Soon after January 1991, when the government of Prime Minister Chandra Shekhar availed of money from the International Monetary Fund (IMF) — the first credit tranche under a three month standby arrangement — in the face of a difficult balance of a payments position, a couple of senior officials from the Ministry of Finance and the RBI were making frequent trips to Washington to negotiate with the Fund and the World Bank, another multilateral lender. These officials were in fact at the office of the Fund Bank in Washington in early March when Rajiv Gandhi withdrew support to the central government — prompting their interlocutors to ask them whom they were representing!
With the squeeze on liquidity and access to even short-term funds from international loan markets, the prospect of a default on sovereign repayments looked real. There were some who felt that didn’t matter, but the overwhelming view among senior policymakers in the government was that the country should not default at any cost. This was reinforced at meetings in the Cabinet Secretary’s office and the Cabinet room. Even as the decision to pledge gold to raise $ 400 million was being taken, President R Venkataraman was informed by the Prime Minister and senior officials and a note was recorded.
It helped that the President was himself a former Finance Minister who was no stranger to the IMF and the World Bank, and who understood the consequences of a potential default. Indeed, in 1980, when India had borrowed $ 3.9 billion — a record amount then — under an extended fund facility from the IMF, Venkataraman was the Finance Minister. But the government then did not avail of the full amount as the economy recovered.
Also, many senior officials in the government were mindful of the experience of countries like Brazil and Argentina which had landed themselves in problems earlier, and were convinced that India should not sully its track record on fulfilling all repayment obligations. Not just that — the fallout of a default in terms of credibility, and the prospect of lenders cutting access to funds, was not lost on most.
Chandra Shekhar’s Finance Minister, Yashwant Sinha, had written to IMF Managing Director Michel Camdessus seeking a contigent facility. Prior to that, Sinha had done the rounds of many countries, including Japan, and later, the United States, to seek support. And Japan was one of the countries that provided the backing that India needed then. Sinha says that it was not as though conditionalities were imposed. According to him, India was too large and respected a nation to be subjected to that — and much of the terms were mutually agreed upon, except the devaluation of the currency. A government without a political mandate couldn’t agree to that — and it was left to the next government headed by P V Narasimha Rao to carry out that decision in early July, within days of coming to power in June 1991. A charitable explanation is that the government headed by Chandra Shekhar, recognising its electoral prospects and the fact that it had nothing much to lose politically, would have acceeded to terms set out by lenders. There were the standard terms on reducing the fiscal deficit, controlling money supply, cutting subsidies, and opening up to foreign investment — besides suggestions on privatising state-owned companies and labour reforms, two proposals that successive governments have baulked at.
Even before the formation of his Cabinet, Rao told the nation that there were no soft options. He met Cabinet Secretary Naresh Chandra and some senior officials before his address to the nation to discuss the state of the economy and the steps that would have to be taken to surmount the crisis. Many of the measures featured in the July Budget — such as fiscal adjustment with a lower fiscal and revenue deficit, the axing of expenditure, lowering of export subsidies, raising of petro product prices, and increasing the price of fertilisers — with Finance Minister Dr Manmohan Singh saying that the economic rationale for higher fertiliser prices was obvious. Singh went on to announce a National Renewal Fund to provide a social safety net to protect workers from what he termed as the adverse consequences of technological transformation. That was like couching what essentially was a fund for workers who would be fired. The language was meant to soften the blow — with the government saying that the fund would provide retraining to workers to help them be productive partners in modernisation.
Over that year, and between 1991 and 1993, India borrowed $ 2.2 billion from the IMF under two standby arrangements, besides the $ 1.4 billion under the Compensatory Financing Facility in early 1991. A little over a decade later, India was to emerge as a creditor to the Fund — as its economy recovered and its balance of payments position improved substantially. And capping that was the purchase of 200 metric tonnes of gold from the IMF in 2009 with the sale proceeds working out to $ 6.7 billion.
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