How Rao made Manmohan India's 'accidental reformer'

Narasimha Rao was the architect of India's reforms. This is the story of how he enabled Manmohan Singh to claim the title of 'reformer'.

hidden September 26, 2012 15:35:45 IST
How Rao made Manmohan India's 'accidental reformer'

Editor's Note: This is an excerpt from Shankkar Aiyar's 'Accidental India:  A History of The Nation's Passage Through Crisis and Change', published by Aleph Book Company. Release: 23 October 2012. Pre-order the book here.

It was a typical Delhi summer day with the temperature hovering in the forties. The rasp of starched khadi blended with the rustle of raw silk, the thud of car doors bounced off the walls of the colonial mansion. Nervous laughter mingled with faux bonhomie and the air was heavy with the obsequiousness unique to the Delhi Durbar.

PV Narasimha Rao had been anointed prime minister just a few hours earlier and the pilgrims lined up to pay obeisance. Ironically, just a few weeks earlier, the wily hermit of the Congress party had been nudged into retirement to write his memoirs, through which he hoped to relive his days of political glory. Tragedy and fate willed otherwise.

As India lurched from turmoil to trauma following the assassination of Rajiv Gandhi on 21 May 1991, Rao returned to centrestage. In less than a fortnight, he engineered his resurrection, outwitting Sharad Pawar, a much younger challenger, through a combination of guile and intellect. Patiently, Rao allowed the aggression and disruption that Pawar represented to threaten the Congressmen. Arguably the most experienced practitioner of Congress politics, the polyglot managed to communicate to members of parliament and loyalists of the First Family — the Gandhis — that it was in their best interest to persist with a tried and tired status quo. The dictates of the moment, though, left no room for any sort of status quo. India may have emerged from its worst political crisis in recent history but it was trapped in an economic crisis that compelled an agenda for disruption.

Rao was to take oath in less than twenty-four hours and had to select a team that was acceptable to the First Family and the fragile coalition of interests he had forged. After sundown that day, all hangers-on at his official residence were shooed away, and Rao asked for his soup. In a quiet chamber, along with another wily old campaigner, Sitaram Kesri, he awaited the return of PC Alexander, his aide de campaign.

How Rao made Manmohan Indias accidental reformer

Manmohan Singh turns 80 today. PTI

Just then, an usher walked in to inform Rao that an important visitor had arrived and was waiting to see him. It was Cabinet Secretary Naresh Chandra, an accomplished bureaucrat. As chief of the bureaucracy, Chandra had witnessed the most tumultuous period of his career since he took over in December 1990. India would swear in its third prime minister in eighteen months. Its economy had already been downgraded twice in six months from stable to speculative by the rating agencies.

Its foreign exchange reserves were enough to cover just seven days of imports. Inflation was rising and the government was on the edge of bankruptcy.

Rao called him in. After the usual pleasantries, Chandra discussed the plans for the swearing in. Everything seemed in order — inasmuch as the chaos that defines politics would allow. The list of forty-five ministers was yet to be finalised and it would, as always, be a last-minute affair. Chandra then pulled out the file he had brought with him and handed it over to the prime minister-in-waiting. It included two notes: one was a detailed account of the economic crisis, the second laid out the blueprint for the revival of the country’s economy.

Rao recognised the fait accompli he had been presented with. The draft for economic revival was the New Delhi Consensus, a promissory note India had committed to while seeking financial assistance from the Bretton Woods twins, the International Monetary Fund (IMF) and the World Bank. The government of India had already availed of two tranches of loans as emergency funding to prevent a financial meltdown but it needed to do much more. On the verge of default, India had committed, in principle, to mend its ways of managing the economy.

To effectively defuse a crisis of this magnitude, Rao needed both the bonfire of the vanities, political empowerment, ideally through a parliamentary majority, and the room to manoeuvre, but he had neither. He owed his crown to a covenant of loyalty to the Gandhis and he didn’t have the freedom to act without let or hindrance. But not for nothing was Rao legendary for his political acumen and his ability to turn perilous situations to his advantage. He sensed this was the opportunity to dismantle not just the apparatus of state control, but an entrenched political class.

