The Congress government has made a bad beginning. Devaluation of the rupee is not merely an economic issue. It is a political one as well. Politically, the question is not so much whether devaluation was avoidable in the circumstances but whether the government can live down the sense of humiliation that it must produce. This sentiment may not appear strong right now because a feeling of fatigue has overtaken opposition parties and the people as a result of what they have been through since 1987 when the Bofors payoff scandal broke. But it can only be a matter of time before this stupor gives way to intense political activity.
Indira Gandhi agreed to an even more drastic devaluation of the rupee in 1966 in similar circumstances under similar advice from individuals and organisations. The country needed foreign credits as desperately then as it does today. Asoka Mehta and LK Jha were as fully convinced of this need in 1966 as Manmohan Singh is now. The shots then were called by the World Bank as they are the International Monetary Fund this time as the latter is to advance the multi-billion-dollar loan.
In the short run, the result of devaluation in 1966 was a near disaster. While the cost of imports and debt repayment obligations rose by 56 per cent, the anticipated benefits in terms of increased exports did not materialize. They could not, for the simple reason that the country did not possess enough goods to export. The monsoon had failed in 1966 and again in 1967, creating near-famine conditions. It was said some years later that the move had begun to pay off. Perhaps it had. But the damage to the political order had been done.
Devaluation and the consequent rise in prices influenced the outcome of the 1967 general election which put the Congress out of office in all the north Indian states, from Himachal Pradesh to West Bengal, and reduced its strength in the Lok Sabha from about 350 to 280. As a result, the Congress leadership concluded that the party must tilt leftwards in order to survive. This led to a competition in pseudo-radicalism in which Indira Gandhi finally outmanoeuvred her rivals.
Single-cause explanations for political developments are doubtful. They cannot be accepted at face value. So it cannot be my case that the 1966 devaluation set in motion a chain of events which led to nationalization of 13 leading commercial banks, the Congress split and Indira Gandhi’s ascendancy in 1969, the growth in the influence of the communists and fellow-travellers in the ruling party between 1969 and 1976, the rise of a powerful anti-Indira sentiment in reaction to her dominance and a phenomenal increase in corruption, the JP movement and finally the Emergency. There is nothing immutable in such supposed chains of developments. In fact, it is only in retrospect that such chains are generally thought of. But it also cannot be disputed that devaluation in 1966 proved to be highly negative in both economic and political terms.
It does not necessarily follow that the story would be repeated once again. Possibly the country is now better placed to push exports to a point where the increase can more than offset the loss of earnings resulting from devaluation. But this remains to be proven. It cannot be taken for granted that this is the case. Evidence in support of the opposite viewpoint is writ large on the face of Indian industry and cannot easily be disregarded. Much of Indian industry is inefficient and deficient in quality control.
As it happens, most of India’s imports are not amenable to a meaningful reduction on account of the rise in prices; crude and petroleum products, fertilizer and non-ferrous metals, for instance. So the import bill must go up by 20 per cent, whatever happens in respect of exports. With that must rise either prices or subsidies, or both. India appears to be caught in a Catch-22 situation.
The decision to devalue the rupee is part of a comprehensive scheme to restructure the economy, as the finance minister said. The entire package can be debated only when it has been unravelled. Even then, the debate cannot be conclusive. Between that promise and fulfilment always falls a shadow. In India, the shadow generally looms large.
Meanwhile, it is difficult to accept either the government’s claim that it has taken this decision entirely on its own in the absence of an implicit, if not an explicit pressure, from the IMF, or its stand that India is so honour-bound to continue to honour past obligations that it must go in for fresh borrowings from the IMF whatever the conditions, or to conditionalities, to use the popular jargon.
The claim is disposed of by the very fact of a second and larger devaluation within three days of the first. Moreover, pressures are normal in creditor-debtor relations; every money-lender and debtor-peasant knows it; the IMF is particularly known to twist arms rather vigorously. India’s must be among the few governments in the world these days to be chary of asking creditors to reschedule payments. They also encouraged us to borrow freely. So they cannot escape their share of responsibility for the present crisis.
