Macroeconomic compulsions and preconditions of multilateral institutions triggered the first wave of reforms in the ’90s. The onus is now on Narendra Modi to finish the unfinished agenda
Analysing 25 years of India’s reforms presents an enigma. Why was India such a latecomer to embracing economic changes? If the Asian Tigers had course-corrected earlier and China commenced significant changes in 1974, why did we wait till 1991?
In seeking an explanation, I came across an interesting comment in I.G Patel’s book, India still needs to go the distance. In this he describes how the U.S. and multilateral institutions, particularly the International Monetary Fund (IMF), succeeded in persuading Indira Gandhi to undertake what was distinctly an unpopular devaluation decision on June 6, 1966. There were many important promises which had been made by way of enhanced economic assistance programmes and significant structural adjustment loans from the World Bank. These never materialised. Dr. Patel says in his book: “The much advertised non-project assistance of a billion dollars did not materialize and there was the usual wrangling about projects and denial by delaying. The hoped-for liberalization of imports could not be attempted, with the result that there was no spurt on growth from greater utilization of capacity… President [Lyndon] Johnson’s ‘ship-to-mouth’ policy on food aid created considerable resentment. All this created a climate for despair for Mrs Gandhi, her first test of popular disenchantment.”
It is a matter of conjecture if India would have embarked on an altered strategy had the promises been kept, but this was a watershed moment in many ways. Indira Gandhi never trusted the West again and instead moved towards an even more regulated economy by way of nationalising banks, populist measures like abolishing privy purses and managing agency houses.
It was much later that Prime Minister Atal Bihari Vajpayee took the major initiative of building a strategic economic and political partnership with the U.S. The disintegration of the Soviet Empire had anyway circumscribed options in a transition to the altered economic considerations.
The steady slide
Recourse to borrowings from the IMF was not new to India. We had borrowed over SDR 500 million in the seventies and around $5.8 billion in the eighties. However, during the period of Prime Minister Rajiv Gandhi, recourse was taken to substantial borrowing to support development programmes, prompted in no small measure by S. Venkitaramanan, earlier Power Secretary and later Finance Secretary. It is another matter that these very problems gave him sleepless nights when somewhat later as Governor of the Reserve Bank he was forced to arrange short-term liquidity accommodation for preventing debt default almost on a day-to-day basis. The immediate impact of the extended borrowings of the eighties was a significant deterioration in our macro fundamentals. The fiscal deficit crept up (from 8 per cent in 1984-85 to 10.4 per cent in 1991) with a yawning Current Account Deficit (3.1 per cent of GDP), the Soviet Union broke up, the Gulf War broke out and there was a sharp fall in inward remittances — which became the more proximate reasons for the balance of payments crisis which surfaced during the period of Prime Minister Chandra Shekhar with Yashwant Sinha as Finance Minister. Earlier borrowings by Madhu Dandavate of $550 million (from the IMF in September 1990) during Prime Minister V.P. Singh’s time proved inadequate to stem the deterioration.
Given political uncertainties, members of the Aid India Consortium and the IMF had hesitation in making deeper commitments. Many of the deeper commitments sought by multilateral entities were contained in the Budget which never got presented by Mr. Sinha in March 1991. In substance, many of the changes were no different from the Budget presented by Manmohan Singh on July 24, 1991. Mr. Sinha, in a recent interview, attributed this to the common authorship of the then Chief Economic Adviser Deepak Nayyar. This perhaps is a somewhat simplistic explanation; the deeper one is that these changes were necessitated by the macro compulsions but more importantly by the preconditions sought by the IMF and the World Bank for additional financial accommodation for the upper credit tranche and the structural adjustment loan respectively.
This also addresses somewhat the oft-repeated question on whether the economic reforms of 1991 were an act of choice or a fait accompli because of the compulsions of the time.
It is important to recognise that the far-reaching changes of 1991 were embedded in strong bipartisan support. Dr. Singh had the fullest support of Prime Minister P.V. Narasimha Rao, who sagaciously kept major Opposition leaders — particularly Mr. Vajpayee and L.K. Advani — in the loop on the proposed changes.
The reforms continuum
Twenty-five years of India’s reforms cover at least three more periods beyond the Manmohan-Rao era. During the period of Prime Minister H.D. Deve Gowda with P. Chidambaram as Finance Minister, far-reaching changes were introduced in India’s tax regime. As Revenue Secretary at that time, I had accompanied Mr. Chidambaram for discussions with the Prime Minister with multiple tax options, the most audacious of which was the recalibration of income tax rates to the three slabs of 10 per cent, 20 per cent, 30 per cent for rationalising tax rates and ushering in a culture of compliance. The tax reforms of 1997 have endured the test of time. The audacious Voluntary Disclosure of Income Scheme, notwithstanding questions of morality raised by the Supreme Court and others, widened the tax net and secured idle wealth into the economic mainstream.
The Vajpayee era, which followed the Deve Gowda and I.K. Gujral governments, unleashed in many ways India’s comparative factor advantages. This was especially so in telecom, which Mr. Vajpayee perceived even then to be the single biggest catalyst in our reforms story, but was equally true of his Golden Quadrilateral project. The highways project, coupled with the Pradhan Mantri Gram Sadak Yojana and the commencement of the Delhi Metro, was early recognition of the fact that for a country of this complexity, connectivity was necessary to trigger and support other growth initiatives. Much later, virtuous circles have sought to be built around both these initiatives. One day Mr. Vajpayee had asked me for the creation of wider consultative mechanisms to reach multiple stakeholders. The constitution of the Prime Minister’s Economic Advisory Council and the Council on Trade and Industry enabled the Prime Minister to seek domain advice and interact directly with potential investors.
Regrettably, the 10 years of United Progressive Alliance rule were a classic example of the old Manmohan maxim that “governments must first survive before they can reform”.
History has cast on Prime Minister Narendra Modi the obligation to both finish the unfinished agenda in multiple directions and also to make the reforms process employment-centric, undertake changes in agriculture untouched by the earlier reforms and improve the quality of governance based on technology. The Aadhaar platform, rural empowerment and wealth creation through Jan-Dhan Yojana and improving the quality of project monitoring and implementation can prove decisive. India has been a latecomer but traversed a credible distance. Mr. Modi realises that global considerations, both economic and political, are more favourable than ever before.
To the rhetorical question of whether India only acts in a crisis, a rational answer must necessarily be in the negative. India needs to act by consensus but more forcefully than ever before. Maximising its human development skills when technology is increasingly labour-displacing needs innovative solutions. Skills must be matched with emerging demands. Technology must be used to improve quality of life and create different patterns of gainful economic activity. This will be the unfolding drama of the next decade of our reforms. It is for good reasons that Mr. Modi is in a hurry to make the next decade of reforms truly transformative.
N.K. Singh is the chairman of the Fiscal Responsibility and Budget Management Review Committee and a former Rajya Sabha MP.
Keywords: 25 years of reforms, Dr. Manmohan Singh, 1991 Budget, General Budget, I.G Patel, Jan-Dhan Yojana