Twenty five years ago, in January 1991, as India struggled to finance its essential imports, especially of oil and fertilisers, and to repay official debt, senior officials managing the economy in the Chandra Shekhar government reached out to influential members of the global financial system. It was in difficult circumstances that they did so: poor economic management in the preceding years had led to a rapidly deteriorating environment, made worse by the Gulf war that led to a spike in oil prices.
RBI governor S Venkitaramanan, a former finance secretary who had only a couple of moths ago replaced his civil service colleague R N Malhotra, was on the phone with his other central bank peers and officials in multilateral institutions. So were those in the finance ministry then: finance secretary S P Shukla, chief economic advisor Deepak Nayyar, and Venkitaramanan’s deputy Rangarajan, besides then finance minister Yashwant Sinha. India had managed to get a bit of a breather with the first tranche of $755 million from the IMF, but that wasn’t enough.
The attempt then was to raise money at a time when even the State Bank of India, the country’s largest bank, was finding it difficult to raise overnight or short-term funds from the international market given India’s economic indicators. For months, the government had kept the show going by using the bank to borrow overnight – raise money for one day and repay the following day. With even that means of borrowing drying up, the only option was to borrow from other central banks.
Given the reluctance of institutions such as the Bank for International Settlements and others, Venkitaramanan pitched for an amendment of the RBI Act to allow the central bank to borrow for a period exceeding 30 days and also from agencies other than central banks.
Borrowing from other agencies, Venkitaramanan argued, would help the central bank borrow funds in an emergency. But it wasn’t a serious option given the government’s fragile political strength and lack of numbers.
During talks with central banks and investment banks abroad, some of them pointed to the fact that India had enough gold which could be utilised. Knowing that a proposal to go in for an outright sale of gold would have run into resistance, the SBI was told to submit a proposal to the RBI to lease gold confiscated from smugglers on the government account. Within two months, the proposal was approved by the central bank and by the government in March 1991.
But then, political turmoil hit the country. The Congress, which had provided unconditional support to the government, withdrew its backing in February, saying that a Haryana policeman had been assigned to spy on their leader Rajiv Gandhi. The Chandra Shekhar government was unable to present its Budget as scheduled by the end of February. By mid-March, global credit-rating agencies had placed India on watch and by April, downgraded the country’s sovereign rating from investment grade to a notch lower, making it virtually impossible to raise even short-term funds.
Without a full Budget and a firm commitment to reforms, multilateral institutions such as the IMF and the World Bank, the major lenders then, put a stop to their funding. Bilateral assistance from many countries also wasn’t forthcoming except for a handful of countries.
Defence payments were being rescheduled and imports monitored daily. In April, finance minister Sinha and the finance secretary made a trip to Japan in a final attempt at securing assistance. The spring meeting of multi-lateral lenders such as the IMF and the World Bank also didn’t lead to any commitments.
With a severe liquidity crisis and time running out and the prospects of a default in sovereign payments a real prospect, officials moved a proposal to pledge the gold. Y V Reddy, then joint secretary in the finance ministry in charge of the balance of payments division, prepared a detailed note. The plan was to send out 20 metric tonnes of confiscated gold given to the SBI for what was known as a sale and repurchase option. Those were desperate times — elections to the Lok Sabha had been called and reserves had slipped to less than Rs 1,000 crore.
At a meeting of senior officials, PM Chandra Shekhar, when briefed about the dire economic scenario and the need to pledge family gold, could only tell them: “Have you left with me any other option”, as some present in that meeting were to recall years later.
So in the middle of the election campaign of 1991, marred by the assassination of Rajiv Gandhi in Sriperumbudur on May 21, Yashwant Sinha, who was then in Patna, signed the file to mortgage the gold. The government then decided on what appeared to be a politically smart move to send the gold out a few days after polling day, with consignments being air-lifted between May 21 and 31.
UBS had bought the gold and India raised $200 million. There were plenty of challenges then in terms of ensuring secrecy including sending the consignments by a chartered plane and also in testing the gold and ensuring the requisite standards. The decision to pledge gold was severely criticised when it later became public.
The new government which came to power in June 1991, headed by Narasimha Rao and with Manmohan Singh as finance minister, too had to raise resources swiftly given the state of the country’s balance of payments. The country had foreign exchange reserves to cover just about three weeks of import.
During this turbulent phase, when governor Venkitaramanan visited Tokyo, central banks such as the Bank of England and the Bank of Japan were willing to lend but not without a collateral. It was pointed out to them that India was a depository of the IMF and ought to be recognised, but that didn’t help. The two central banks insisted on physical delivery of gold.
Between July 4 and 18, 1991, the RBI pledged 46.91 tonnes of gold with the Bank of England and the Bank of Japan to raise $400 million. But as the economic situation improved, the government repurchased the gold before December that year and transferred it to the RBI. But this time round, the political fall-out was high after The Indian Express broke the story of gold being moved out for pledging, forcing Manmohan Singh to tell Parliament later that it was a painful necessity.
Avoiding a default in payment was the overriding objective of the political establishment and policy makers then. If India can today boast of a default-free sovereign record, much of the credit for that should go to this set of leaders and officials for crisis management and for later putting in place a clear strategy for building adequate foreign exchange reserves and improving macro-economic fundamentals. In 2009, during the UPA government’s tenure, with Manmohan Singh as prime minister, India bought 200 tonnes of gold valued at $6.7 billion to diversify its assets. The wheel had come full circle.