The forgotten PV and his reforms

AN EXCLUSIVE BY S NARENDRA, FORMER ADVISOR TO PRIME MINISTERS

 July 24th, 1991.

This was not just another date in independent India’s calendar.  It was on this day the Indian economic elephant came out of its chains. 

Indians born after this date, generally referred to as the Liberalisation era children, do not know what it was like if anyone wanted to start a business-small or big under the then prevailing laws and regulations.

Pre-91, one had to first obtain  a hard to get a licence  from the  government to start any business. Then he had to apply to the government for approval for importing machinery and equipment, if they were not available in India, and that was the case in most instances. The entrepreneur’s wait got further extended if he chose to import technology and had to satisfy official regulators that the technology was unavailable in India. A further hurdle had to be crossed if the person had to buy the equipment or technology abroad. The requisite foreign exchange permit was rarely given.

The most difficult license to get was when an entrepreneur wanted to raise capital from the market. It was the government that decided how much capital a businessman could raise, what to produce and how much to produce. A whole range of bureaucratic institutions such as the Monopolies and Restrictive Trade Practices Commission, Directorate General of Technology and Development, Import and Export Controller and a host of others could at any time interfere with any entrepreneurial activity. A government appointed committee (Hazari Committee) in the 1960s had revealed that a handful of business houses with political connections had managed to corner most of the industrial licences in order to block competition but had not used the licences for either investment or production, thus creating shortages and a sellers’ market.

In the early ‘80’s, Texas Instruments, then the world’s leading makers of calculators and electronic business machines, wanted to start their production in India, in the so- called special economic zone at Santa Cruz, Bombay. After a wait of 18 months, the Indian licensing authority permitted them to make less than 5000 machines, because in the official mindscape that was the size of the expected market for calculators, officially regarded as a non-essential item. This tale of woe was narrated to then Finance Minister of India V.P Singh who was visiting Hong Kong for an Investors’ conference in 1984. (I was covered the event as  a foreign news reporter). An   NRI from   Hong Kong narrated his experience of operating an export production unit in the Santacruz EPZ. According to him, it took him weeks to import vital spare parts  and before he was allowed to export anything from this dedicated EPZ, he had to grease the palms of  several customs officials. On the contrary, his export-import firm in Hong Kong  was able to import an item  required for making   any electronic equipment all the way   from Latin America and he could export his final product with the imported part fitted in to Australia in a matter of five days .

The Indian Five-Year Plan (1985-90) that was being   prepared (1984) estimated the demand for TV sets for the entire 5- year period as one million sets. Around this time, an upstart Indian firm put out advertisements that it had obtained technology from Sony of Japan for producing TV sets and invited customers to deposit Rs 2000 as an advance booking amount. In a matter of a few months it had collected  Rs 60-odd crores  from  the customers. This development forced the Planning commission to substantially revise its forecast of demand for TV sets and the production capacity to be permitted. But such upwardly revised estimates of production had to be exclusively done in the small scale sector only, effectively denying TV production the economic   scale   advantages, thus making products expensive and lower in quality.

The official policy did not allow soaps, detergents, radio or TV sets  to be marketed under foreign brands, as part of a severe import substitution and ‘self- reliance ‘ (or self -denial) policy. Most consumer durables production was reserved for the small- scale industries which did not have the scale and technology advantage. But in an economy of shortages, the consumer had little choice. Typical of the prevailing mindset was the declaration in a government budget (1970) that refrigerators and air conditioners (even bread), were ‘luxuries‘ deserving prohibitive  taxes. The Electronic media advertising of such products and jewellery   was banned as part of shunning items of conspicuous consumption. Only public sector companies could be named in government -controlled news media, not private companies. Investment bankers and stockbrokers did not have free access to economic and financial news from across the globe under an official restriction. And, there were a host of other such policies ostensibly to promote domestic entrepreneurship.

The draconian legislation that sanctioned all such strict government controls and interference in business decisions died on the evening of July 24th, 1991.

Unexpectedly (for many), the central government abolished   the practice of licensing industries under the Industries (Development and Regulation) Act (IDRA),1951, for all industries except a few   placed in a negative list. The manner of announcing such a game-changing policy was low key, without a press conference by the then Industry Minister, who was none other than the Prime Minister P.V. Narasimha Rao himself. The abolition of ‘the licence-permit raj’, (as described by C. Rajagopalachari or Rajaji) laid the foundation for the movement towards EODB - Ease of Doing Business in India, now being vigorously tom-tommed .

Decades later, India is being celebrated as the centre for manufacturing innovations and global IT hub. The foreign exchange reserves that hovered around a few million dollars in 1991, requiring  India  to pledge its gold reserves for staving off a default in paying interest on foreign loans  and  meet the cost of  importing  essential goods like POL, has grown to  about $300 billion. After the opening up of the economy   by scrapping IDRA and other bold steps, India showed that it could grow annually at 8% to 9%  and close the economic gap with  China. This new India now   gets invited to the international high table, such as G-7.  It caused the coining of acronym-BRIC or Brazil-Russia-India-China, as these economies were  perceived as potential engines of  global economic growth. 

Narasimha Rao, as the prime minister-cum-industry minister came under increasing criticism. As his   information adviser, I did suggest that he should appoint a separate industry minister so that there is a buffer between the criticism of the Industrial and Investment policy and the prime minister. Rao’s unexpected response was that if he were to appoint a separate minister, the latter would try to make his role more important by controlling industry. He added: ‘I want industry to be important, not this ministry or the minister.’ After holding this portfolio for 3 years, he did induct an Industry minister - K.Karunakaran. Soon after taking office, the latter wanted FIPB to be placed under his ministry and showed reluctance to carry out further deregulation and opposed steps for disinvestment in government owned companies.

Writing about the government’s  totally unexpected bold measure of abolition of the Licence Raj, the Financial Times: “One of the most fragile governments in India’s history has, paradoxically, started to make the bold economic policy changes that not even Rajiv Gandhi’s ostensibly the more stable administration could (not)  risk.”

The prime minister’s own Congress party was unhappy with the opening of the economy. The left parties and BJP  and sections of industry and business were not only critical of Rao’s economic reforms but also had launched a campaign opposing India’s entry into the World Trade Organisation (WTO), requiring changes in several outdated laws like the Indian Patent Act, Copy Rights Act, Indian Telegraph Act. It was PM Rao who gave the call for economic reforms with a human face, meaning protection for large sections of poor and rural people who were likely to be adversely affected in the short term by economic reforms, including globalisation. He went before the WEF or the World Economic Forum and argued against demands by rich countries for unrestrained globalisation of emerging economies like India. Some 20 years later, the same WEF was forced to recognise the wisdom of Narasimha Rao’s words in the face of global protests against globalisation that had made the rich richer and the poor, poorer. The WEF meeting at DAVOS in 2010, after the global financial crisis, said in its report that economic globalisation should be ‘inclusive’ (not leave the poor behind).

Narasimha Rao was a shrewd political leader. He put specialists like Dr.Manmohan Singh and P.Chidambaram as the face of India’s economic reforms, with he himself working  from behind  the political system and processes in support of his economic reforms.