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The Rediff Business Special/ Mohan Guruswamy

'Yashwant Sinha was upset. He discussed resignation with me'

'I opposed the crony capitalism, that was sought to be passed off by the PMO as liberalisation'

When it was decided that Montek Singh Ahluwalia would be moved out of the MOF, the PM and FM met to decide upon his successor. The FM proposed the name of Dr Y V Reddy, deputy governor of the RBI. The PM agreed. The announcement was to be made the next day. At about five in the afternoon, the FM received a call from Brajesh Mishra that the PMO was announcing that Vijay Kelkar, who had distinguished himself as the pliant secretary in Captain Satish Sharma's ministry of petroleum, was being appointed as the new finance secretary.

Yashwant Sinha was quite understandably upset. He discussed resignation with me. I then called up the HM and informed him of the FM's state of mind. The HM spoke to the PM who refused to budge. He even said that the FM could go if he wanted. Yashwant Sinha preferred to stay on. He told me that evening that he had not been a bureaucrat for well over three decades for nothing and that he would be able to take care of Kelkar.

Yashwant Sinha's tribulations did not end here. Jaswant Singh, a favourite of the PM, was asking for more powers to be shifted to the Planning Commission from the MOF. He wanted control of Expenditure. With Revenue already under the AIADMK minister of state, this would have left the FM with only Economic Affairs. When Jaswant Singh became minister for external affairs he began suggesting that the international aspects of Economic Affairs, which was most of that department, be handed over to the MEA.

As if this was not enough to make the FM insecure, an attempt was made to dump the Onion fiasco upon him and get him out of the MOF.

I then had to counter-attack to defend the FM. I argued with the media that the FM was responsible for managing money supply, which could be directly correlated to the rate of inflation. Since inflation seemed fairly under control the FM had done a decent job. If there was a runaway situation with respect to a few specific commodities such as onions and pulses, it was due to demand supply mismatch. This then involved the administrative ministries, that is agriculture, food and civil supplies, and commerce. The MOF came into the picture only with respect to tariffs, which it had in case waived.

If the three most concerned ministries failed to co-ordinate their activities, I suggested that surely this must be the responsibility of the PMO and the Cabinet secretary. Therefore in all fairness, if some heads had to roll it ought to be either that of the principal secretary or the Cabinet secretary, if not both. This did not endear me to the two gentlemen, but the PMO moved to newer subjects.

I did not help myself either by taking positions on the FIs and public sector bank's subscription of the GE Caps debenture issue and the loans and guarantees to Enron's Dabhol II project. In both cases I argued that the companies were supposed to bring in money from overseas and that we were being unfair to Indian corporates by lending them money.

What GE Caps was doing was to borrow money from Indian FIs and banks at 12% and lend them in the NBFC financial markets at rates much lower than the NBFCs. This they could do because they were borrowing at only 12%, whereas the NBFCs had to borrow at much higher rates. In this manner GE Caps has deployed over Rs 3,000 crores badly hurting the indigenous NBFCs.

This in turn affected their lending to the truck owner/driver and small fleet operator who depended on the NBFCs for finance. This in turn grievously hurt the commercial vehicle industry. What was worse was that the only cover GE Caps provided to the lender was a "letter of comfort" its US parent, GE, of the "to whomsoever it may concern" variety which merely stated in effect that GE Caps was its company. The letter has no value as collateral and no legal sanctity whatsoever.

My argument was that GE should bring money from its huge parent and deploy it here. The huge spread as a result of the big disparity between Indian interest rates and US cost of money would be more than enough to cover the currency risk. It is well known that GE has powerful affiliations in Bombay. I was requested not to press the issue.

I saw this as Suhartoism and the PMO tried to paint me as Swadeshi. The only person who was pleased by this was the convener of the SJM, S Gurumurthy, who added to my problems by hailing me for it. With newfound friends like him I did not have to try very hard to make enemies. Likewise in the case of Dabhol II, I argued that Enron should directly bring in funds from overseas to meet its requirements above the GOI policy determined FI limits.

The FIs agreed with this, but the PMO wanted to keep Enron happy. We all know that Enron has friends in much higher positions than its detractors hold, and knows how to keep them happy or "educated".

Soon after I entered the MOF the FM embarked on a series of outstation visits to meet with industrialists to cheer them up as well as to get ideas for a strategy to pull industry from what Sinha very quaintly described as its "gloom-doom" mindset. From this the idea emerged that the government must create conditions to make vital sectors like steel, cement, construction, telecommunications, and commercial vehicles viable once again.

The revival of NBFCs was also identified as critical. Committees were cast for the task. The committee for steel was headed by C M Vasudev, special secretary, banking. The Vasudev Committee identified indiscriminate dumping from CIS countries, South Korea, Japan and some others at extraordinarily low prices as being mainly responsible for the mess the steel industry was in.

The FIs had also stated that unless the industry was made viable it would not be possible for them to lend any more money to the various projects under implementation. Following this report the FM called for an inter-ministerial meeting to frame policies to meet the situation. A referral price of around $ 300 per ton imports emerged out of this. How this price went up from $ 250 that was mooted to $ 300, only the three ministers concerned and the prime minister can tell.

Once this measure was in place, the FM directed that the FIs must expedite the clearance of loans to ongoing projects, particularly the ones hit by the US sanctions. This is easier said than done.

First of all, each project had its own peculiar problem. Cost overruns were the only similarity. Most of the groups behind the projects were badly stretched in a host of unrelated activities. Each of them seemed to have a major political patron.

Often, there were intense rivalries between the groups, mostly emanating from ego conflicts. This was ideal N K Singh territory. As little headway was being made, and as September had long since gone, the FM was once again being taunted. Nothing hurt Sinha more than the popular perception that he was just an amiable duffer. In all fairness he was better than that. But the PMO and the PM's coterie was determined to stick it on him, and he suspected that it was only preparation once again to bring Jaswant Singh to the MOF. He may not have been wrong.

I was asked by the FM to chase the tardy FIs on steel. The FIs were clear that no broad sectoral approach was possible and each group had to be dealt with separately. First to be taken up was the Essar Group.

A meeting was fixed for January 4 at the FM's office with the heads of IDBI, ICICI, UTI, SBI and Vasudev. The group felt that we should meet prior to this at the IDBI office to define the problem and have a recommendation for the FM. I went there a bit late as the FM, FS and myself were calling on Dr Amartya Sen. Vasudev could not attend, but sent a joint secretary in his place. The Essar steel plant was a functioning one and was once again viable. Its problems related mainly to a floating rate note for $ 250 million raised in the USA, which the company has to retire in mid 1999.

The interest on this FRN was high and was an extraordinary burden on the company. The company had worked out an arrangement to replace this ahead of maturity with a lower cost loan. But the sanctions nixed that plan. Essar naturally believed that the government had an obligation to settle this for them as per its public pronouncements after the sanctions were imposed. The FM had earlier told me that there was indeed such an obligation.

'I was requested by the PM's Man Friday to expedite for Ispat what the PMO apparently disapproved for Essar!'

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