CWC on 1 July 1991, the Finance Minister’s admis-
sion on prices came under sharp attack. But on 7 July, at a press conference in
Hyderabad, in a bid to douse the flames, the PM said that the Finance Minister’s
statement was not a reflection of the government’s decision (ibid., p. 30).
Manmohan Singh took some time to transform himself from an honest civil
servant into a canny politician. Rao had a difficult time handling his Finance
Minister’s thin skin but stood by him all the way through. Singh had offered to
quit on at least three occasions in the face of intra-party criticism, and each time
Rao had to get him to withdraw the resignation offer, reminding him that these
attacks, mainly from Arjun Singh, A.K. Antony, and the Congress left, were in
fact aimed at the PM. The Finance Minister was but the surrogate target (Baru,
2016, p. 81). On the third occasion when Singh sent in his resignation, an irritated
Rao sent his messenger P.V.R.K. Prasad, PM’s media advisor, with word asking
the Finance Minister to withdraw his resignation (Prasad, 2012). Having named
Manmohan Singh to the Finance Minister’s job, Rao never interfered with him.
The point about this entire narration is that Rao was fully in charge of min-
istry making and it was his personal decision to appoint a reputed economist
as his Finance Minister. Having done that, he let the Finance Minister pick his
personnel, lending his political weight whenever Rao’s technocrat Finance
Minister needed it. Thus, Rao’s masterstroke was the appointment of Manmohan
Singh.
Kumar 623

Rao and the Congress Party

Despite his crucial role in opening up the Indian economy, Rao remains an elusive
and largely unhonoured figure. Through his five long years as PM, Rao was a ship
that sailed out every day into a storm. In pushing economic reforms or welfare
schemes, he would routinely encounter gales in Parliament and gusts from his
own party. The fact that the ship of state remained afloat for five full years was
itself a wonder. No minority government in India had ever completed a full term
in office; the previous two governments, both minority, had collapsed within a
year. The mandate of 1991 Lok Sabha elections (232 of the 521 seats) presented
Rao with challenges no other democratic reformer had ever faced. Rao had been
chosen as PM by Sonia Gandhi because he was politically weak. No faction
rooted for him within the Congress. After becoming PM, Rao threatened no one:
not Sonia Gandhi, not his rivals Sharad Pawar, Arjun Singh and N.D. Tiwary, and
not Rajiv’s sycophants (Sitapati, 2016, pp. 183–184).
In November 1991, Rao contested from the Nandyal Lok Sabha seat in Andhra
Pradesh. He made history when his election saw the highest ever voter turnout in
any democracy till that date. Rao was elected with 89.5 per cent votes and consid-
ered himself a people’s politician. This victory was a morale booster for the PM.
Rao’s impressive victory helped stabilise the minority government.
As a PM and President of Congress Party, Rao inherited a fractured organisa-
tion. The Congress was elected to the office for the first time in 1991 under the
leadership of a ‘non-Nehru–Gandhi family’ political leader. The conversion of the
106-year old party into a family proprietorship had resulted in its ‘deinstitution-
alisation’ (Kohli, 1991; see also, Sitapati, 2016, p. 184). Any semblance of inner-
party democracy had also long been displaced by ‘high command’ hand-picked
by the Nehru–Gandhis. According to James Manor, ‘anyone can come and go as
he likes, and can push others aside to place himself in a better position’ (Sitapati,
2016, p. 184).
Rao’s first major political move was to convene the seventy-ninth session of
the AICC on 14 April 1992 at Tirupati in Andhra Pradesh. He announced that the
party would conduct organisational elections in late 1991 or early 1992, ahead of
the session. The last time that India’s oldest and largest political party had internal
organisational elections was in 1973. The Tirupati session was historic because it
was the first such session after 1966 when neither the PM (Lal Bahadur Shastri)
nor the party President (K. Kamraj) belonged to the Nehru–Gandhi family.
Rao wanted the Congress to return to a pre-1966-trajectory, seeking a future
independent of any one family. In 1991, Rao may well have wanted the party to
contemplate life after the Nehru family. Rao’s election as PM had created new
hope for India’s oldest political party. It embedded the seed of the Congress’s
renewal as a normal democratic political party, in which leadership is not inher-
ited but attained through political initiative, effort and relevance. The Tirupati
session strengthened Rao and the party organisation and, in doing so, became an
important step in the direction of once again making the Indian National Congress
(INC) a truly national political party that was not identified with any one indi-
vidual or family (Baru, 2016, pp. 119–123).
624 Indian Journal of Public Administration 63(4)

