THE DEREGULATION OF LICENSE RAJ

 

We all try to live in the present and think about the future. But no one ever wants to contemplate their past. As my mentor, Mr. Charlie Munger says, "There is no better teacher than history in determining the future." History has answers which have the capacity to pay us millions, if not, billions, but no one wants to read the past. I think I was fortunate enough to read about Mr. Munger way back when I was 15. I have been a student of economics, markets, and psychology since, but being a student of history gives me the greatest pleasure. This blog talks about one of the most important events that took place in the history of this country and how that event changed the way we live today. 

The year was 1971. President Nixon had decoupled the dollar from gold. The US was booming and so were other European economies. But there was this tiny southern eastern economy that was on the verge of bankruptcy. Not knowing what crisis was on the horizon. The country is India. Our current account deficit was increasing (it is the difference between imports and exports). The fiscal deficit was also touching new highs. Unemployment was the word on every tongue and production was decreasing. India was going through the license raj. Companies had to apply for licenses before they started a company. After getting a license, the government used to decide how many employees to hire. How much should be produced? What should be the MRP? What should the salary be? etc. As Richard Nixon had decoupled the dollar, the demand for dollars was increasing and the rupee was sweating like crazy. Talking about how close we were to bankruptcy, India had forex reserves to meet 7 days of imports only. That's close. S Venkatraman, then a member of the Rajya Sabha and the Governor of the RBI, advised the PM to pledge 20000 tons of gold reserve against foreign currency. This gold was collected by the customs officers, which was smuggled. The aid was not enough. Another 47,000 tons of gold was deposited into the Bank of Japan and other Swiss banks overnight. India had no FDI (foreign direct investment). The IMF was asking the then government to change a few policies, which included deregulating the license raj. Mr. Chandrashekhar's government was formed in November of 1990.

Then something unexpected took place. Saddam Hussein attacked Kuwait. Then, all of a sudden, crude oil prices skyrocketed. Kuwait was our 5th largest oil exporter back then. India was spending about Rs 500 Cr/month on our oil bills before the attack, which later skyrocketed to Rs 1200 Cr/month. IMF chief Michael Comdessus openly talked about India's increasing fiscal deficit and current account deficit. In fact, he also advised India's government to deregulate the license raj, but the government was adamant. The licensing economy was killing us. It made our economy monotonous. Indian businesses were handicapped. India asked the IMF for a loan. We should be aware that the United States has 80% voting power in the IMF. It's kind of like the US runs the IMF. When India asked for a loan, the US said that we would give you a loan, but the condition was to allow American fighter jets to enter Indian airspace for refueling as American troops were "helping" Kuwait get rid of Saddam. India shared healthy relations with Kuwait as we used to import a lot of oil from them. Allowing the US fighter jets to refuel in Mumbai was like helping the US fight the battle. This would have damaged our relationship in the future. But India gave the permission, and the next day our loan was approved. The IMF gave India a loan of $2.2 billion. That's how nasty America is. They could have easily refueled in any of the European countries, but they did not. The US thought that if we started a fight between India and Kuwait, then India would have to increase their dependency on US crude.

Later, India once more faced the situation of pledging gold, but this time the cabinet approval was ignored. Some of that gold went to UBS, a chunk of that went to the Bank of Japan, and the remaining chunk was kept by the Bank of England. Narsimha Rao came into power. The biggest problem in front of Rao was who should be the next financial minister. Rao offered IG Patel to take charge of our finances, but he cancelled the plan. Then, P. C. Alexander suggested Mr. Manmohan Singh to Mr. Rao. Mr. Rao immediately approved Mr. Singh as the financial minister, and the following day, he passed the budget. Mr. Singh quoted Victor Hugo, "There is no power on earth that can stop an idea whose time has come." The idea was India. Mr. Singh abolished the License Raj and presented the LPG (Liberalization, Privatization, and Globalization) policy. Our wings were now light and free. Just like Siberian Swans migrating to India in the winter, FDI poured in. The Sensex hit new highs and our economy was on track. That was the masterstroke. Many freedom fighters fought for India's independence, but since Gandhi played the last few cards, we never appreciated their contributions. Similarly, many politicians, governors, and economists played a key role during this crisis, but since Manmohan Singh came up with the LPG policy, we tend to ignore their valuable contributions. India has been through a lot. We have faced a financial crisis, wars, political instability, and what not. We surely have matured since our independence, but one thing where I would like you all to pay attention is, has this growth travelled to each and every household in this nation? Has the situation of India's middle class improved and has our standard of living developed? India ranks 63rd in terms of ease of doing business. We surely have grown a lot, but we still have a lot of travel to do. I would ask you all to give your input and raise your complaints on government portals. Help this nation become an indispensable part of the global economy because

IF NOT US THEN WHO? 
AND, IF NOT NOW, THEN WHEN?