However, in order to put his plan into action, he would need an effective firefighter. Even before the final word on his coronation was out, Rao had approached the famous economist and former governor of the RBI, IG Patel, to join his team. Patel, ever the pragmatist, had begged off and suggested another career bureaucrat, Manmohan Singh, as a possible choice.

Rao’s need was for someone who was an acceptable face to the IMF and the World Bank, who knew the economy and understood the web of levers that controlled political decision-making. Singh qualified on all counts. He had served on every rung of hierarchy in the bureaucracy and was familiar with the interlocutors in the Fund-Bank dispensation. As secretary general of the South Commission — an institution set up to boost cooperation between poor and developing economies — he had interacted closely with Bank officials and IMF Managing Director Michel Camdessus.

He was also known to harbour political ambitions.

Singh was on a flight back from Japan. The next day, at 5 am, Alexander rang him to say he wanted to see him. Alexander turned up at Singh’s house at 7 am and offered him the post of finance minister. Singh, says Alexander in his memoirs, Through the Corridors of Power: An Insider’s Story, replied with a classic bureaucratic poser: ‘What do you think?’ His concern: would Rao and he get the political backing they needed?

It was more a rhetorical poser than a real concern. After all, Singh had survived every political turn — from the nationalisation of banks to partial liberalisation — of successive governments for over two decades. He owed his survival to his ability to make a distinction between his opinion and the expediency his political masters expected of him. An economist as ambidextrous as any, he knew his ‘on the one hand and on the other hand’ arguments well. And, as adviser to the preceding prime minister, Chandra Shekhar, he knew the lie of the land, metaphorically and literally.


There is no question that the credit for the reforms of 1991 goes to Rao. Among the first decisions he took as prime minister was to retain the ministry of industries portfolio. Having chosen Manmohan Singh as minister for finance, Rao brought in P Chidambaram as minister for commerce. His choice of people was dictated by the need to protect executive decisions from political baggage and influence.

Simultaneously, he brought in as his principal secretary AN Verma from the Planning Commission and asked him to get Rakesh Mohan to create a presentation of the new industrial policy. Rao also instituted a steering group within the PMO which met every week to discuss and debate the architecture of what would eventually be defined as the liberalisation of 1991. It was decided that the budget would be presented on 24 July, which left the team less than a month to get everything ready.

In Bombay, the RBI was faced with the twin challenges of managing the foreign exchange balance and restructuring exchange rates. Having been associated with virtually every important ministry, including being finance secretary, RBI Governor S Venkitaramanan was able to locate, analyse and resolve complex issues while simultaneously managing his political masters. His partner at the time was Deputy Governor C Rangarajan, one of the top Indian economists. For almost a year Rangarajan had been part of a core team which included Deepak Nayyar, Gopi Arora, Venkitaramanan and Y Venugopal Reddy, then joint secretary in the ministry of finance.

How Rao made Manmohan Indias accidental reformer

The credit for the reforms of 1991 goes to Rao. Reuters

This team had been tasked with the infinitely delicate and complex task of restructuring the economy. Among other things, it required the exchange rate of the rupee to be devalued further, to reflect both the fragility of the balance-of-payments situation as also the real value of the rupee. Together, they pushed through a devaluation of 18 percent between 1 July and 3 July. The core team knew that waiting for legislative sanction would delay relief. So Rangarajan, Venkitaramanan and Verma advised Rao and Manmohan Singh to use administrative powers wherever possible to prevent political opposition from within the Congress or from the Opposition. The two-step devaluation of the rupee, for instance, was not only hastened but also pushed through by executive fiat. It was agreed that Rao would manage the uproar after the deed was done.

