How WB, IMF got India to adopt reforms in 1991

It’s open to the public now. Declassified documents from the World Bank show how it and the International Monetary Fund chivvied and cajoled India into economic liberalisation in the summer of 1991. Significantly, it blamed the poor macroeconomic policies under the Congress regime of the 1980s for India’s eventual external sector debacle.

The new Congress government with finance minister Manmohan Singh was presented a stark choice by the two institutions. It will either have to undertake reforms that will promise the needed external support, or brace itself for a “disorderly and painful” transition that will significantly reduce growth for years to come.

The World Bank informed the government of PV Narasimha Rao, sworn in after a tumultuous year, that “the only real options (for India) are whether the adjustment is made in the context of an orderly, growth-oriented adjustment program with external financial support, or through a disorderly and painful process that will leave the country cut off from international capital markets for years to come and significantly reduce its growth”.

About the successive Indira Gandhi and then Rajiv Gandhi-led Congress governments of the eighties, the documents say: “Poor macroeconomic policies throughout most of the 1980s had led to unsustainable fiscal and external imbalances”.

The papers make clear how keenly the Bretton Woods institutions tracked the political developments in India during that period to assess whether India could stomach the economic reforms, which would change the economic and even the political history of this country. It advised the government that “successful implementation of an appropriate programme of stabilisation and reform will require adept political as well as technocratic management”.

Simultaneously, it assures the government about what to expect. “Restoration of rapid growth after a period of stabilisation will quickly ease transitional costs and ameliorate longer term problems”.

The documents, part of the Country Economic Memorandas prepared by the World Bank, usually as background papers to pitch for international aid to India, were absolutely accurate about the problems facing the Indian economy.

The papers make it clear that the Bank was aware of the magnitude of the changes which had to come within the government — of reinventing itself, within industry — to take the first steps to face up to global competition and the society, which will have to bear the adjustment costs including job losses.

For instance, when the term of the Congress government was about to end in late 1995, the Bank made an analysis of the political situation, which turned out to be correct. “There seems to be agreement among political analysts that the reforms initiated in 1991 will not be reversed, as demonstrated by the reform plans and actions in states with non-Congress Party governments”.

It therefore notes, “We do not expect political development(s) to interfere with the medium-term structural reform process started in 1991. However, there are some fiscal risks (which) may lead us to reconsider the timing of some operations.” It adds, in another para, “as attention shifts to national elections, the pace of reforms may slow temporarily in the pre-election period. Finally, administrative decisions essential for the processing of projects may be delayed. A hiatus may thus develop in next year’s lending programme”.

As events turned out, the Narasimha Rao government was replaced by the United Front government, which though short-lived, continued with the direction of the reforms. But in anticipation, after earmarking $8.1 billion mostly as soft loan for the next three year period, the Washington-based institution said it could go down to “as little as $2.3 billion”.

Underlying this strategy was a clear understanding that it will give out loans, which at that time India badly needed only after it satisfied itself about achieving results. “The best loan is the loan that has not been made until the basis for its effective use is established.”

Returning to the pitch for reforms, the Bank assessed that Indian government would have a tough time to sell the reforms to its people.

“Support for such (reforms) is growing in India but is held back by fears of the social and political costs of adjustment coupled with as yet incomplete public understanding of the depth of the economic crisis now confronting the country.”

India landed in an acute balance of payments crisis in 1991 with forex reserves down to cover for just seven weeks of imports, when it turned to the IMF and the Bank for support. The support programme mounted by the two, also wrote in a fundamental transformation of the centrally planned economy to a market-driven one, whittled down the role of the government, cut trade barriers and encouraged foreign investment into the economy.

According to the Bank and IMF, the balance of payments crisis was brought on when India ramped up exports to the erstwhile Soviet Union by 50% in 1990-91 at the cost of trade with hard currency areas. This “made it attractive for the Soviet Union to import Indian goods (in some cases for re-export),” and “was an important factor in the decline of India’s foreign exchange reserves”.

The other was the debt waiver for small farmers that shaved off nearly 1% from the GDP, almost equivalent to the oil shock from the Gulf crisis.

The bank, therefore, recommended and pushed through reforms focused on five key areas of investment and trade regimes, the financial sector, taxation, and public enterprises. “They effectively ended four decades of central planning, significantly shifted resource allocation decisions from the public sector to the private sector and markets, and started integrating the country into the world economy”.

(By Subhomoy Bhattacharya, Financial Express, September 17, 2010)