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Rao's name will be written in gold

December 24, 2004 00:03 IST

When in 2047, the history of the 100 years of Independent India is written, P V Narasimha Rao will occupy a pivotal place and in some senses is likely to be ranked far ahead than those held in high esteem today merely for reasons of political expediency.

Certainly when it comes to economic liberalisation as the system to lift India out of its degrading poverty rather than the socialistic pattern of a planned economy, his name will be written in letters of gold. Perhaps the most appropriate phrase for what he did when he became prime minister would be Winston Churchill's famous quip made in the context of World War II: 'It was not the end, or even the beginning of the end; but rather the end of the beginning.'

Rao began the end of the socialist regime. Nehru, a firm admirer of the Soviet planned economy model, followed its economic model that placed emphasis on the State's role in economy and on distribution rather than production. The economic model was import-substitution that reduced trading with the rest of the world. To be fair to Nehru, given the history of the British East India Company that came as traders and went on to build an empire, Indians viewed traders, especially foreigners, with huge amount of suspicion and really did not want them around.

Indira Gandhi only increased the State's control over businesses. She nationalised the major banks and reduced foreign investment. Foreign investors soon left India, taking with them innovation and new technology. She raised taxes to ludicrous levels as a measure of socialist distribution and created the pernicious license-quota raj that fixed production levels. As the wag put it, with wealth not increasing, India was distributing poverty!

A Mumbai industrialist once recalled that when his firm wanted to increase its cement production (considering India's huge infrastructure needs, cement was then always in short supply), it was not allowed to do so! The Ambassador cars, whose shape remained (and remains) unchanged from the 1960 best exemplifies the economic stasis and all that was wrong: they were inferior, inefficient, and in India!

By the 1980s, it was clear that this license-quota raj had failed. Economic growth through the 1950s, 60s, and 70s was stuck at 3.5 per cent of GDP (called the Hindu rate of growth). But considering that population growth was 2.5 per cent, this meant that real growth was just 1 per cent. It was only in the late 1980s that economic growth crossed the 5 per cent mark, an improvement but still not enough to take India out of poverty in the foreseeable future.

The late 1980s and early 1990s were momentous years for India and the world. V P Singh, who became prime minister in November 1989, introduced the Mandal Commission report -- that is, job reservations for the other backward castes in August 1990. His government fell soon afterwards and Chandrashekhar, who next became prime minister, reigned for just a few months before an election was called in May 1991, when Rajiv Gandhi was assassinated.

Elsewhere, the Berlin Wall came tumbling down in November 1989 and the Communist government of East Germany was ousted. By now it was clear that Communism as a political and economic system had profound fundamental weaknesses. It was certainly not the panacea that it was made out to be. The Soviet Union had already been experimenting with glasnost and perestroika (openness and restructuring of its economy) for a few years without much success (the Soviet Union would collapse in August 1991).

India's worsening economic situation hit a nadir when the first Gulf War broke out in early 1991 and oil prices went through the roof. To the utter horror and shame of Indians, the Government of India had to fly India's gold reserves to the Bank of England as a deposit to ensure that India did not default on its international payments.

It is my humble belief that the implementation of the Mandal report and the depositing of gold abroad were the two issues that mentally prepared the Indians for a paradigm shift. For many middle-class (and mostly upper caste) Indians, the Mandal report meant that they could no longer depend on government jobs to keep their social and economic status. They needed jobs in the private sector and they needed a larger private sector.

Moreover, in India, the largest consumer of gold in the world, the yellow metal is a part of a family's emotional psyche. Most Indian Indian women wear a mangalsutra (a chain with some gold and a small pendant of gold or stone), and which is never removed unless the woman is widowed. It thus symbolises the health and wealth of the house. Sending Indian gold to Britain (the country that millions hold responsible for impoverishing India) was, clearly, deeply humiliating and unacceptable. In fact, it was an intrepid reporter who broke the story of Indian gold being flown out; the government had no intention of declaring this shameful incident.

Thus, when P V Narasimha Rao took over as prime minister in June 1991 and began his reforms, many middle-class Indians were ready for a change, clearly believing that the previous economic model had failed them and the country. This support was to play a crucial role.

Interestingly, Rao was not an economist (he had been minister for external affairs, home and defence); but he was an uncanny politician and now he revealed his shrewdness.

First, he asked (present Prime Minister) Manmohan Singh to be his finance minister. Manmohan had the credentials that endeared him to the middle-class: he was an economist of repute who had studied at both Oxford and Cambridge on scholarships; he was a former Reserve Bank of India governor and thus perceived as a reliable and non-corrupt economist rather than an untrustworthy politician out to make money. Better still, Singh, who was briefly a member of the Communist Party of India, had once supported the socialist model but had later turned against it for justifiable reasons. The apocryphal story goes that this happened after his visit to Malaysia (or Thailand), where he was boggled by the massive production in the factories for exports, compared to India's slow producing factories. East Asia was becoming the workshop of the world and Singh rued the fact that India was missing the boat.

Rao gave Singh a free hand and the latter, in the 1991 Budget (which was presented in July since the election was announced in February) announced a slew of economic reforms -- measures doing with the need for licenses and quotas in most industries, cutting import duties, and allowing foreign investment in most industries.

Rao, an unlikely hero

Not surprisingly, politicians and many Indian businessmen cried foul. Some spoke of allowing investment in computer chips but not potato chips; industrialists, used to protection and no competition, gave reason after reason why at least their sector should not be opened up to the foreigners (the famous cry then was for a 'level-playing field,' that is the conditions be equal for all, which effectively meant not allowing foreign firms since they had some advantages), and so on.

It is to Rao's absolute credit that he did not merely initiate economic reforms but that he stayed the course. Believe it or not, Manmohan Singh was the first finance minister of India to present all the five budgets of his government, thus showing how difficult is the job of the finance minister (and the prime minister who has to back him).

No wonder, Singh has always said that all credit for economic reforms belong to Rao who took care of the politicians and vested interests baying for Singh's blood.

Rao's critics seek to deny credit to him by saying he was forced to do what he did, especially after the International Monetary Fund agreed to provide loans on the condition that India reformed its economy. But such critics miss a crucial point: Rao could have always taken a different road. He could have clamped a financial emergency (never applied in India till date) and announced harsh economic measures, something that was in fact done in the late 1960s and early 1970s when India faced an economic crisis. No one would have opposed such measures then.

What will always be Rao's credit is that he had the intelligence and the courage to take -- and stay on -- a different road.

What do you think of P V Narasimha Rao's contribution to India?

Alas, Rao's record on other fronts is terribly dismal. He was accused time and again of corruption, though he was proved innocent later. In fact, corruption (or charges of corruption) reached unbelievable levels during his five-year rule. He is also blamed, and rightly so, for allowing the destruction of the Babri Masjid and not taking a firm stand against a radical Hindu mob, a folly that would prove very expensive later on for both him personally and his party. Strangely, Rao's political shrewdness seemed to have then deserted him.

But at least in one area, Rao will always be a hero. If today Indians can talk of eight per cent and 10 per cent GDP growth, it is simply because this non-economist changed India's economic direction!

Also Read: 'PV': A scholar, a statesman

Amberish K Diwanji