Unsung Rao changed India’s economic destiny

Although Narasimha Rao’s tenure saw policy reforms across most economic sectors, he chose not to be the voice and the face of those vital policy impulses

July 24, 1991. It was on this day the powerful chains controlling the Indian economic elephant were removed by Prime Minister P.V. Narasimha Rao. Without much fanfare, not even a ministerial press conference, the industry ministry he was in charge of, announced the abolition of the Industries (Development and Regulation) Act, 1951. All licensing of new industries, barring a few sectors put in a negative list, was removed. The “licence permit raj” of nearly 40 years had unexpectedly ended, marking the beginning of massive economic reforms and the movement of EODB or ease of doing business.

IDRA was the mother goddess of a web of restrictive laws and regulations constricting innate Indian entrepreneurship. Before this date, if one set out to be an entrepreneur, wanting to make something in India, the person had to first obtain a hard-to-get licence from the government. Then he had to apply for a licence for importing machinery and equipment, as such equipment was not available domestically. The entrepreneur’s wait got further extended if he chose to import technology as the person had to satisfy official regulators that the technology was unavailable in India. Another permit was needed to pay for such imported equipment in foreign exchange that was scarce.

The most difficult licence to get was when an industrialist wanted to raise capital from the stock market. It was the government that decided how much capital a firm could raise, what to produce and how much to produce.

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 policy. Most consumer durables production was reserved for the small scale industries which did not have the scale and technology advantage. Investment bankers and stockbrokers did not have free access to economic and financial news from across the globe under an official restriction.

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. Electronic media advertising of such products and jewellery was banned as part of shunning items of conspicuous consumption.

A cascade of bold economic reforms followed after IDRA scrapping. As some of Narasimha Rao’s critics point out, such reforms were undertaken for averting a financial crisis caused by severe balance of payments imbalance. The difference between Rao’s government and predecessors was that the latter in similar situations went to the International Monetary Fund for a bailout. They accepted IMF loan conditions requiring the government to reduce its controls over the economy. But as soon the situation improved, the predecessor governments reverted to their old ways. Prime Minister Rao, on the other hand, worked swiftly to address the root causes of the recurring financial problem by removing the government controls over businesses.

Further, he gave political backing to his finance minister, Dr Manmohan Singh to implement wide ranging fiscal and taxation reforms, and unprecedented changes in export-import policies by the commerce minister, P. Chidambaram.

Although Prime Minister Narasimha Rao’s five-year tenure witnessed policy reforms across most of the economic sectors, he chose not to be the voice and the face of those vital policy impulses. This was not just part of his political strategy to deflect criticism of reforms away from himself. This was more due to his deep conviction that the rushing economic reforms which were likely to put at a disadvantage large sections of the people could destabilise both the core reforms underway and the democratic political system. Very early in his tenure, in 1991, he told the World Economic Forum, an assembly of wealthy investors, that economic reforms and globalisation should work for the building of a more humane and caring society. Addressing another global investors’ meet in Delhi, Rao implored them to assist him to carry out further economic reforms by investing in employment intensive sectors.

From mid-1992, Rao initiated policies and programmes that went to benefit the disadvantaged sections. Such initiatives included substantial increases in the expenditure on rural development, moves for setting up of a National Renewal Fund for rehabilitating workers displaced by PSU disinvestment, made the school midday meal programme a national central scheme, put in place EAS or Employment Assurance Programme that later became MNREGA. It was his government that laid the groundwork for the national highways programme by setting up NHAI and paved the way for Prime Minister Vajpayee to take it forward. The thrust was on employment generating sectors such as food processing linked to modern agriculture, infrastructure. He promised to increase government spend on education and health to six per cent of GDP as the economy grew.

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, requiring changes in several outdated laws like the Indian Patents Act, Copy Rights Act, Indian Telegraph Act.

It was not just the economy and development alone which engaged his attention. The separatist militancy in Punjab and J&K was at its height when he assumed office. Narasimha Rao singularly succeeded in ending militancy in Punjab; more spectacular was his success in restoring normalcy in J&K, much to the discomfiture of Pakistan. Facing unprecedented changes in the world order due to the collapse of the Soviet Union, he set about reworking India’s relationship with the new states and an altered Europe. Through economic reforms he prised open new doors for economic diplomacy, especially with the US and the tiger economies of southeast Asia.

Decades later India was and is being celebrated as the centre for manufacturing innovations and a 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, has grown to about $300 billion. After the opening up of the economy, India showed that it could grow annually at 8-9 per cent and close the economic gap with China. This new India now gets invited to international high tables such as G-7.

The scrapping of IDRA significantly went to change the mindset of India that led to changing the country’s economic space and the nation’s face.