How Shekhar-Sinha and Rao-Singh saved India in 1991
By Vinay K Srivastava
It is July 24—the twenty-ninth anniversary of the policy of economic reforms in India. It is a historical date—not only for India, for the world too. On this day, in 1991, when scientists at University of Manchester announced the discovery of a planet outside the solar system, India announced a new economic policy that drew cheers for the economy and changed its fate. The Rao-Singh duo worked together and introduced the policy without which India would have collapsed.
Amid this debate of the contribution of Rao-Singh, we cannot ignore the contribution of another duo, their predecessor—Ex-PM Chandra Shekhar and his FM Yashwant Sinha. Shekhar-Sinha ran a minority government from November 10, 1990 to March 6, 1991, with the outside support of the Congress party and a caretaker government from March 6, 1991 to June 21, 1991. During their tenure, the law and order situation in the country had become precarious because of Mandir-Masjid issue, Mandal Commission and the Gulf war.
The government had inherited an economy that was in deep crisis, the budget deficit had reached Rs 13000 crore, persistent fiscal imbalances had accentuated inflationary pressure and strained the BoP. The burden of servicing the accumulated internal and external debt had become arduous. There was a steep reduction in forex reserve—it dipped to Rs 3,142 crore. It was not even enough to finance imports for a month.
The crisis was shaking the confidence of investors. There was a sharp decline in capital inflows through commercial borrowings and non-residents deposits. With the efforts of the government, the IMF sanctioned a loan with the condition that the government initiate certain reforms. In this backdrop, Sinha presented a mini-budget and introduced new indirect tax levies. He also announced a cut in the fiscal deficit by 2% of GDP to satisfy the IMF. The IMF had promised Sinha that it would release about $1.8 billion by January 1991 and a full loan of $5-$6 billion after the budget. As per the promise, the IMF gave the first tranche of the loan in January 1991 and further assured to give the second tranche if the government would present a reform-oriented budget.
As per the condition made by the IMF, Sinha was preparing a reform-oriented budget. But the Congress party did not allow him and asked to present an interim budget instead of a regular budget. The interim budget was presented on March 4, 1991. But the government fell on March 6, 1991, after the interim budget was passed. Pranab Mukherjee at a book launch revealed that Sinha would have been India’s first reformist finance minister had the then prime minister Chandra Shekhar not decided to sacrifice the budget that Sinha was to present to save his government.
Being a caretaker government, Shekhar-Sinha had a challenge to ensure that there was no default, especially on the short-term debt of over $5 billion. FM requested finance ministers of donor countries and financial institutions to disburse loans that were already sanctioned.
The IMF and the World Bank were not happy with India because the country did not honour the promise of a reform-oriented budget. Nevertheless, the then finance secretary SP Shukla and the then RBI governor S Venkitaramanan went to Washington on April 28, 1991. They requested a $700 million bridge loan from members of the consortium consisting of US, Japan, Germany, UK, France and the Netherlands. Their request worked, as a few days later Germany granted a loan of $400 million, Japan extended a soft loan of $150 million with a further commitment of $350 million and the Netherlands offered $30 million.
The government had pledged twenty metric tonnes of gold on May 16, 1991, to the Union Bank of Switzerland to solve the BoP problem. The gold was not from the reserves held by the RBI. It was confiscated from smugglers and kept with the State Bank of India. The pledging of gold was necessary because the government did not have a forex reserve. Later on, the Rao government also shipped out around 46.91 tonnes of gold worth $405million. The reserve was the assets of the RBI.
Chandra Shekhar government set about the task of meeting the various challenges confronting the government, but the government did not last long enough to produce results. But we cannot under-rate their efforts. They had only 64 MPs and ran the government with the outside support of the Congress party. Despite leading a caretaker government, they had saved India from defaulting on payment of external debts. It was a huge achievement. Whether they were at the helm or not, but they did save the economy.