There is poetic justice in the fact that it is a Congress government which finds itself landed with the task of administering the bitter medicine to the country. If the economy is in the dire straits it is in, then the Congress is primarily responsible for it. Others, such as VP Singh and Devi Lal, have contributed to the mess by their decision to waive off loans amounting to Rs 16,000 crore. But they have only followed in the footsteps of their Congress predecessors who invented such “brilliant” schemes for undermining the banking system as loan melas.
The story, of course, goes back to Jawaharlal Nehru. But his insistence on an ever-growing public sector in control of the “commanding heights” of the economy and denial of enough room and freedom for commerce and industry to grow in size and thereby in maturity and responsibility look innocent in comparison with the havoc Indira Gandhi wrought in one way and Rajiv Gandhi in another. The Monopolies and Restrictive Trade Practices Act symbolizes the Indira era, just as the free import of TVs and VCRs symbolizes the Rajiv era. The first stifled growth and the second promoted consumerism on a massive scale.
Nehru at least genuinely believed in what he prescribed. His mind was shaped by socialist theories dominant in the West in the twenties and thirties, and the terrible experience of depression and Nazism in the pre-war period. Also when he came to occupy the office of Prime Minister, there was no known example of the public sector becoming an intolerable burden on an economy. The Soviet Union’s performance in the economic field was well regarded even by those who were aware of and appalled by Stalin’s terrible crimes against the Soviet peoples.
By the time Indira Gandhi came to office in 1966, however, the failure of the Indian public sector to serve as an instrument of India’s economic advance was well known. The then Congress president, Nijalingappa, for example, drew attention to it at the 1969 Congress session in Faridabad. Indira Gandhi controverted him publicly by arguing that the public sector was intended not to earn profits but to serve a large social purpose. The takeover of commercial banks, coal mines and at one stage the grain trade flowed from this dangerous politics of populism. It was accompanied by the growth of a parallel black-money economy, smuggling and rampant corruption.
All that apart, however, an issue of fundamental and long-term importance needs to be discussed. Which is the extent to which India can wish to be “integrated” into the world economy without seriously compromising its freedom of action in respect of its security, both external and internal.
A report has already appeared to the effect that the proposed test of the long-range Agni missile has been put off in deference to the wishes (or as it in anticipation of the wishes?) of donor governments. This report may or may not be accurate. But there can be no question that pressure will mount on the question of our missile programme.
Moreover, it is a becoming quite “normal” for western agencies such as Amnesty International and governments to make critical observations on our record in respect of human rights in places such as Punjab and Jammu and Kashmir where we are confronted with Pakistan-backed terrorism on a massive scale. This cannot but be a matter of concern, especially in the context of the desperation the government is showing in regard to the loan from the IMF.
This is, of course, a “wrong” time to raise the question of autonomy. Among former members of the Soviet bloc and advocates of self-reliance, only the Chinese are preserving a modicum of self-respect. They are not ready to be pushed around too violently. The Soviet leaders have gone so far as to get their plans for restructuring their economy prepared in the US universities, Gorbachev at Harvard and Yeltsin at Stanford. But the question of autonomy is particularly relevant precisely because the circumstances are so adverse.
The talk of democratizing the world order is hogwash. We are in no position to influence the course of events in the world. The ridicule to which we exposed ourselves in our misguided effort to salvage Iraq’s Saddam Hussein should teach us a lesson. The quicker we drop the pipe-dream of a world role the better. The desire to be regarded as the pre-eminent power in South Asia is equally absurd, except in the defensive sense of being able to protect our vital interests. Our own autonomy is an altogether different proposition. It must be safeguarded which it cannot be if we lose control on our economy. That loss would also not buy us prosperity.
That is where Nehru began as an ardent nationalist. Unfortunately, his socialism had the better of his nationalism. He thought the two would reinforce each other. In reality, socialism eroded the foundations of growth and national self-reliance. We can rectify this mistake and hopefully come into our own despite the loss of time and the damage in the past four decades.
Sunday Mail, 7 July 1991