Within the span of a year, Rao showed that the Indian economy and polity
could dream of better times; that India would enter the 21st century as an open
society, an open economy and a normal democratic polity. India was no banana
republic in which one family would rule. India was not a closed economy in which
bureaucratic socialism would crush free enterprise (ibid., p. 130).
Jairam Ramesh, in his latest book, To the Brink and Back: India’s 1991 Story,
describes Rao as a ‘fox’ who ‘was remarkably decisive’ in a critical 90-day period
in 1991 when India was staring at a balance of payments crisis-led economic
disaster. He says in his book that over June, July and August of 1991, Rao demon-
strated that he was not, unlike the general perception about him, at all indecisive.
He further observes: ‘To borrow an analogy from Isaiah Berlin, if Manmohan
Singh was the hedgehog who knew only one big thing and that is economic
reforms, Rao was the fox who knew many things. It is the fox-hedgehog combine
that rescued India in perhaps its darkest moment’ (Ramesh, 2015, pp. 147–148).
Jairam furthermore remarks, ‘India in 1991 could well have mirrored Greece in
2015. That it didn’t is due to the Rao and Manmohan Singh combine.’ His further
remark also deserves mention: ‘There is no doubt that Rao was navigating India
through a most troubled period ... I have to say that he was simply magnificent. ...
From the outset, Rao proved everybody wrong.’ A man who famously remarked,
‘even not taking a decision is a decision’ was remarkably decisive in the initial
months. Jairam writes, ‘Quick decisions were taken, by being exceedingly crafty
as well as bold he [Rao] propelled change’ (ibid., pp. 135–137).

Rao’s Strategy for Economic Reforms

Rao wanted a visibly honest reformer whom the West could trust. He also needed
a loyalist who could deflect domestic criticism away from the PM. Manmohan
Singh would prove to be the perfect foil. Montek Singh Ahluwalia was another
official whom Rao drew into his inner circle. Rao also recruited Jairam Ramesh
as officer on special duty. In 1991, he was Rajiv Gandhi’s pointman on the economy.
In the words of the economist Rakesh Mohan, ‘Jairam was the flag bearer for
Rajiv’s policy inside Rao’s PMO (Sitapati, 2016, p. 117). For Commerce Minister,
Rao selected P. Chidambaram, a young lawyer from Tamil Nadu. Chidambaram,
who had a reputation for efficiency, was an unashamed liberaliser. Thus, Rao
had chosen to give the Finance and Commerce Ministries to known liberalisers,
and selected a Principal Secretary, Amar Nath Verma with pro-market views.
The appointment of A.N. Verma as principal secretary was also fortuitous. Verma
had wide experience in both the Commerce and Industry ministries.

Rao as Executioner of Economic Reforms Since 1991

Rao is the executioner of economic reform in as much as he cleared the financial
mess that he faced. By June 1991, the country had faced acute shortage of foreign
exchange reserves and India had only to pay for just 2 weeks of imports (Ramesh,
2015, p. 11), while a minimum safe level was considered six times that amount—
enough for at least 3 months’ worth of imports.
Kumar 625

