P V Narasimha Rao steered reforms but shunned spotlight

Rao had carefully picked his team of ministers and officials, whom he resolutely backed despite the expected political backlash.

In a climate hostile towards liberalisation, Rao devised a strategy of not taking any credit for the reforms as he realised that being at the helm of affairs, he needed to safeguard his political legitimacy. On one hand he took a backseat during meetings and on the other hand backed his team to be the face of the reforms.

For instance, when 50 MPs from his own party sent a signed letter criticising the Budget, he left it to Singh to do the explaining. Similarly, he left the task of announcing the contentious industrial policy in the Lok Sabha to the Minister of State for Industry although he was himself the Industry Minister.

When Rao offered Singh the Finance Minister portfolio, Singh only had one condition: Rao’s full political backing. “He replied, only half-jokingly, ‘You will have a free hand. If the policies succeed, we will all take the credit. If it fails, you will have to go’,” Singh recounted in Vinay Sitapati’s book, Half Lion: How Narasimha Rao Transformed India. Rao kept his word. When Singh offered to resign following a political furore over the second round of devaluation of the Indian rupee by 11%, Rao refused. Besides exhibiting political courage to back his team, Rao chose those who shared his appetite for bold reforms. Among his team members were his principal secretary Amar Nath Varma and Cabinet secretary Naresh Chandra. Both were known to be fearless when it came to speaking their minds. Rao also brought Montek Singh Ahluwalia into his inner circle, who actively advocated for reforms.

At times, Rao attributed the reforms as part of the Nehruvian-Gandhi legacy to make it more palatable for the political establishment. His team followed a similar strategy. For example, when some ministers in Rao’s government opposed the new industrial policy draft, Jairam Ramesh, who was then a part of the Finance Ministry, added a preamble linking the thinking behind the policy to Congress’s fundamental ideals and its leadership. The ministers withdrew their opposition.

The reforms were necessitated after a sharp jump in oil prices in August 1990, leading to an unmanageable balance of payment (BoP) situation, depleted foreign exchange reserves along with massive capital outflows, pushing India closer to the possibility of default.

The government devalued the Rupee on July 1, 1991 and the RBI transferred over 46 tonnes of gold from its reserves to the Bank of England for borrowing forex to manage liquidity resulting from the BoP crisis.

The rupee devaluation was done by the Rao-led government in two tranches of 9% and 11% in quick succession, taking the total downward adjustment to 17.38% in terms of pound sterling and about 18.7% in US dollar terms.

These steps were followed by the new industrial policy, a landmark document in accelerating India’s economic liberalisation. The policy abolished industrial licensing for all projects barring a select few strategic industries, allowed the government to disinvest its shareholding in the public sector, and amended the Monopolies and Restrictive Trade Practices (MRTP) Act to allow for the setting up, expansion, and merger of businesses without prior approval.

Notably, it also allowed foreign direct investment of up to 51% foreign equity and removed bottlenecks to facilitate foreign technology agreements in high priority industries. The new industrial policy was presented on the same day as the 1991 Budget. Nearly 80% of the industry was taken out of the industrial licensing framework and the number of sectors reserved for public sector companies dropped from 17 to 8.