This is the 20th anniversary of that week when the central bank had to sneak out 47 tonnes of gold to England
Elections for the tenth Lok Sabha were to be held beginning May 20, 1991. But after the first phase was over, the very next day, on the campaign trail in Sriperembudur, former Prime Minister Rajiv Gandhi was assassinated. Hence elections had to be rescheduled and completed by June 15. Gandhi had been PM for five years from 1984 to 1989, but his government could not get re-elected. The next Lok Sabha unfortunately lasted only for 16 months, instead of full five years, and was marked by instability, and worsening economic situation. Inflation was running at above 15 per cent, industrial growth was negative, and foreign exchange reserves had fallen below one billion dollars, barely enough to pay for three week’s worth of imports. The situation was so bad that even Indian Oil Corporation was unable to import crude oil, since no foreign supplier could trust its creditworthiness. They all wanted a bank guarantee from IOC. But the total stock of dollars in the country was near zero, so it wasn’t easy for IOC to show those requisite dollars. Dollars continued to decline since even the non-resident desis (the NRI’s) pulled out more than 1 billion dollars in a few months. Meanwhile, crude oil prices were rising, because Iraq was about to invade Kuwait, and Americans would surely retaliate. In this precarious situation, there was no choice for India but to sell some gold. The government initially decided to sell 20 tonnes. This was done somewhat surreptitiously using State Bank of India as an intermediary (i.e. gold was first transferred to SBI from RBI and then sold). But that wasn’t enough. We needed an emergency loan. Who’s the money-lender to distressed economies? That “money lender” was the International Monetary Fund. But IMF loan came with lots of strings and conditions. It wanted the fiscal deficit reduced. (Greece today is in similar distress, but IMF cannot act tough with Greece, and hence cannot impose any conditions. Greek default will hurt Europe much more than itself. In case of India in 1991, IMF had the stronger hand.) It also wanted the rupee to be drastically devalued. But this too had to be done without any advance warning to the markets, else there would be all round panic and huge political backlash. The newly elected minority government of Narasimha Rao was really in a fix. They decided that there was no choice but to pledge additional gold from their lockers. But foreign lenders were so skeptical, that they would not lend to India without physical possession of the gold. Which meant that the 47 tonnes of gold had to be airlifted from Mumbai to be stored in the vaults of Bank of London. Hence on the evening of July 3, 1991 the first consignment was loaded on to a truck by the Reserve Bank of India to be taken to the airport. Unfortunately the truck had a flat tyre. It was as if the gold didn’t want to go out of India. The RBI must have really sweated its maiden attempt at gold “smuggling” (for all this was done very quietly)! The next day the RBI also announced its second installment of a massive devaluation. In three weeks, on July 24, the finance minister presented his first budget in the evening at 5 pm. The devaluation, the emergency gold loan and the landmark budget speech which dismantled the Licence Raj and brought eventual glory to India. That same FM, could proudly announce to Parliament in November that year, that all the loan against gold was repaid, and even the earlier gold sold was repurchased! Twenty years later India has become a net lender to IMF, and also recently injected 7 billion dollars into IMF by buying their gold!
Mumbai Mirror