Three proximate causes had dwindled India’s dollar reserves: (a) the Gulf War
of 1990 had trebled the price of oil which India was buying from the world market
and had also diminished remittances from Indians working in the Middle-East;
(b) Indians living abroad had withdrawn 950 million dollars’ worth of depos-
its from Indian banks between April and June 1991 (ibid., p. 12), panicking at
political uncertainty in Lutyens’ Delhi and (c) reckless borrowing during the Rajiv
years. Many of these were short-duration loans, and by 1991, they were due.
Rao also controlled inflation. The average rate of inflation during the five-year
period (1985–1990) was 6.7 per cent. But in 1990–1991, it had shot up to 10.3 per
cent and reaching a pick of 16.7 per cent by the end of August 1991 (ibid.). This
made our export expensive and non-competitive.
Rao also brought down India’s short-term external debt, which had ballooned
to alarming levels. By end-March 1991, short-term debt, whose original maturity
was 12 months or less, had reached over 8.5 billion dollars, which was about
10 per cent of the country’s total external debt (ibid., pp. 12–13).
Rao’s predecessor as the PM, Chandra Shekhar had taken a loan from the
IMF in early 1991. So low was the trust in India’s ability to repay that the IMF
had wanted India to pledge her gold. That loan had not been enough to solve
India’s balance of payments crisis. By mid-1991, India was in need of a second
tranche. The IMF refused. As Rao put it, ‘In April 1991…consultations were held
with both the IMF and World Bank. The report of the discussions was that no
fresh commitments of aid would be forthcoming until basic reforms were under-
taken’ (Rao, 1993, p. 1060). India’s executive director to the IMF, Gopi Arora,
told Jairam Ramesh, ‘Our credibility was rock bottom’ (Ramesh, 2015, p. 31). It
was Rao who created trust in India’s capacity to repay loans given to her by world
economic bodies.
The state-controlled economy before Rao was also persistently inefficient,
with scant returns on investment. Anaemic industrial growth, low export levels
and bloated inflation were all symptoms of this chronic malaise. These symp-
toms, in turn, ensured measly taxation revenue, leading to stingy public spending.
The irony was that in Indian-style socialism, there was precious little money spent
on education, health and food for the poor (Sitapati, 2016, p. 109).
The arguments for reducing state control over the economy convinced Rao in
a single day that he showed ‘go in’ for economic reforms in June 1991. As Rao
envisioned the economic changes essential for his country, he also contemplated
the barricades he would have to climb over. He took an interesting step forward.
Not restricting himself to crisis management, fiscal and balance of payments sta-
bilisation, he chose to commit his government to wider economic reform:

The government is committed to removing the cobwebs that come in the way of rapid
industrialisation. We will work towards making India internationally competitive,
taking full advantage of modern science and technology and opportunities offered by
the evolving global economy. (Rao, 1993, p. 4)

The first obstacle to convert this dream into reality was that Rao’s party was a
minority in Parliament. Unlike Indira Gandhi in 1980 or Rajiv Gandhi in 1984,
Rao did not have the numbers to impose his legislative writ. Rao, leading a minority
626 Indian Journal of Public Administration 63(4)

government in a fractious democracy full of veto players, had no other comfort

options. Established business houses, known as the ‘Bombay Club’ and repre-
sented through various lobbying groups, were another hurdle to economic reforms.
But perhaps the tallest fence that had closed off the economy was the party of
Jawaharlal Nehru and Indira Gandhi, which could not be seen as abandoning
its commitment to socialism (Jenkins, 1999). The text of the 1991 Congress
manifesto also gave no hint that the party would pursue radical reform. Any
attempt to open the economy had to overcome the stodgy Congress party, a
divided parliament, nervous industrialist and shrill intellectuals. Those who ben-
efited from a centrally planned economy—rich farmers, trade unions, business
houses, corrupt politicians and bureaucrats—were also powerful (Sitapati, 2016,
p. 111). On 19 June 1991, 2 days before Rao took oath as PM was the first time
Rao realised the magnitude of the economic crisis. The Cabinet Secretary, Naresh
Chandra had given him the eight-page document on India’s financial predicament
(ibid., p. 112). It talked of fiscal discipline, dismantling trade barriers and remov-
ing the licences, permits and anti-monopoly laws that bound domestic entrepre-
neurs. In short, it contained the core elements of what would be the ‘big-bang’
reforms of the coming months.
On 24 June 1991, Rao met the opposition leaders one by one. The follow-
ing day, opposition leaders, including V.P. Singh and Jaswant Singh were briefed
by the new Finance Minister. At the meeting, Manmohan Singh gave details of
the crisis: ‘I told them all the things that were necessary to control the fiscal
deficit, to change the thinking on industrial policy, to liberalise the economy’
(ibid., p. 118). Rao, however, chose not to tell the opposition leaders two things:
that he would devalue the rupee soon; and that India’s gold was being mortgaged
in return for foreign loans. Had they known, they would not have allowed these
actions, regardless of how serious the crisis was.
The Indian rupee was artificially valued against the dollar. This discouraged
foreign investors and depressed exports. Before committing more funds, the IMF
wanted the rupee devalued as proof that new Indian government was serious.
But Rao knew, it would hit imports as well as foreign debt. Rao was also under
pressure from left intellectuals to not lower the value of rupee (Ramesh, 2015,
p. 36). But Manmohan Singh was adamant that devaluation was necessary, and
Rao decided to back him. To take the opponents by surprise, they decided to first
lower the worth of the rupee and then announce it as fait accompli. Manmohan
Singh planned to announce it in two phases. Rao agreed (Sitapati, 2016, p. 119).
On 1 July 1991, India lowered the value of the rupee by around nine per cent.
The next day, 2 July, Manmohan Singh sent Rao a note in which he suggested that
Rao should spin the devaluation of the previous day in a way that sounded routine:

