In 1991, Saddam Hussain’s Kuwait invasion had created a debilitating ‘oil crisis’ for India. Today, COVID-19 has inflicted an unprecedented demand contraction. While the two crises differ vastly in content and structure, they are completely comparable in their respective severities:
So, if Prime Minister Modi and Finance Minister Sitharaman need out-of-the-box ideas, they have a ready reckoner in how M/s Narasimha Rao and Manmohan Singh snatched an economic miracle from the abyss of despair. There are lessons hidden in three ‘positive shocks’ from the early 90s – bold, risky, near-desperate actions which triggered dramatic, not incremental, changes.
Just imagine the usually restrained Dr Manmohan Singh doing a ‘hop, skip, and jump’ (which is what the reckless operation was code-named). On Monday, 1 July 1991, India’s pegged rupee was devalued nine percent by a government order. It was a straw-clutching move to stop a run on rapidly dwindling foreign currency reserves. But a nervous market began to panic even more. So, two days later, on 3 July 1991, the rupee was devalued another 11 percent, with a promise to stop. That calmed the market and stanched the outflow. Eventually, two years later, India put its tightly controlled currency on a ‘managed float’. As economic shocks go, this one had turned out to be bold & beautiful.
Today, despite the Reserve Bank taking an ‘in principle’ call to permit a one-time restructuring of loans, questions remain since the fine print is to be figured out by a committee – should it permit an ‘unqualified’ restructuring of corporate and personal debt, or hold off? Well, I think the answer lies in the Rao/Singh playbook, namely, ‘twin moratoriums’:
In true Narasimha Rao style, the most potent economic reform was also the most silent. On 24 July 1991 (a mere 20 days after the dramatic devaluations), even as Rao was holding the industries portfolio, he permitted his low-profile minister of state, PJ Kurien, to table ‘The New Industrial Policy of 1991’ in parliament. It was an explosive document. Except for 18 controlled industries, licenses were abolished across the board. Industrialists were free to enter any sector and expand capacities without bothering with New Delhi’s approvals. Foreign ownership, hitherto restricted to 40 percent, was taken above the critical threshold of 51 percent in another sharp ‘hop, skip, and jump’.
Prime Minister Modi can now match Rao’s chutzpah by launching an equally courageous and ‘silent’ reform, that is, the ‘Maruti model of public sector disinvestment’, by giving up 26 percent in each undertaking – including banks – to strategic partners, followed by a hugely profitable ‘exit from control’.
For those who are unfamiliar with this model, here’s a recap:
To demonstrate his unshakeable intent, Prime Minister Modi must push to get Air India, BPCL, and Concor sold within the next six months, with the commitment that two dozen PSUs would be divested a la the ‘Maruti model’ every year for the next five years, that is, the creation of 120 Maruti-like ex-PSUs. This would electrify India’s reform story in global boardrooms, generating billions of dollars of investable surplus for the government.
In the early 90s, M/s Rao & Singh took uncharted actions to harness the American dollar and create an equity cult in the country. India’s closed, clubby, and scam-prone stock markets were thrown open to foreign investors. The sheltered, fragile rupee was made partially convertible on the capital account. Two new institutions, the Securities & Exchange Board of India (SEBI) and National Stock Exchange (NSE), were inaugurated to clean the Augean stables. Soon, India’s remarkably digitised stock market, perhaps the most modern in the world at that time, won over the foreigners. India’s equity cult was born.
M/s Modi & Sitharaman now have a pioneering option to create India’s much-needed-but-perennially-aborted corporate bond market. In fact, they could revive their own enterprising idea of the dollar bond – unfortunately abandoned by their risk-averse babus (bureaucrats) – to emulate the Rao/Singh brand of audacity.
Here, think about this:
Let me end by second-guessing what must be whirring in naysayers’ minds: ‘kite flying, undoable, too risky’. But just remember that the same guys must have said the same things in 1991, but Narasimha Rao, the Sphinx, had remained unmoved.
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