It was way back in 1991 that liberalization was initiated by the Narasimha Rao government. Twenty five years after, the benefits are still to accrue to the common man
By Kalyani Shankar
Twenty-five years ago, Dr Manmohan Singh as the then finance minister closed his first budget speech with a fighting spirit. “I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘no power on earth can stop an idea whose time has come.’ I suggest to this august house that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”
The world heard it and India is on its way to becoming a global power today. After a quarter of a century, it is time for the country to toast Prime Minister PV Narasimha Rao and his able deputy, Dr Manmohan Singh, besides the successive governments which kept the reform process going.
Have the reforms been on the right path? Has the country benefited by the measures? Was the pace satisfactory? What will be its future? The short answer is that while reforms were timely, there could have been better consensus and less politics and the fruits of it are yet to reach the common man.
Unfortunately, there is more politics than economics in the reform story. It was out of compulsion that the Narasimha Rao government took this historic decision. When Rao took over on June 21,1991, India’s economy had already been downgraded twice within six months by global rating agencies. Foreign exchange reserves were enough to cover just seven days of imports ($1.12 billion). Inflation was rising and the government was on the edge of bankruptcy. “There was nothing more to do. You had no money, you were going to become a defaulter within two weeks…Once you become a defaulter your entire economy, your honour, your place in the community of nations, everything goes haywire. And you have really no face to show,” Rao admitted in a TV interview to NDTV on 2004. Added to that was the burden of retrieving 20 tons of gold pledged to Union Bank of Switzerland and 47 tons to the Bank of England as part of a bailout deal with the International Monetary Fund (IMF).
What struck Dr Singh the most was that “many governments have come and gone since then but the process has not been stopped. There has been a kind of consensus which keeps the reform process going”.
Yashwant Sinha, who later on became Vajpayee’s finance minister, said: “It had been one of ‘stop and go’ as the pace has been frequently interrupted.” But it was another former finance minister, P Chidambaram, who succinctly put it: “I was lucky to have had a part in the various acts of the drama that continues to play even today. The script was more or less the same only the key actors changed from time to time.”
The reform story began with Rajiv Gandhi but it was Yashwant Sinha who realized that whoever became his successor, the fact remained that India would have to go to the IMF and World Bank for help. He recalls that the stage had been set and the 1991 budget had already been prepared. Even Singh admits: “What we did was not original. There were ideas which were in the air. Several discussions had taken place but the political system was not responsive to implementing the reforms.”
Rao’s first task as prime minister was to find a credible international face to head the finance ministry. His first choice was the then director of the London School of Economics, IG Patel, and when he refused, the choice fell on Manmohan Singh. It was this Rao-Singh duo, which steered the liberalization process for the next five years. Patting Singh, Rao told NDTV: “Behind him I stood like a rock. It was teamwork. There were occasions when I encouraged him. There were many occasions I pulled him back. It was a question of managing people.”
The reform team consisted of Singh and Chidambaram. At the official-level, RBI governor S Venkitaramanan, C Rangarajan (deputy governor of RBI), AN Verma (principal secretary), Montek Singh Ahluwalia (commerce secretary), Rakesh Mohan (former deputy governor of RBI) and Ashok Desai (chief consultant to the ministry of finance) helped.
Economic diplomacy also began in Indian embassies. As Ahluwalia notes, reforms in industrial and trade policy were a central focus in the early stages. The major thrust was to address the macro-economic and balance of payments crisis. With the new industrial policy, the biggest hurdles to industrial expansion disappeared. Within a month, came a two-step devaluation of rupee. The Indian economy was finally unshackled.
Leading a minority government with no room for maneuverability, Rao made reforms politically tenable at a time when his own party was out to scuttle it. It was not an easy exercise. There had been many stormy Congress parliamentary party meetings in which senior cabinet ministers like Arjun Singh attacked Rao and Singh for their departure from the Nehruvian model. Rao countered this by paying obeisance to the Nehru-Gandhi family in the new industrial policy and in the budget.
The right-wing BJP, the main opposition party, opposed reforms for the sake of opposing them. The Communists passionately opposed the liberalization policies, terming them as “abject surrender to the IMF”.