We are living in a world of floating currencies. Most currencies of the world are floating
on a daily basis. Some days exchange rates go up next day they come down. India is no
exception to this rule… We shall do everything in our power to restore the health of our
economy and of balance of payments. (Ibid.)

On 3 July 1991, there was a further devaluation of the rupee by around 11 per
cent. The rupee slipped from `17.9 to a dollar to `24.5. By the end of 1992, it was
Kumar 627

approximately `31 to a dollar and remained around that level till the end of Rao’s
term. Once the two-step devaluation done, government spokespersons moved fast
to assure the markets that there would be no further devaluation. The rupee had
found its warranted level. The markets remained stabilised.
Following devaluation, the government began the process of liberalising the
trade regime. No sooner had the devaluation exercise been completed; then Rao
moved on the trade policy front, authorising an end to the sop given to exporters
called the Cash Compensatory System (CCS). The rupee now closer to its true
value after the depreciation, an export subsidy was superfluous, and Manmohan
decided to get rid of (Vikraman, 2015). Devaluation was an incentive for export-
ers. Hence, on the same day that the RBI took the second step on rupee devalu-
ation, the CCS was withdrawn, ignoring the apprehensions of the Commerce
Ministry, which had long regarded its dharma to be the defence of the interests
of exporters.
The trade policy reform was defined by two key considerations: First, to enable
India to move closer to the emerging new global trade policy architecture that
was to be put in place by the yet to be established World Trade Organization;
second, to link import entitlements to export performance. Combining devalua-
tion with trade policy liberalisation made sense. The purpose to take these meas-
ures was also to demonstrate to international investors and financial institutions
that the new minority government was prepared to take difficult decisions. Thus,
the measures were aimed as much at boosting confidence in India as they were at
securing access to hard currency (Baru, 2016, p. 94).
On 9 July 1991, Rao addressed the nation for the second time and explained
to the people in simple terms the logic behind his early policy moves. ‘You cannot
import if you do not export. My motto is—trade, not aid. Aid is a crutch. Trade
builds pride. India has been trading for thousands of years’ (Ramesh, 2015,
pp. 68–69).
Reduction in the budget deficit was, in fact, the single most important feature
of Manmohan Singh’s first budget speech on 24 July 1991. Yashwant Sinha had
made a commitment to that in December 1990, but Manmohan Singh deliv-
ered on that commitment. As a result, Rao’s government brought down fiscal
deficit sharply from a high of 8.4 per cent of GDP in 1990–1991 to 5.9 per cent in
1991–1992. This was, by any standard, a sharp and decisive cut. The crisis of the
fiscal system was a cause for serious concern. Without decisive action, the situa-
tion could have moved beyond the possibility of corrective action. A steep reduc-
tion was proposed in subsidies—food, fertiliser and exports—and spending on
defence was reduced—both aimed at bringing the fiscal deficit down. Manmohan
Singh candidly ended his budget speech on 24 July 1991 (Singh, 1991).
Exchange rate adjustment and fiscal deficit reduction was a further dent in the
confidence of credit rating agencies and financial markets. However, Rao went a
step further. He and his team turned to the next set of reforms. The need to change
industrial policy—the red tapism that so tightly bound private manufacturers—
had been first acknowledged a decade earlier. Keeping this perspective in mind,
Rao instructed the Ministry of Industry to prepare a new industrial policy disman-
tling the infamous Licence-Permit raj.
628 Indian Journal of Public Administration 63(4)

