Indian economy would’ve liberalised long before 1991. But Bofors scandal stalled it

The whole truth regarding the 1991 reforms is that India was in the process of revamping its industrial and trade policies from the last years of Rajiv Gandhi’s tenure.

Illustration: Soham Sen/ThePrint

There is truth, and then there is the whole truth. There are facts, factlets, and factoids — the latter being ‘highly exaggerated assertions which appear credible’ because when repeated so many times, they begin to appear like truth.

Let us examine these truths, facts, factlets, and factoids in the context of the 1991 economic reforms and the role of AN Verma, who headed the Prime Minister’s Office (PMO) under PV Narasimha Rao. The fact is that India faced a balance of payments crisis. The fact is that Narasimha Rao and Finance Minister Manmohan Singh deserve top honours for changing the gears of the Indian economy. The factoid is that structural adjustment was pushed by the International Monetary Fund (IMF) and the World Bank. The whole truth is that India was in the process of revamping its industrial and trade policies from the last years of Rajiv Gandhi’s tenure, and there was a continuity (even) during the VP Singh and Chandra Shekhar years. Also, contrary to the perception of reforms being foisted on the government by the IMF, these reforms were entirely “made in India.”

Economist Ankit Mittal, who is writing a book on the 1991 economic crisis, tells us that work on liberalising the economy had started from the times of Lal Bahadur Shastri, but with PN Haksar and PN Dhar, the reforms had been placed on the back burner. Rajiv Gandhi did make an effort to open up the economy, and it was during his tenure that Finance Minister VP Singh acquired a reputation for being a liberal reformer. However, the reform process under the Congress government was stalled in the aftermath of the political maelstrom caused by the Bofors scandal, which also resulted in Singh’s dismissal in 1987. But when Singh became the prime minister two years later, there was a renewed focus on industrial reforms. It was against this backdrop that Amar Nath Verma and Rakesh Mohan submitted a set of policy recommendations that were the basis for the New Industrial Policy 1990, but neither VP Singh nor Chandra Shekhar could see it through.

The policy and the preamble 

It was the very same policy, now called the NIP of 1991 — a comprehensive policy statement that looked at issues ranging from the promotion of small and medium enterprises, removing “unnecessary bureaucratic shackles” and easing raw material import restrictions to de-licensing, deregulation, and welcoming foreign investment that was proposed for the consideration of the Cabinet. However, Rao’s colleagues in the Cabinet and the Congress Working Committee (CWC) could not arrive at a consensus.

From the liberalisation of industrial location policies and the relaxation of monopolistic and restrictive trade practices (MRTP) controls to “anti-PSU” measures and openness to foreign direct investment (FDI), every proposal under the policy came under attack. Verma then suggested that ‘rather than tinker with the policy, it was better to prepare a politically acceptable preamble’ to the cabinet note to stress the continuity of reforms besides reassuring key stakeholders that their interests would be taken care of. Last but not the least, in words (and certainly not in deed), the statement had to be sufficiently obsequious to Nehru and the Gandhis. This task was assigned to Jairam Ramesh, who was still working in the PMO.

The new preamble did the trick, and the Cabinet gave its seal of approval to the industrial reforms on 23 July 1991. The CWCfollowed suit later that afternoon, and the next day, on 24 July, in the pre-lunch sitting of the Lok Sabha, the Bill was presented, not by the Prime Minister, or Finance Minister Manmohan Singh, or Minister of State P Chidambaram, but by the low-key Minister of State (Industry), PJ Kurien.

The far-reaching impact 

The Bill had tremendous impacts. Firstly, it abolished the Licence Raj by removing all restrictions for all industries except for those “related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues.” Next, the old policy of government approval for foreign technology agreements was scrapped to allow for up to 51 per cent foreign equity participation, thereby enabling foreign companies to bring modern technology. The third point related to the dismantling of public monopolies by floating shares of PSUs and limiting them to essential infrastructure, goods and services, mineral exploration, and defence. Last but not least, the concept of an MRTP company was scrapped.

An interesting factlet of the times 

Before we continue with the AN Verma narrative, here is an interesting factlet that appeared in the Economic Times of 7 August 2018. Tarun Das, then-Director General of Confederation of Indian Industry (CII), had approached 10 Downing Street at the behest of Narasimha Rao to understand the workings of the private office of the UK’s prime minister. It reflects on the Half Lion’s ‘out of the box’ approach, not just to ideas but also to newer methods of gathering inputs, as neither the Indian High Commission nor the PMO was in the loop.

After Rao demitted office, India had short-lived coalition governments — and the PMO, which always reflects the glory of the PM, also went into eclipse. Deve Gowda brought in TR Satishchandran, the ex-Chief Secretary of his home state of Karnataka,as the seventh Principal Secretary, but his term, co-terminus as it was with that of the PM, lasted only one year and eighteen days. IK Gujral, who came next, brought in NN Vohra, who had been India’s powerful Home Secretary and is best known for his report on the criminalisation of politics.

The report contained several observations made by official agencies on the criminal network which was virtually running a parallel government. It also discussed criminal gangs who enjoyed the patronage of politicians of all parties and the protection of government functionaries. Per the report, “In the bigger cities, the main source of income relates to real estate — forcibly occupying lands/buildings, procuring such properties at cheap rates by forcing out the existing occupants/tenants, etc. Over time, the money power thus acquired is used for building up contacts with bureaucrats and politicians and expansion of activities with impunity. The money power is used to develop a network of muscle-power which is also used by the politicians during elections.”

“The nexus between the criminal gangs, police, bureaucracy, and politicians has come out clearly in various parts of the country. The existing criminal justice system, which was essentially designed for individual cases, was unable to cope with this magnitude.” With Gujral’s term coming to an end, Vohra left the PMO, but he went on to become the director of the prestigious India International Centre and later the Governor of Jammu and Kashmir.

Sanjeev Chopra is a former IAS officer and Festival Director of Valley of Words. Until recently, he was Director, Lal Bahadur Shastri National Academy of Administration. He tweets @ChopraSanjeev. Views are personal.

This article is part of a series on the PMO.

(Edited by Prashant)