When the Indian Economic Elephant Flew...the promo created by the author, S Narendra

When detergent was luxury, Calci non-essential

Pamulaparthi Venkata Narasimha Rao (28 June 1921 – 23 December 2004) was an Indian lawyer and politician who served as the 9th Prime Minister of India from 1991 to 1996. His ascendancy to the prime ministership was politically significant in that he was the second holder of this office from a non-Hindi-speaking region and the first from Southern India. He led an important administration, overseeing a major economic transformation and several home incidents affecting national security of India. On his 100th birthday, S Narendra, PV’s information adviser and the Government of India’s Principal Information Officer, recalls the bad and the subsequent good days of the Indian economy.

July 24th, 1991.  

It was on this day the Indian economic elephant was unshackled by Prime Minister P.V. Narasimha Rao. A major activity without much fanfare, not even a ministerial press conference, the Industry Ministry that he was in charge of, announced the abolition of Industries Development and Regulation Act 1951. All licencing required for new industries, barring a few sectors, that were in a negative list was removed overnight and in just one stroke. And in that master stroke, the 40 year long ‘licence-permit raj’ had ended, marking the beginning of massive economic reforms and the movement of EODB or ease of doing business.  

Indians born after this date, generally referred to as the Liberalisation Era children, do not know what it was like if anyone wanted to start any   business -small or big under the IDRA. It was the mother - goddess of a web of restrictive laws and regulations constricting innate Indian entrepreneurship. Sample this:

Before July 24th, 1991, if one set out to be an entrepreneur, wanting to make something in India, one had to first obtain  a hard licence  from the  government to start any business. Then apply to the government for approval for importing machinery and equipment, if they were not available in India. And most equipment was just not available within the country. The entrepreneur’s wait would get much longer if he or she were to import technology.  They had to satisfy the official regulators that the technology was unavailable in India. A further hurdle had to be crossed if the person had to buy the equipment or technology abroad. That was because he/she would be required to obtain a foreign exchange permit which is rarely given.

The most difficult clearance to get was when an industrialist had to raise capital from the stock market. It was the government that decided how much capital he/she could raise, what to produce and how much to produce. A whole range of bureaucratic institutions such as the Monopolies and Restrictive Trade Practices Commission, Directorate General of Technology and Development, Import and Export Controller and a host of others could at any time interfere with any entrepreneurial activity.

The government-appointed Hazari Committee in the 1960s reported that a handful of business houses with political connections had managed to corner a large number   of the industrial  licences in order to block competition, but made no investment of their own for production of licenced goods, thus creating shortages and a sellers’ market.

In the early ‘80s, Texas Instruments, then the world’s leading makers of calculators and electronic business machines, wanted to start their production in India, in the so-called Special Economic Zone at Santa Cruz, Bombay. After a wait of 18 months, the Indian licensing authority permitted them to make less than 5000 machines, because in the official mindset that was the size of the expected market for calculators. Believe it or not, a calculator was officially regarded as a non-essential item! This tale of woe was narrated to the Finance Minister of India, V.P Singh who was visiting Hong Kong for an Investors’ conference in 1984 and I was covering it as a foreign news reporter. An   NRI from   Hong Kong told his experience of operating an export production unit in the SEEPZ, Mumbai. According to him, it took him weeks to import vital components going into an electronic product and before he was allowed to export anything from the dedicated export zone. He had to grease the palms of  several customs officials. Whereas, his export-import firm in Hong Kong was able to import an item  required for making   any electronic equipment all the way   from Latin America and he was able to export his final product with the imported parts fitted in,  in a matter of five days without having to please any official.

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 and self- reliancewhich actually turned out to be a process of self-denial policy. Most consumer durables production was reserved for the small- scale industries which did not have the scale and technology advantage. But in an economy of shortages, the consumer had little choice. Typical of the prevailing mindset was the declaration in a government budget (1970) that refrigerators and air conditioners and for that even bread, were luxuries deserving prohibitive taxes. Advertising in the electronic media for such products and jewellery   was banned as part of discouragement to consume luxuriers. Only public sector companies could be named in government-controlled news media, not private companies. Even the news agenciues would not name private companies in their news coverage. Investment bankers and stockbrokers did not have free access to economic and financial news from across the globe. And, there were a host of other such policies ostensibly to promote domestic entrepreneurship.

