In the dead of night on a hot summer day in May 1991, India flew out 67 tonnes of gold – considered a symbol of pride and security among its millions – to the UK and Switzerland on a chartered jet so it could borrow $600 million to avert a foreign exchange crisis.
The Greek economic crisis, with Germany suggesting that Athens put up $50 billion in an aid-for-collateral plan, has brought back to many Indians memories of that night, after which a newly elected government of Prime Minister P.V. Narasimha Rao began a wave of liberalization and globalization of the economy, 10 weeks after Prime Minister Chandra Shekhar’s rump coalition pawned the gold.
The India and Greek crises are quite different from each other – but both have in common a history of high government spending, a threat to foreign exchange rates and a sharp wound on national pride. India rose like the Greek Phoenix from the ashes of the crisis, which was then deftly turned into an opportunity by the then finance minister and later Prime Minister Manmohan Singh.
Can Greece, cradle of the Western civilization, bounce back like its Oriental counterpart – with EU playing Kamadhenu, the ever-giving creature from Indian mythology?
While the comparison of the two nations may be evocative, in essence India’s problem was a relatively short term one, and Singh’s measures, beginning with two incisive rounds of devaluation of the state-controlled rupee on July 1 and 3, were focused.
A 23% devaluation of the rupee sent a strong message of austerity to Indians. Three weeks later, Singh unshackled most industries from state licences and permits to help private enterprise and unveiled a budget that readily, if painfully, began to tighten India’s fiscal deficit from the then 8.4% of GDP to under 5 % in a couple of years under the watchful eyes of the International Monetary Fund and the World Bank. The two institutions lent tide-over loans of $2.2 billion and $500 million, respectively.
When Singh began his reform, forex reserves had shrunk to a mere $1.2 billion, barely enough to cover three weeks of imports.
From 1980 to 1991 India's domestic public debt had increased steadily, from 36 percent to 56 percent of the GDP, even as its external debt grew three-fold to $70 billion, as the government spent more on a bloated public sector, especially employee wages.
This was similar to Greece, but India also suffered on other short-term shocks that had little to do with its own profligacy.
An anti-Congress coalition led by Prime Minister V.P.Singh fell from power in November 1990, a month after the BJP led its “Rath Yatra” to build a Ram temple in Ayodhya. The social unrest and political uncertainties led to a flight of short term non-resident Indian forex deposits. To make matters worse, Iraq’s invasion of Kuwait in August 1990 led to a global oil price hike, making imports costlier. Former Prime Minister Rajiv Gandhi, expected to be re-elected, was assassinated on May 21, 1991 coinciding with the gold mortgage.
At about $354 billion, Greece’s debt level is at 177 % of GDP, three times that of India’s during the crisis, but the Syriza government is showing much less willingness to tighten its belt.
India did not miss a single payment during its crisis, unlike Greece. Two years reforms began, India decided not to go for a larger IMF loan that was on the cards.
I recall Dr. Bimal Jalan, then the chairman of the Economic Advisory Council, telling me in mid-1991: “We are ready with a programme. As soon as a new government comes to power, we can do something. The international institutions understand this.”
Inflation was close to 17% a month after reforms began, causing a threat to both exports and imports.
Singh’s government quickly did what was necessary. It cut subsidies, cracked the whip on the public sector, and allowed in both foreign director and foreign portfolio investors who steadily invested in India’s strong but under-exposed private companies. India also began a long march to disinvestment in state enterprises.
India’s GDP crawled by 1.2% in the first reform year (No contraction, like Greece), and picked up pace to hit 5% in 1993/94 and 6.3 percent in 1994/95. Exports also kept up pace.
In 1992, India weathered a bruising stock market scandal triggered by a boom that resulted from the 1991 reforms that raised hopes on the country’s future.
In 2009, India bought 200 tonnes of gold from the IMF and had come a full circle. There are as many as 90 Indian dollar billionaires now in the Fortune 500 list between them worth $295 billion.
Greece has a longer haul ahead – and India, in 1991, did not seem to have the long financial rope that Athens seems blessed with.