No big deal

The minority government that came into power in June 1991, facing a first rate economic crisis, had to look for help. The IMF had already been approached by the previous regime. In July that year, amidst a chorus that included such words as ‘imperialism’, ‘sell-out’, ‘conspiracy’ and ‘dependency’, the government devalued the rupee by 20 per cent. In August the government requested the IMF for a standby arrangement — a loan, in other words — of SDR 1,656 million (SDR is special drawing rights, IMF’s currency). Devaluation was one major commitment to the IMF. Reducing the fiscal deficit was another; as a proportion of GDP, the Centre’s fiscal deficit was 9.4 per cent in 1990-91. ‘IMF conditionalities’ entered India’s political lexicon. And the critical question with the greatest currency was, could India cope with IMF-imposed conditions?

We know the answer. It is clearer than the Department of Atomic Energy’s expenditure accounts ever will be. And I can end this comment right here by inviting readers to undertake a simple exercise: compare India’s economic numbers then and now, compare qualitative assessments of India’s economy in July 1991 and December 2006. That will indicate to you the capacity of even a politically and economically weakened establishment to cope with “imposed” conditions. It will give you an idea of the strength of the Indian establishment, irrespective of its political make-up. It will give you a better perspective to understand the debate about the nuclear deal.

But I can’t end the argument here. First, the considerable flexibility the Indian Express allows its editors does not include impromptu halving of the size of the main commentary on the edit page. Second, and equally important, to conclude by saying we coped with IMF conditionalities just fine would be to miss an important point — India, although it took an IMF loan with conditions attached, did not stick to the script. In some cases it did less than what the IMF wanted. In other cases it did more. And in doing all this the establishment proved two crucial things. First, even if a deal is not wholly favourable, India has the ability to think and bargain its way out. Second, rather than registering a decline, India’s policy-making freedom increases post-deal.

The IMF had wanted India to make the rupee fully convertible. India still hasn’t. Indeed, a prime ministerial call in the recent past was met by a we-really-don’t-want-full-convertibility report from a committee set up by the RBI. The IMF had wanted a particular timeline for fiscal deficit reduction. It wasn’t met. The deviation became so great that the fiscal responsibility law had to be brought in. But the IMF didn’t ask for it; the standby arrangement with the Fund ended in 1993. India’s establishment wanted the fiscal rule. The Fund was also supposed to have asked for steep cuts in government expenditure and for privatisation. But India’s politics wasn’t and still isn’t fully prepared for either of this. So, neither has happened.

But the IMF hadn’t asked for the paradigm-shifting internal deregulation measures. Why did India undertake them, even after the 1990-91 crisis conditions passed? Because, by then, the establishment was clear that the alternative to reform — as opposed to compromising while reforming — was crushing economic mediocrity. The establishment could also do what it did because its policy-making capacity had increased. Foreign-born advice, of whatever ideological predilection, had less real power.

Contrast that with the India of 1960s and 1970s, supposedly the last decades of real economic independence for those who opposed the deal with the IMF. Note that foreign aid as a proportion of GDP was averaging over 3 per cent during the 1960s — an excellent indicator of dependency. Americans had a huge aid bureaucracy working out of India. American advisors were posted in ministries. In 1966 India’s chief planner, Ashok Mehta, presented the fourth plan proposals to the then US president, Lyndon Johnson. He had to: the plan was worthless without US aid. The Americans asked for currency devaluation. A young and freshly sworn-in Indira Gandhi obliged. But the monsoons failed, so post-devaluation farm exports couldn’t take off and the devaluation produced more problems. Everyone screamed ‘American conspiracy’ and Mrs Gandhi rediscovered Indian socialism.

The problem for India then was that economic isolation had severely reduced its capacity to adjust and respond. The advantage for India after its 1991 deal with the IMF was that engagement with the global economy had increased its policy capacity. India was more sovereign after its “surrender” to the IMF.

The Indo-US nuclear deal is predicated on bringing India out of nuclear isolation. Assume, for argument’s sake, that US Congressmen and senators have the worst motivations. Just as many commentators had assumed on the part of the IMF. Then recall how India had handled the fallout of the deal signed in July 1991. It will give you a clue to what will happen after the December 2006 deal.