Both Rajiv Gandhi and V.P. Singh understood the need to dismantle the
Licence-Permit-Quota raj, but neither had the political courage to do so. Rao
chose to bite the bullet. The PM (then Industry Minister also) gave A.N. Verma,
the Principal Secretary, the mandate to convert the previous draft into policy.
Verma and Rakesh Mohan, the economists, had a policy draft ready from their
time together in the Industries Ministry in the V.P. Singh government. By 7 July
1991, Rakesh Mohan’s original draft had been polished into what would become
the new industrial policy. On 12 July, The Hindustan Times carried a report by its
political editor, Kalyani Shanker, declaring ‘Industrial Licensing to Go’ (Sitapati,
2016, p. 124). She wrote that ‘all industrial licences except for a short negative
list’ would be removed soon. Actually, Rao was testing reactions to the policy
before formally announcing it.
Three days later, that is, on 15 July 1991 Rao stood up in the Parliament during
the vote of confidence in his government. As before, he made use of the threat
to the prestige of the nation, urging the opposition to give up their maximalist
ideologies in the face of calamity. He quoted a Sanskrit verse to make his point:
Sarvanashe Samutpanne ardham tyajati panditah (‘Faced with total ruin, the wise
settle for half’) (Rao, 1993, p. 9).
Jairam Ramesh helped get the statement on industrial policy cleared by the
Group of Ministers (GoM) and the CWC by adding a long preamble that paid
generous homage to Nehru, Indira and Rajiv. All the party gods had been propiti-
ated. Rao appreciated Ramesh’s spin doctoring. As Ramesh recalls, ‘Verma called
me and said that Rao was appreciative of what I had done and felt that, with
the preamble, we might still be able to get the industrial policy reforms through’
(Ramesh, 2015, p. 92).
Finally, the much delayed ‘big-bang’ of industrial delicencing and decontrol
was announced by the Minister of State for Industry, P.J. Kurien, on the morning
of the Finance Minister’s budget speech on 24 July 1991. Given the political
and media focus on the budget speech, the real reform of the day did not get the
play it deserved. It was only after a fortnight that India Today journalists Sudeep
Chakravarti and R. Jagannathan got the picture right when they reported:

Here is something that Rajiv Gandhi forgot to do as Prime Minister. …Rao and his
Finance Minister Manmohan Singh got it just right. On the one hand, they sang praises
about Nehruvian socialism. On the other hand, they took the country by the scruff of the
neck and said move, or we all die. (Chakravarti & Jagannathan, 1991)

In a single day, Rao and Manmohan Singh had done more than anyone to disman-
tle the three pillars of licence raj: monopolies for the public sector, limits on
private business and isolation from the world markets.
Rao’s real contribution to economic reform and liberalisation was his political
management of a contentious process. In April 1997, Rao clarified that he was aware
of Rajiv Gandhi’s views on economic policies and he walked a path that Rajiv too
would have taken, if he had been PM. It is because we had a clear idea of the problem
and what was to be done that we were able to move so quickly and deal with the situ-
ation (Baru, 2016, p. 103). By February of 1992, Rao was able to travel to the World
Economic Forum at Davos, the annual gathering of business and government leaders
and reassure the world that India was back in business (ibid., p. 104).
Kumar 629

It is this new political economy and the changing geography of capitalist develop-
ment that played an increasingly important role in defining the contours of economic
policy in the year since. Whatever Rao’s critics in the Congress and Parliament
may have said in 1991, the fact is that not one of his policy initiatives, taken
between 1991 and 1996, was ever rolled back.

Conclusion
Before the economic reforms of 1991, the ‘Hindu rate of growth’ characterised
Indian economic growth. However, even within the constraints of democratic poli-
tics and the relatively ‘soft’ nature of the economic reforms implemented since
1991, the Indian economy has reaped several welcome rewards from its reforms.
These have strengthened the conviction that the broad direction of the reforms is
right and, in that sense, made the reform process irreversible. India launched a ‘second-
generation’ of economic reforms, with a more human face. Politicians and admin-
istrators need to display greater pragmatism while designing and implementing
future economic reforms. The reforms must be based on the long-term vision of
transforming India into a global economic power in the next 20–25 years. It will be
of the utmost importance that all sections of society are educated as to the long-
term benefits of reform in order to mobilise public support. These reforms, there-
fore, will have to be drastically redesigned and politically ‘marketed’. Future eco-
nomic reforms must be seen and experienced as not only good economics but also
good politics. Rao had displayed visionary political statesmanship and it is required
to be carried forward. Guiding India through new and hitherto uncharted terrain, in
that fateful year, 1991, Rao became the man of the moment. Rao’s espousal of
economic policy fronts has been followed in India ever since 1991. India won its
political independence in 1947, but a new generation of India believed that they
had won their economic independence in 1991 (ibid., pp. 157–158).

