Dr Manmohan Singh went ahead with the Rupee devaluation in 1991 after PM Rao developed cold feet
Twenty years after the economic reforms took place, Dr. Manmohan Singh’s record as the Prime Minister, particularly in UPA-2, seems to be impinging upon his track-record as the finance minister who turned around India’s fortunes in 1991. Dr. Singh is now dismissed as not being a committed reformer, and the then PM PV Narasimha Rao being the real architect of the economic reforms of the early 1990s.
If one were to go by the anecdote recounted by Dr. Sanjaya Baru (and mentioned by then RBI governor, C Rangarajan in 2001 in the Financial Express and Bibek Debroy in Economic Times), this modern view about Dr Singh and PM Rao might not be completely true.
In June 1991, the RBI’s foreign currency assets stood at $1.12 billion, equivalent to less than three weeks of imports at the time. India was on the verge of default as a new government, under the leadership of Prime Minister P V Narasimha Rao, took charge. The first and the most important policy step that India took to regain credibility with its creditors and rating agencies was to go in for a massive devaluation of the rupee.
In a two-stage operation code named “hop, skip and jump” by the architects of the move – then finance minister Manmohan Singh and RBI’s C Rangarajan – the rupee was devalued by 9 per cent on July 1, 1991 and by another 11 per cent on July 3. The “hop” on July 1 was meant to test the waters. The political reaction at home was strongly negative. Congress party leaders rushed to Prime Minister Rao and warned him that devaluation had cost even the mighty Indira Gandhi dearly in June 1966, and it would unseat him. Barely a month in office, Mr Rao panicked. He called Dr Singh and asked him to stop further action.
Both Dr Singh and Dr Rangarajan knew that a half-hearted move would make matters worse. Global financial markets and the IMF expected more. Dr Singh pretended to get in touch with the deputy governor in Mumbai and claimed he was unable to get him. Mercifully, those were not the days of cell phones and SMS. Good old MTNL could be depended upon not to put a call through! A night of failed communication between North Block and Mint Road enabled the “jump” after the intervening “skip”.[BS]
Additional Reading: The 1991 budget speech (pdf) of the then Finance Minister, Dr. Manmohan Singh.