Facing flak from all around, Rao had to apply a mild break, which was evident from his famous “Middle path” speech at the World Economic Forum in Davos in 1994. The next two years saw a slower pace after the Congress lost in some states, including his home state, Andhra Pradesh, in 1994. He presented Singh as the spearhead of reforms, while he himself advocated a middle path. But it was his vision that Singh executed. Rao lost the 1996 election amidst charges of corruption and “reforms without a human face”.
The successive governments since 1991 (mostly coalition ones) have continued and advocated the free market ideology without any hesitation. When the Congress supported the United Front governments led by Deve Gowda first and then by IK Gujral (1996-1998), the Left-wing parties supported their policies regarding financial sector liberalization, disinvestment and foreign investment, albeit reluctantly.
During the Vajpayee era (1998 -2004), he promoted external liberalization and announced measures to attract private foreign investment on a large scale. Ironically, a comparison of the 2004 election manifestoes of the BJP and the Congress shows that they essentially guaranteed the same things, but couched them in different words. Vajpayee would have gone far ahead had not the Congress put the brakes on reform measures.
Ironically, when Singh became the prime minister, he could not push through the reform process. Unlike Rao, Congress president Sonia Gandhi did not back him fully. Vested interests, trade unions and Left parties which supported UPA 1 from outside, combined with vote-bank politics and populism worked to block reforms.
At the state level, regional partners like the DMK delayed reforms. Above all, Singh was not able to market the reforms to the masses, as they had failed to generate employment corresponding to the high growth. The “human face” concept did not work. The opposition parties dubbed the reforms as pro-rich and anti-poor. During UPA-2, the government was crippled by huge scams. This resulted in halting the process.
While reforms have a broad consensus, the speed is often held hostage by coalition politics and vested interests. Modi believes in reforms and coming from a business-friendly state, wants to speed up the pace but politics is blocking reforms again. The GST and Land Acquisition Bills are examples of politics overtaking economics.
The reforms story is only half-done. India is today a $2 trillion-plus (6.3 times more than 1991) economy. It is less agrarian, more global and more connected and integrated with the global economy. The middle class has grown to about 300 million and likely to double by 2025. In the 2000s, the cumulative effect of gradual reform finally made India an 8.5 percent miracle growth economy. The inflow of better quality consumer goods satisfied the middle class and high foreign exchange stocks were beneficial to investors. Foreign investors see India as an attractive market.
However, while support for economic reforms mostly comes from the middle and upper classes, there is a perception that liberalization, privatization and globalization while making available foreign exchange and high quality consumer goods, has not touched the common man. Such a state of affairs is sure to have a backlash, particularly for the government in terms of votes secured.
But there still is a long way to go. Second and third generation reforms need to be launched. Public sector and labor market reforms, reduction of subsidies in food, power and fertilizer, defense, foreign direct investment, banking and legislative reforms are other areas of concern. Irrigation is neglected; setting up an irrigation bank would help in this regard. Areas beneficial to the common man like power, transport, roads, water, sanitation and education need more focus. Crony socialism should not give way to crony capitalism.
Another lacunae is that economic reforms have not been accompanied by administrative, judicial and legislative reforms. The process has been more difficult particularly in the legislative side because of political instability during the coalition era in the past two decades or so. Only in 2014 was there the ushering in of a single-party government headed by Modi. It has been difficult to build consensus for legislation in the insurance, financial sector and labour reforms.
There is also room to reduce central government subsidies which are highly distortionary and poorly targeted (e.g. subsidies on food and fertilizers). A rational user charge for services such as passenger traffic on the railways, postal system and university education needs attention. Overstaffing was recently estimated at 30 percent and downsizing would help reduce expenditure.
Simultaneously, state governments also need to take corrective steps. Liberalization should be accompanied by supporting action by state governments. Sales tax systems need to be modernized in most states. Agricultural income tax is constitutionally assigned to the states, but no state has attempted to tax agricultural income. Land revenue is a traditional tax based on landholding, but it has been generally neglected and abolished in many states. Urban property taxation could yield much larger resources if suitably modernized. State governments suffer from very large losses in state electricity boards (about 1 per cent of GDP) and in urban water supply. Overstaffing is greater in states than in the center.
While overall there has been a reduction in inflation, steady fiscal consolidation, a comfortable balance of payments position and build-up of foreign exchange reserves, the biggest challenge is to sustain the momentum and make a success of the reform story. What is needed is not less but more reforms with a quicker pace. For this, political will is required but populism and vote-bank politics come in the way. The center and states will have to work out an answer for the success of economic reforms.