Notes
1. Professor Raj Krishna, an Indian economist, coined the term ‘Hindu rate of growth’ in
1978 to characterise the slow growth and to explain it against the backdrop of social-
istic economic policies; see also, Siva (2013).
2. Reference may be made to the following illustrative books for tracking down these
‘tinkering’ changes in the thinking of Indian policymakers and planners: Jalan (1991)
and Wadhva (1977, 1994, Chapter II).
3. See  businessworld.in/article/The-Economics-Of-Indira-Gandhi/19-11-2015-88463
(accessed on 05 February 2017).

References
Alexander, P. C. (2004). Through the corridors of power. New Delhi: Harper Collins.
Baru, S. (2016). 1991: How PV Narsimha Rao made history (p. 2). New Delhi: Aleph Book
Company.
630 Indian Journal of Public Administration 63(4)

BBC. (1998). India: The economy. BBC, 12 February.

Chakravarti, S., & Jagannathan, R. (1991, August 15). Ending the Licence Raj. India Today.
Retrieved 13 January 2017, from http://indiatoday.intoday.in/calendar/1083/1991/
magazine.html
Dagli, V. (1979). India committee on controls and subsidies. New Delhi: Government of
India, Ministry of Finance.
Government of India. (1956). Second five-year plan (1956–61). New Delhi: Ministry of
Finance, Government of India.
Harris, J. (1987). The state in retreat? Why has India experienced such half-hearted
liberalisation in the 80s? IDS Bulletin: Institute of Development Studies, 18(4), 31–38.
Jalan, B. (Ed.). (1991). The Indian economy: Reforms and prospects. New Delhi: Viking
Publishers.
Jenkins, R. (1999). Democratic politics and economic reform in India (p. 41). Cambridge:
Cambridge University Press.
Joshi, V., & Little, I. M. D. (1994). India: Macroeconomics and political economy, 1964–
1991 (pp. 190–191). Delhi: Oxford University Press.
Kelegama, S., & Parikh, K. (2000). Political economy of growth and reforms in South Asia,
Second Draft. New Delhi: Global Development Network. Retrieved from www.eldis.
org/document/A13031
Kohli, A. (1991). Democracy and discontent: India’s growing crisis of governability.
Cambridge: Cambridge University Press.
Li, H. (1977). China’s political situation and the power struggle in Peking (p. 107).
Michigan: University of Michigan.
Pradhan, R. D. (2014). My years with Rajiv and Sonia. New Delhi: Hay House.
Prasad, P. V. R. K. (2012). PMs, CMs and beyond: Wheels behind the veil (p. 123).
Hyderabad: Emesco Books.
Ramesh, J. (2015). To the brink and back: India’s 1991 story (p. 4). New Delhi:
Rupa Publications India.
Rao, P. V. N. (1993). Selected speeches 1991–92 (p. 106).
Sachs, J. D., Varshney, A. & Bajpai, N. (Eds.). (1991). India in the era of economic reforms
(p. 1). New Delhi: Oxford University Press
Sharma, C. K. (2011). A discursive dominance theory of economic reforms sustainability.
India Review, 10(2), 126–184.
Singh, K. N. (2014). One life is not enough: An autobiography (p. 290). New Delhi:
Rupa Publications India.
Singh, M. (1991). Budget speech. Ministry of Finance, Government of India, 24 July.
Sinha, Y. (2007). Confessions of a Swadeshi reformer: My years as finance minister (p. 6).
New Delhi: Viking Penguin.
Sitapati, V. (2016). Half lion: How P V Narasimha Rao transformed India (p. 142).
Gurgaon: Penguin Books.
Siva, M. (2013, June 8). What’s a ‘Hindu’ rate of growth. The Hindu Business Line.
The Times of India. (2001, November 25). Street Hawking promise jobs in future. Patna.
Vikraman, S. (2015, August 13). Commitment, quick decisions in making of new trade
policy. The Indian Express.
Wadhva, C. D. (Ed.). (1977). Some problems of India’s economic policy (2nd ed.).
New Delhi: Tata McGraw Hill.
———. (1994). Economic reforms in India and the market economy. New Delhi: Allied
Publishers.