Even as all this was going on, the RBI had to manage a unique logistical challenge. It had to ship 47 tons of gold to the Bank of England. The earlier shipment of confiscated gold had been sent in tranches on commercial flights. However, the airlines, worried about the risk, objected. So the RBI chartered Heavy Lift Cargo Airlines for four flights to ship the gold in stages. The gold had to be shifted from the vaults of the RBI in South Bombay and first transported 35 kilometres by road to the airport before being loaded on to the aircraft. Needless to say, all this required the utmost secrecy because of the security and political backlash that would ensue if the news leaked out.

As it happened, the operation could not be kept secret. In their anxiety, the RBI had reached an agreement with the Customs Department that the consignment would not be specified but it was precisely this which was the giveaway. Working on a tip-off, on 6 July 1991, I reached the Sahar International Airport in Bombay with photographers Mukesh Parpiani and Sudharak Olwe. All I had to work with was a chit that said ‘21,000 kilograms of precious metal being shipped to England’. Six hours of probing at the airport and the cordoned off Customs’ enclosure resulted in a national scoop, published in sixteen editions of the then unified Indian Express. The story, accompanied by an eight-column picture of the aircraft being loaded with gold, brought home the magnitude of the crisis to Indians.

Expectedly, the news triggered public outrage, for nothing is more humiliating in this country than pawning family gold. The day after, there was a furore in and outside Parliament. The government was forced to own up — India was broke.

In Delhi, work on the budget was proceeding at a furious pace. The package was ready in terms of the commitments to the lenders but it had to be made politically palatable. To start with, this was not a regime with a majority in Parliament. Worse, there was tremendous resistance to the budget even within the Congress party as well as in the cabinet and in the bureaucracy. Entrenched interests — both politicians on pelf row and big businesses nurtured on the licence-permit-quota raj — were concerned, and marshalled all their resources to prevent long-term damage to their interests. However, the options for derailing the process were limited by the circumstance. Providence provided me with a follow-up scoop and the government with exogenous support. A consignment of 14 tons of gold made its way from the RBI to the airport and on to the front pages again. Everybody recognised and accepted that defaulting would be a recipe for long-term disaster.

To make the plan politically palatable, Rao and the managers of the process presented to the stakeholders the strategic shift in the country’s economic policy as a temporary tactic. The policy change would result in the dismantling of the Nehruvian way that the Congress had worshipped for decades. So Rao advised the team to present the package to the public and to the high priests of socialism in the Congress as a minor detour and not as game-changing disruption. In the final days, before the policy was presented the steering committee met many times every day to fine-tune the language.

Once a final version was ready, Rao and Chidambaram — who simultaneously spearheaded the liberalisation of the country’s trade policies — went over it one more time, injecting a political message. Obeisance was paid to the entire pantheon of the Congress leadership — from Jawaharlal Nehru to Indira and Rajiv Gandhi — in the new industrial policy and in the budget. Six new paragraphs were added to the policy in which encomiums were paid to the vision of Nehru and Indira Gandhi. Audaciously, the liberalisation of the economy of 1991 was portrayed as a tribute to the aspirations of Rajiv Gandhi; further, it was represented as being built on the foundations laid by Nehru and Indira Gandhi. Homage was also paid to India’s socialist past. It said: ‘Thanks to the efforts of Pandit Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi, we have developed a well-diversified industrial structure. This constitutes a great asset as we begin to implement reforms.’

Despite all efforts there was no dearth of protests. The Opposition even alleged that the budget had been written in Washington. Undeterred, helped by the enormity of the crisis, Rao carried the day.

On 24 July 1991, India finally honoured the promissory note it had presented to the lenders who had bailed the country out. The new industrial policy was unveiled by Prime Minister Rao, dismantling the licence-permit-quota raj of four decades. The Indian economy was finally unshackled. As Finance Minister Manmohan Singh said in his budget speech, quoting Victor Hugo, ‘No power on earth can stop an idea whose time has come.’

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