On July 24, Manmohan Singh, then Finance Minister, commended the budget with the evocative line “No power on earth can stop an idea whose time has come” by Victor Hugo.The idea came with time and the tide of crisis and bailout. In the past weeks, there has been an intriguing attempt to represent a version of history—just as earlier it was claimed that reforms were not compelled by crisis. The implicit suggestion is that the ideas that constituted reforms were home-grown.
This represents contextual autism. For sure, the opposition to licence raj existed from 1956 when C Rajagopalachari first voiced them. The critique of restrictive trade existed since the 1960s and the argument for opening up the economy had been made through the 1970s. What is critical is none of the ideas were accepted till they were pushed on board by lenders.
Let us look at the big headlines of July 24. Prime Minister P V Narasimha Rao, as the industries minister, announced the dismantling of licence raj. To appreciate its arrival, one must interrogate history. In 1989, V P Singh inducted young Ajit Singh —a former IBM executive—as the industries minister. Ajit Singh memorably described licence raj as “madness”. Ergo the A N Verma (then industries secretary) and Rakesh Mohan who was then economic adviser drafted a new policy. The policy was summarily binned by V P Singh. How did it make a comeback?
At 3 pm on January 18, 1991, Gopi Arora, while representing India’s case before the IMF Executive Board for assistance, quoted Yashwant Sinha who told Parliament on December 27, 1990, “Today, the soft options stand exhausted.” Arora added that polices “that would enhance the efficiency and competitiveness of industrial production” would be implemented. Evidence of intent was the draft of June 1990. The minutes of the meeting reveal the progression. Executive directors K Yamazaki and T C Dawson urged India to reform. Yamazaki criticised “restrictive industrial policies” and observed that “we expect these restrictive measures will be abolished”. Dawson found the 1990 draft as a good start and asked India to commit to “implementation of the policy”. That the big bang announcement followed on July 24 is evidence of the persuasive powers of the lenders.
The reforms that formed a part of the budget speech too are documented in the loan agreements. The December 5, 1991 Loan Agreement between World Bank arm Industrial Bank for Reconstruction and Development (IBRD) and India signed by Abid Hussain for India and Joseph Wood for IBRD in Schedule 1 (para 4) states explicitly that no withdrawal or commitment will be made unless actions specified are taken to the satisfaction of the lender. Schedule 4 lists 25 conditions, each of which starts with “That the borrower has…”
The conditions (in brief) were:
1: Bill to amend Sick Industrial Companies Act 1985
2: Creation of National Renewal Fund for workers
3: Issue guidelines under IDR Act 1951 on licensing
4: Adopt a plan for implementing decontrol of steel industry
5: Complete a review of laws governing labour, transfer of land, role of state in industrial restructuring
6: Adopt automatic approval for import of capital goods (with caps and conditions)
7: Abolish restrictions by RBI on imports (cash margins, foreign financing and on LoCs)
8: Eliminate forex for public sector at special rate, reduce monopoly of PSUs in imports
9: Permit freely import of items related to health, environment and security under OGL
10: Permit import of unlisted capital goods with Exim scrip
11: Eliminate licensing requirements for imports of capital goods
12: Abolish user requirement of imports on importers
13: Abolish Limited Permissible List of Exim Policy
14: Abolish procurement preference to domestic suppliers provided by Director General of Supplies and Disposals
15: Remove export licensing, canalisation and minimum export requirements
16: Review and reform customs tariffs, adopt a plan of action to simplify and reduce duties
17: Adopt a plan for action and timetable to eliminate budgetary transfers and loans to CPSEs deemed sick
18: Adopt a plan for closure and winding up of CPSEs, refer units to BIFR under new SICA guidelines
19: Complete divestment of at least 20 per cent of the equity of select PSEs to yield at least `25 billion
20: Prepare a list and adopt a timetable to implement a plan to increase private equity in profitable PSE to 49 per cent
21: Reduce Statutory Liquidity Ratio required to be maintained by banks beginning in April 1992
22: Review and reform financial system, including reduction of interest rate subsidies by April 1992
23: Introduce legislation, satisfactory to the Bank, to confer on SEBI powers to operate as independent regulatory body
24: Adopt a plan and timetable to reform trading mechanism in stock exchanges and set up a national clearing settlement and a central depository trust
25: Adopt a plan and timetable for setting up of private mutual funds
The proof that perforates all pretence is the World Bank Project Completion Report of June 1995. It states that “of the twenty-five specific agreed actions contained in the SAL/SAC loan agreement, twenty-two had by the time of second tranche release (May 1992) been fully and three substantially complied with.” This is not an argument against reforms or imposition of conditions—in
fact, many, including the liberalisation of trade, induction of competition, empowerment of SEBI, launch of private mutual funds, revamp of SICA, divestment of PSU shares, were welcome steps. The point is that these steps were listed in the loan agreement and found special mention in the 1991 budget and were steps thwarted by successive regimes.
The occasion is not to judge actions but to learn from history. A quarter of a century after the crisis, India and Indians deserve to know what actually transpired. More importantly, this knowledge can only fortify the ability of the reformers and enables the expansion of the constituency for reforms. shankkar.aiyar@gmail.com