In 1991, Saddam Hussain’s Kuwait invasion had created a debilitating ‘oil crisis’ for India. Today, COVID-19 has inflicted an unprecedented demand contraction. While the two crises differ vastly in content and structure, they are completely comparable in their respective severities:
- Then, India had to pledge 67 tonnes of gold to stave off a default on sovereign debt. Today, the economy is shrinking in high double digits, with the central government defaulting on its revenue commitments to the states
- Then, India was downgraded to ‘junk’ status. Today, we have been put on watch for perhaps the same
- Then, we had almost run out of foreign exchange to pay for critical imports. Today, we have run out of jobs for our hordes of unemployed; poverty is increasing after decades of decline
So, if Prime Minister Modi and Finance Minister Sitharaman need out-of-the-box ideas, they have a ready reckoner in how M/s Narasimha Rao and Manmohan Singh snatched an economic miracle from the abyss of despair. There are lessons hidden in three ‘positive shocks’ from the early 90s – bold, risky, near-desperate actions which triggered dramatic, not incremental, changes.
A Twin-Moratorium to Match the Twin-Devaluation
Just imagine the usually restrained Dr Manmohan Singh doing a ‘hop, skip, and jump’ (which is what the reckless operation was code-named). On Monday, 1 July 1991, India’s pegged rupee was devalued nine percent by a government order. It was a straw-clutching move to stop a run on rapidly dwindling foreign currency reserves. But a nervous market began to panic even more. So, two days later, on 3 July 1991, the rupee was devalued another 11 percent, with a promise to stop. That calmed the market and stanched the outflow. Eventually, two years later, India put its tightly controlled currency on a ‘managed float’. As economic shocks go, this one had turned out to be bold & beautiful.
Today, despite the Reserve Bank taking an ‘in principle’ call to permit a one-time restructuring of loans, questions remain since the fine print is to be figured out by a committee – should it permit an ‘unqualified’ restructuring of corporate and personal debt, or hold off? Well, I think the answer lies in the Rao/Singh playbook, namely, ‘twin moratoriums’:
- As far as corporate debt is concerned, it must permit a one-time restructuring for all genuinely distressed borrowers, without any discretionary rule-outs, while habitual defaulters are denied relief
- For disciplined individual borrowers, it should innovate with an ‘equity top-up’ plan in place of the rather strange ‘more loans against gold’ scheme. Let me explain. Imagine Mr X borrowed Rs 1 crore to buy a house five years back. The house has now gained 50 percent in value, but Mr X has already repaid Rs 30 lakhs of the principal amount. So, he could borrow an additional Rs 80 lakhs (taking his outstanding loan from Rs 70 lakhs to Rs 1.50 crore) against the existing collateral, without increasing his EMIs (equated monthly instalments), by extending the period of the loan. Don’t be surprised if Mr & Mrs X soon buy a new car, a new refrigerator and what not… got it, right?
From Rao’s Delicensing to the ‘Maruti Model of Disinvestment’: Potent, Silent Reforms
In true Narasimha Rao style, the most potent economic reform was also the most silent. On 24 July 1991 (a mere 20 days after the dramatic devaluations), even as Rao was holding the industries portfolio, he permitted his low-profile minister of state, PJ Kurien, to table ‘The New Industrial Policy of 1991’ in parliament. It was an explosive document. Except for 18 controlled industries, licenses were abolished across the board. Industrialists were free to enter any sector and expand capacities without bothering with New Delhi’s approvals. Foreign ownership, hitherto restricted to 40 percent, was taken above the critical threshold of 51 percent in another sharp ‘hop, skip, and jump’.
The monopolies law was abolished. The State was allowed to sell public sector shares. The pace of change was breathless.
Prime Minister Modi can now match Rao’s chutzpah by launching an equally courageous and ‘silent’ reform, that is, the ‘Maruti model of public sector disinvestment’, by giving up 26 percent in each undertaking – including banks – to strategic partners, followed by a hugely profitable ‘exit from control’.
For those who are unfamiliar with this model, here’s a recap:
- Government of India (GOI) was the majority shareholder in Maruti Udyog Limited (MUL), but Suzuki exercised control even though Suzuki owned only 26 percent in the unlisted company
- In 1982 and 1992, Suzuki was allowed to increase its shareholding, first from 26 to 40 percent, and then to 50 percent
- But GOI, which had nearly equal ownership, ceded even more control to Suzuki, winning several valuable concessions in exchange, including access to larger export markets and the manufacture of global models in the Indian plant. Consequently, the joint venture’s valuation multiplied
- This was followed by a masterstroke. GOI renounced its shares in a Rs 400 crore rights offering and earned another Rs 1000 crore as ‘premium for shedding control’. It also got Suzuki to underwrite an offer-of-sale to the public at a price of Rs 2300 per share
- GOI made a terrific ROI (return on investment) – all because it kept the ownership, but gave up control, allowing its entrepreneurial partner to create a huge amount of value in the joint venture
To demonstrate his unshakeable intent, Prime Minister Modi must push to get Air India, BPCL, and Concor sold within the next six months, with the commitment that two dozen PSUs would be divested a la the ‘Maruti model’ every year for the next five years, that is, the creation of 120 Maruti-like ex-PSUs. This would electrify India’s reform story in global boardrooms, generating billions of dollars of investable surplus for the government.
Audaciously Harnessing the American Dollar to Create a ‘Debt Cult’ for India’s Savers
In the early 90s, M/s Rao & Singh took uncharted actions to harness the American dollar and create an equity cult in the country. India’s closed, clubby, and scam-prone stock markets were thrown open to foreign investors. The sheltered, fragile rupee was made partially convertible on the capital account. Two new institutions, the Securities & Exchange Board of India (SEBI) and National Stock Exchange (NSE), were inaugurated to clean the Augean stables. Soon, India’s remarkably digitised stock market, perhaps the most modern in the world at that time, won over the foreigners. India’s equity cult was born.
M/s Modi & Sitharaman now have a pioneering option to create India’s much-needed-but-perennially-aborted corporate bond market. In fact, they could revive their own enterprising idea of the dollar bond – unfortunately abandoned by their risk-averse babus (bureaucrats) – to emulate the Rao/Singh brand of audacity.
Here, think about this:
- India raises USD 10 billion in ‘sovereign dollar bonds’ from the Chicago, London and Singapore Bond Markets, at a time when the dollar is set to weaken and treasury rates in America are under a percent; this cash is used to capitalise a new entity, namely, the Indian Corporate Bond AMC, which is listed on NYSE and LSE
- Simultaneously, Indian corporations above a threshold size are instructed to list their debentures on the National Bond Exchange (NBE), a new derivative platform of NSE
- A thicket of outdated laws is cleared to permit modern norms on margining, provisioning, netting off, leveraging, etc
- The Indian Corporate Bond AMC, which has USD 10 billion in cash from the government, is mandated to actively market-make and provide two-way quotes – in short, do everything to ensure liquidity on NBE; the AMC should be free to further leverage its asset book to create even deeper pools of capital/liquidity
- Voila! A multi-billion-dollar corporate bond exchange goes alive and kicking in India, creating a whole new ‘debt cult’ for savers, igniting an investment revolution
Let me end by second-guessing what must be whirring in naysayers’ minds: ‘kite flying, undoable, too risky’. But just remember that the same guys must have said the same things in 1991, but Narasimha Rao, the Sphinx, had remained unmoved.
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