Tapes with the RBI reveal a fascinating story about the 1991 balance of payments crunch

Who actually was responsible for the 1991 balance of payments crisis? Rajiv Gandhi or V.P. Singh? Therein lies a tale.

In 2004, I was asked by the Reserve Bank of India (RBI) to edit and rewrite volume three of their history. During the process, we came up against significant blanks because the record was not fully complete in that many statements were unsupported — not as to what had happened but as to why they had happened in that particular way and not in some other way.

In 2006, after work on volume three was over, I was able to persuade the RBI that it should allow an oral history to be recorded. All the main dramatis personae of the 1991 crisis — and several others — would be interviewed on audio and videotape. This would help future historians.

A very senior officer of the RBI, Dr. T.K. Chakrabarty and I interviewed around 40 officers from the bank and the Finance Ministry. Those tapes are now in the RBI’s archives in Pune and can be accessed if the Governor grants permission. Another way, I imagine, is to use the RTI route because there is no security involved.

The tapes reveal a fascinating story about the 1991 crisis. Of course, there is considerable memory loss and self-exculpation. But even after allowing for all that, and after checking with contemporaneous records, a simple story emerges.

This is that Rajiv ignored the advice of two Finance Secretaries and V.P. Singh’s Finance Secretary hesitated at a crucial time to tender the proper advice. By the time he made up his mind — to go to the International Monetary Fund (IMF) — it was too late.

It turns out that in March 1988, the Managing Director of the IMF, Michael Camdessus, while in India told Rajiv that if India asked for a loan, the IMF would take a sympathetic view. The Finance Ministry and the Prime Minister’s Office advised Rajiv to go for it.

But Rajiv, reeling from the Bofors scandal in which he had been accused of accepting a Rs.64 crore bribe, was contemplating an October election. He decided not to ask the IMF. The Finance Ministry, however, did send a secret delegation a bit later to do the initial groundwork.

By the middle of 1988, Rajiv had been persuaded by his political managers to stay the full term which would finish at the end of 1989. The Finance Ministry did ask him a couple of times more.

Rajiv agreed that it would be prudent to approach the IMF. But he also said to wait till after the election. After that, the IMF option was pretty much ruled out.

In the general election of November 1989, the Congress was defeated and V.P. Singh formed the National Front government. It was supported by the Bharatiya Janata Party (BJP) and Communists “from the outside.”

By March 1990, it had become absolutely clear that India was heading towards a serious problem and that only the IMF could help. It was up to the Finance Ministry, headed by a V.P. Singh favourite from the days when he had been Finance Minister (1985-87), to make a recommendation to the Prime Minister.

And this is where the Finance Secretary made a big mistake. As he said during the oral history recording, he thought it would be politically inconvenient for the PM to go to the IMF when the government was dependent on Communist support and further that he could get the financing support from other sources.

So he did nothing for three crucial months. By August it was too late because the BJP had started the rath yatra and Saddam Hussein had invaded Kuwait, sending oil prices rocketing. Everything the RBI Governor had been warning against had come to pass.

After that it was steadily downhill. By December, even the State Bank of India could not get its paper rolled over. Credit to India dried up completely. Then, to make matters worse, the V.P. Singh government fell and Rajiv agreed to support Chandra Shekhar as Prime Minister “from the outside.”

By January, India was broke. It was then that Yashwant Sinha, as Finance Minister, went to Japan asking for financial help. Those were Japan’s haughty days.

The Finance Minister of Japan met him for a few seconds in his ante room and then rushed off, leaving Sinha to talk to his deputy. No money materialised. In 2000, it was Sinha’s turn to make the Japanese wait, for weeks, before he met them.

Now P. Chidambaram has also gone there. He says, though, that he is only seeking investment in infrastructure. Perhaps he is. But what if there’s more to the visit than that?

Meanwhile, an influential business newspaper — which counts in its editorial board a former Chief Economic Adviser to the government and a former Deputy Governor of the RBI who just demitted office — has asked the government to go to the IMF for a standby arrangement.

Is something along those lines being contemplated?

srinivasaraghavan.tca@thehindu.co.in