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Economic crisis drove India off the socialist road

It had been a terrible year.

Former Prime Minister Rajiv Gandhi had been assassinated by a suicide bomber, and now the economy was about to collapse.

Enter Manmohan Singh, the 'architect' of a reform process that ditched more than four decades of socialist shibboleths and spawned grand predictions that India would soon become Asia's next economic tiger.

"We had to keep a steady nerve," recalls Singh from his Parliament office, which still has an air of musty antiquity despite the modernisation he ushered in during that tumultuous summer 10 years ago.

"These were tough policy decisions and the danger was that we were a minority government."

A softly-spoken Sikh with copious whiskers and an impeccable sky-blue turban who was bounced from the stodgy world of India's bureaucracy into the hurly-burly of politics after the Congress party scraped to power in 1991's elections, Singh is no braggart.

But the former central bank chief's task was indeed awesome.

India was fighting off default on a $70-billion mountain of foreign debt. Even before Singh became finance minister in late June, it had sold off 20 tonnes of confiscated smuggled gold to meet short-term debt repayments because overseas banks had turned off the credit tap.

The country's foreign exchange reserves had virtually disappeared, prices were rising at an annual rate of about 20 per cent and the central government's fiscal deficit had ballooned to 9 per cent of gross domestic product.

The crisis was triggered by two unexpected shocks.

The first was a slump in exports after the collapse of India's most faithful trading partner, the Soviet Union, and the second was the leap in its oil import bill due to the Gulf War.

Subramanian Swamy, a former minister and now an economics lecturer at Harvard, says that with the Uruguay Round of trade talks reaching its final stages, the writing was in any case on the wall for India's protectionist, command economy.

'Wild West, with bureaucrats as the robbers'

"The economic policy in this model was embedded in an unbelievably complicated system of controls and restraints that became the despair of the enterprising and the happy hunting ground for the unscrupulous," he wrote in a book on India's reforms which was published last year.

Surjit Bhalla of Oxus Fund Management recalls the Kafka-esque nightmare of controls that had shackled the economy for so long.

"It was an economy geared to protection and serving the bureaucracy in every possible way. It was a wild west with the bureaucrats as the robbers," he says.

Under a big brother regime known as the "licence raj", entrepreneurs had to get permission to set up or even expand their businesses. A minefield of red tape made India a no-go area for foreign firms.

But the worst was the mind-boggling range of towering excise taxes and customs duties which made it impossible to import even grapes and dentists' chairs and fed a culture of corruption.

For a country so steeped in the socialist ethos of its first prime minister, Jawaharlal Nehru, it took nerve to push through measures which would challenge both orthodoxy and entrenched vested interests.

There had been efforts to reform the stringently controlled economy since the end of the 1970s, and these had helped lift average growth during the 1980s to more than five per cent.

But the pace had been glacial because politicians were reluctant to cede control of both public investment and subsidies, which gave them tremendous clout at the ballot box.

When the fiscal crunch of 1991 came, they were forced to embrace -- as one commentator put it "in sorrowful confusion rather than ideological triumph" -- private enterprise and foreign investors to prop up investment.

Singh began his shock treatment at the beginning of July, devaluing the rupee -- in two stages -- by nearly 19 per cent.

High drama

Financial Express editor Sanjaya Baru recalls how Prime Minister P V Narasimha Rao got cold feet after the first devaluation and asked his finance minister to stop.

But Singh, determined to push the devaluation through, "depended on the legendary inefficiency of the Indian telephone system" to pretend that he couldn't get in touch with the central bank on time, Baru wrote in a column on the 1991 crisis.

Commerce Minister P Chidambaram, who went on to become finance minister in 1996, also unveiled a package of trade reform. His assault on socialist self-sufficiency included the withdrawal of export subsidies and formal curbs on imports.

The government also announced a radical industrial policy which allowed firms to take majority stakes in joint ventures and, in its own words, "unshackle the Indian industrialist from the cobwebs of unnecessary bureaucratic control".

In July, India sent almost 47 tonnes of gold to the Bank of England as collateral for a fresh loan, a humiliating step in a country where ordinary citizens revered gold as the highest form of financial security.

Baru said the first consignment of five tonnes was sent on an Indian Airlines commercial flight in a "top secret" exercise which was blown wide open when the heavily guarded vehicle broke down on its way from the Reserve Bank of India to Bombay airport.

"The central bank authorities were worried about the news leak because the aircraft had to fly via West Asia and they didn't want any terrorist outfit to know that Indian gold was being airlifted through the region," he said.

The gold shipments enraged the opposition and fired criticism that Singh was a lackey of the International Monetary Fund.

India had borrowed $1.79 billion from the IMF in January that yea, but that money had already run out and it was negotiating hard for another multi-billion-dollar loan.

Recovery came quickly under Singh's treatment, and growth averaged more than 6 per cent over the following four years.

"By the end of 1992 the economy had started responding to the reform," Singh says. "And there was a sense from the outside that here was a government that knew what it wanted to do and had the will to do it."

By 1997, as the country entered a period of political instability and Asian tiger economies went from boom to bust, the reform process lost much of its momentum and political opposition to liberalisation mounted.

Many now ask if India needs another crisis.

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