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25 Years Of Reforms: What Really Happened In July 1991
How humiliation, tragedy, politicking and ill health set the stage for the historic reforms launched in July 1991
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In August, 1990, Iraq under the late Saddam Hussein invaded and captured oil rich Kuwait and threatened an encore with Saudi Arabia. Even as war loomed in West Asia, Indians felt proud of the manner in which Air India managed to bring back tens of thousands of stranded Indians back home. I believe there is an Akhshay Kumar movie called 'Airlift' about that operation that is being released soon. While ordinary Indians applauded the rescue, most couldn't understand that this "Gulf crisis" that the already troubled Indian economy went into a tailspin. Even as armies of Mandal and Mandir clashed on the streets of India, NRIs withdrew all their foreign currency deposits, the economy reached a stage of collapse and Cassandras once again predicted the disintegration of the Indian Republic.
But it was news about another kind of "Airlift" that jolted even ordinary Indians out of their Mandal-Mandir debates. By the time a US-led alliance had pulverized and thrown the Iraq Army out of Kuwait, the Janata Dal government led by the late V.P. Singh had collapsed and the late Chandra Shekhar was the Prime Minister of a ragtag minority government supported by the Congress under the late Rajiv Gandhi. Yashwant Sinha, now a "rebel" BJP veteran was the Finance Minister and preparing to present his first Union Budget. Behind the scenes, Indian bureaucrats had been negotiating with the World Bank and IMF for emergency assistance.
Things were really precarious. India had foreign exchange to cover just three weeks of imports; credit rating agencies had downgraded India to speculative or junk status and exporters in other countries were refusing to honor letters of credit extended by Indian banks. India stood on the verge of a Sovereign default. Things got worse when Rajiv Gandhi withdrew support to the Chandra Shekhar government and fresh Lok Sabha elections were called. It was around this time news leaked that India had secretly airlifted gold to Switzerland and England as collateral for foreign currency loans to meet immediate and emergency obligations. For a nation obsessed with gold, this was humiliation almost akin to the one inflicted by China in 1962. The truth is: 20 tons of Indian gold lying in vaults in Switzerland were used as collateral. The actual airlift of gold happened later. But in an electorally charged atmosphere with Mandal and Mandir vying for attention, this "news" about India pledging gold finally drove home the point that something drastic had to be done to save the Indian economy. Remember, the Berlin Wall had fallen by this time and Socialism and Communism were in ignominious retreat all over the world. It was known that there would be fundamental changes in economic policy making in India after the Lok Sabha elections.
Tragedy struck on May 21, 1991 during election campaigning when Rajiv Gandhi was assassinated by an LTTE suicide bomber. When results of a further postponed elections came out in June, 1991, it was clear that the Congress would be heading a minority government. But who would be Prime Minister? As the recently released autobiography of Sharad Pawar claims, he was the front runner and several other Congress leaders were contenders. In the end, it seems Sonia Gandhi was persuaded to bring the "safe" P. V. Narasimha Rao back from retirement. Rao, who had not even contested the 1991 elections, became Prime Minister. The most critical decision for Rao, given the perilous state of the Indian economy, was to choose a finance minister who could navigate India out of the crisis. The offer went to the late I. G Patel, a much respected economist and former RBI governor. Patel politely declined saying his health would not permit him the long hours and the stress needed for the job.
The second choice was another former RBI governor Dr Manmohan Singh, a lifelong bureaucrat who was then chairman of the University Grants Commission. Singh accepted the job. It was under his watchful eyes that gold was airlifted to London in July, 1991. This time, secrecy was maintained. It was only in 2009 when India purchased 200 tons of gold from IMF that this fact was revealed.
Thus was the stage set for the Union Budget of 1991 that fundamentally transformed India.
Also Read | (How India Changed Forever In 1991)
To follow in this series: The Unleashing of India and The Persistence of Crony Capitalism.