Decades later, India was and is being celebrated as the centre for manufacturing innovations and 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,  and  meet the cost of  importing  essential goods like POL, has grown to  about $300 billion. After the opening up of the economy   by scrapping IDRA and other bold steps, India showed that it could grow annually at 8%-9%  and close the economic gap with  China. This new India now gets invited to the international high table such as the G-7.  It caused the coining of acronym BRICS - Brazil, Russia, India, China and South Africa, exciting investors and marketers, as these economies were perceived as potential engines of global economic growth. 

The bold economic reforms, meaning opening up of the economy  to the private sector and foreign direct investment, as some of Rao’s critics point out, was undertaken for averting a financial crisis  caused by severe  imbalance of payments. The difference between Rao’s government and predecessors   was that latter in similar situations went to the International Monetary Fund for a bail out. They accepted the IMF loan conditions requiring the government to reduce its controls over the economy. But at the first sign of easing of the crisis, the predecessor governments reverted to their old ways. Prime Minister Rao, on the other hand, swiftly chose to address the root causes of the recurring financial problem by removing the government controls over businesses. Further, he gave the much required political backing to his finance minister, Dr Manmohan Singh to implement fiscal and taxation reforms, and to Commerce Minister Chidambaram to make unprecedented changes in export-import policies.

Commenting on the government’s  totally unexpected bold measure of abolition of the Licence Raj, the Financial Times of London wrote: “One of the most fragile governments in India’s history has, paradoxically, started to make the bold economic policy changes that not even Rajiv Gandhi’s ostensibly the more stable administration could (not)  risk.”

Although PM 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 merely part of his political strategy to deflect criticism of reforms away from himself, but 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,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 Revisiting  the same forum in 1994, Rao  propounded his ‘middle-path’,  that simultaneously  allows market orientation of the economy, while offering government  protection to  the poor and others who were likely to bear a bigger economic  burden due to the change. From mid-1992, he  substantially increased  the expenditure on Rural Development, asked for setting up a National Renewal Fund for assisting workers who were likely to be affected by disinvestment, made the school midday meal programme a  national central scheme, put in place EAS or Employment  Assurance  Programme that later became MNREGA. He cautioned against sudden withdrawal of farm subsidies. 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 intensive sectors such as food processing linked to modern agriculture, infrastructure. EODB or the ease of doing business in India is a work in progress that was begun with the scrapping of IDRA. In Narasimha Rao’s own words, the direction of economic change had been set and irreversible, but the pace could vary.

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 (WTO), requiring changes in several outdated laws like the Indian Patent Act, Copy Rights Act and Indian Telegraph Act. As the Prime Minister’s information adviser, I was much concerned.  

I did suggest that he should appoint a separate industry minister so that there is a buffer between the criticism of the Industrial and Investment policy, especially the Prime Minister. Rao’s unexpected response was that if he were to appoint a separate minister, the latter would try to make his role more important by controlling industry. He added: ‘I want industry to be important, not this ministry or the minister.’ After holding this portfolio for three long years, he did induct an Industry minister, the Kerala string man K.Karunakaran. Soon after taking office, KK wanted FIPB to be placed under his ministry. He showed reluctance to carry out further deregulation and opposed steps for disinvestment in government owned companies.

It was Prime Minister Rao who stood his ground, gave the call for economic reforms with a human face, meaning protection for large sections of poor and rural people who were likely to be adversely affected in the short term by economic reforms and including globalisation. He went before the WEF or the World Economic Forum and argued against demands by rich countries for unrestrained globalisation of emerging economies like India. Some 20 years later, the same WEF was forced to recognise the wisdom of Prime Minister Narasimha Rao’s words in the face of protests against globalisation that had made the rich richer and the poor, poorer. The WEF meeting at DAVOS in 2010, after the global financial crisis, said in its report that economic globalisation should be ‘inclusive’ (not leave the poor behind).










Recent News