PV Narasimha Rao, Not Manmohan Singh, Paved The Way For India's Economic Reforms

1991: The year PV made history.

07/10/2016 2:28 PM IST | Updated 07/10/2016 3:31 PM IST
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PV Narasimha Rao with Manmohan Singh. (Photo by Prashant Panjiar/The India Today Group/Getty Images)

Sanjaya Baru, policy analyst and bestselling author of The Accidental Prime Minister: The Making and Unmaking of Manmohan Singh, has new book out. 1991: How P.V. Narasimha Rao Made History (Aleph Book Company, hardback, Rs 499) is an insider's account of the politics, economics and geopolitics that came together to make 1991 a turning point for India. As opposed to Manmohan Singh, who is credited to be the architect of the liberalisation of the economy, Baru argues it was Narasimha Rao, or PV as he was popularly called, who paved the way for the historic reforms. Edited excerpts.


A day after being sworn in as prime minister on the evening of 22 June, PV addressed the nation on television. His speech was drafted by Cabinet Secretary Naresh Chandra. Chandra recalls that he was assisted in this by Principal Information Officer Ramamohan Rao, though the latter very modestly claims the effort was entirely Chandra's and he has no recollection of his own role. Rao was a serving official of the Indian Information Service. He had cut his teeth as a wartime propagandist for the government in the 1962 conflict with China and reported from the battlefield during the 1965 war with Pakistan. He knew a thing or two about strategic communication during a crisis.

India was in a different kind of war, fighting on a different kind of battlefield. The prime minister was addressing the nation for the first time. He had to be seen speaking his mind. In his characteristic dull, dry and deadpan manner PV told his people:

The economy is in a crisis. The balance of payments situation is exceedingly difficult. Inflationary pressures on the price level are considerable. There is no time to lose. The government and the country cannot keep living beyond their means and there are no soft options left. We must tighten our belts and be prepared to make the necessary sacrifice to preserve our economic independence which is an integral part of our vision for a strong nation.

The prime minister then took an interesting step forward. Not restricting himself to crisis management, fiscal and balance of payments stabilization, PV chose to commit his government to wider economic reform.

The government is committed to removing the cobwebs that come in the way of rapid industrialization. We will work towards making India internationally competitive, taking full advantage of modern science and technology and opportunities offered by the evolving global economy.

In two simple sentences PV declared to the nation his decision to utilize the crisis as an opportunity to shift India's trade and industrial policy from the inward-orientation of the Nehru-Indira years onto a new trajectory of globally integrated development.

The 'evolving global economy' was being reshaped by new geopolitical factors—the disintegration of the Soviet Union and the restructuring of the world trading system by an assertive United States. It was the US that had helped create the GATT in the 1950s with the purpose of installing a global trading regime that would enable the war-torn economies of Europe and Asia to rebuild themselves while creating new markets for US exports. The US believed GATT had served its purpose, helping Germany, Japan and many 'East Asian Tigers' emerge as globally competitive economies. Their exports were now threatening the US and the sole superpower wanted a restructuring of the global trading system, replacing GATT with a new world trade organization.

Opinion was already divided in India between those who sought to tackle the balance of payments crisis through 'import compression' and those who felt the crisis was an opportunity to open up the economy and seek export-oriented investment that would increase India's export earnings.

On his very first day as prime minister, PV told the nation that he would like to see India take advantage of the evolving global economy, rather than shut its doors tighter. While the immediate demands of crisis management, especially the urgent need to avoid default on external debt repayments, required 'import compression', in the months to come PV lent his weight to trade liberalization and the reintegration of the Indian economy with the global, especially the dynamic East Asian economies.

On his very first day as prime minister, PV told the nation that he would like to see India take advantage of the evolving global economy, rather than shut its doors tighter.

The second significant statement he had made was about making India 'internationally competitive'. Every graduate student of economics knows that for an economy to be internationally competitive it must contain sectors that operate at competitive levels of scale and efficiency. One of the worst legacies of the licence-permit raj was to restrict firm and plant size. Joint secretaries in Udyog Bhavan decided the capacity of firms, neither the market nor technology.

To become globally competitive Indian industry needed to exploit what economists call the 'economies of scale'—building large plants that cater to a global and not just a local market. The philosophy behind curbing scale was shaped by concern about monopolistic and oligopolistic practices of large firms. To 'prevent the concentration of economic power' in any given industry was a stated objective of industrial policy.

This did not mean that every company strictly adhered to government regulations. All it meant was that such restrictions encouraged corruption. Companies would operate at scales well beyond their authorized capacity and sell the excess output in the black market. Inspectors and taxmen would be bribed. For a firm, this made economic sense. Indeed, this is how many globally competitive firms had been set up. What PV decided he would do was to bring them out of the closet, so to speak: Legalize capacity by removing regulations that delegitimized expansion of scale.

Few seemed to notice the radical implications of that sentence in the prime minister's very first speech. It set the stage for the profound transformation of industrial policy that PV authorized a month later.

With permission from Aleph Book Company.

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