Friday, July 22, 2016
Twenty-five years ago, it was July 24, 1991; venue: Parliament House, New Delhi; occasion: Presentation of budget for the year 1991-92, and as Dr Manmohan Singh started appraising about India’s “economy [that] is in deep crisis” owing to large and persistent macroeconomic imbalances, low productivity of investment, unsustainable increase in government expenditure, budgetary subsidies grown to an alarming level, excessive and often indiscriminate protection provided to industry that has weakened the incentive to develop a vibrant export sector, growing current account deficits in the balance of payments, depleted foreign currency reserves, etc., no one had any inkling that India is about to tread a new path in search of prosperity.
Faced with the financial crisis of that magnitude, PV— Pamulaparti Venkata Narasimha Rao—“a courageous and wise statesman” but often dubbed as a consummate backroom politician —having just taken over the reins of the government as the PM, in an unprecedented and courageous move, appointed Dr. Manmohan Singh as Finance Minister with the responsibility of nursing and strengthening the ailing Indian economy. Just as Deng Xiaoping steered China away from the Maoist policies to market economy during the early 1980s, PV enabled Dr. Singh—by standing behind him solidly—to gently nudge India away from Nehruvian economics to a path of liberalization that freed India from the shackles of socialist-ideology-driven ‘inward looking’ growth path.
The reform process that PV had launched made far-reaching changes: foreign trade, foreign investment and exchange rate regimes were all redefined—a two-stage devaluation of the rupee against the US dollar and the shift in the very exchange rate regime by way of allowing current account convertibility of Indian rupee being the fundamental change brought in. The financial sector was totally overhauled. In fact, Rao had himself spearheaded the move for dismantling the ‘License Raj’ as the Prime Minister while holding additional charge of the Industry Ministry. In a pretty subdued way, Rao could thus reform the economic policies so radically to reconfigure India’s hitherto much heckled “Hindu growth rate” of around 3 to 3.5% at around 8% plus per annum.
As Pranab Mukherjee, President of India said while delivering the first PV Narasimha Rao Memorial Lecture in Hyderabad that the “economic reforms [he had launched] enabled the nation to traverse the path of realization of its economic potential” as is reflected in these facts: India’s per capita income has shot up from $310.08 in 1991 to $1700 today; it is today the fastest growing economy recording a GDP growth of 7.6% with almost an identical figure in the previous fiscal too; traveling southward since 1994 fiscal onwards, India’s fiscal deficit touching a record low of 2.5% of GDP in 2007-08 currently stood at 3.9% of GDP; government’s debt fell from 63% of GDP in 1991-92 to 50% by 2015-16; around 138 million people were raised above the poverty line by 2011; in purchasing power parity terms, India is today the third-largest economy in the world after China and the US, and in1991, India was a member of the G77 group, while today it has become a member of the G20, and thus transformed itself into a potential superpower.
That said, it must also be admitted that there are still many flaws which need to be set right soon if India wants to excel in growth. And it is the right time for India to relaunch itself on the growth path, for the global economic scenario is quite favourable: low oil prices coupled with the fact that “challenges in other major economies have made India the near-cynosure of eager investors” can really give a big push to our growth. But there are obstacles: infrastructure continues to be the major binding constraint. Many projects remain stuck in red tape, mostly owing to land-acquisition problems. The ease of doing business must be improved substantially—World Bank’s doing business ranking places us at 142 out of 189 countries—if we want to attract FDI. The National Goods and Services Tax bill needs to be passed soon to make India a single market and pave the way for increasing our gross investment rate to GDP which is a must for accomplishing double digit growth in GDP.
The next in importance is putting in operation a new monetary policy framework: the government should accept ‘low and stable inflation’ as the single objective of monetary policy, for well anchored inflation expectations is the best tool to aim at growth. Also, low and stable inflation reduces macroeconomic volatility and is good for financial stability, besides lowering the exchange rate volatility. Simultaneously, the rot in the banking system must also be set right with no further loss of time and if required, the government should not hesitate to dilute its stake in them.
Intriguingly, we are not paying the desired attention to the widening gap between our spending and our saving because of which we are relying more and more on short-term foreign inflows, such as FII investments, which have indeed reached a dangerously high level. And surprisingly, our political economy is found opposing Foreign Direct Investment though it adds to our productivity capacity, generates more employment and pays direct taxes. On the other hand, they have nothing to say against FII investment, though it can anytime fly away leaving us in lurch particularly in the hour of crisis. And if FDI inflows are to increase, there is no better way out than to go all out for bold reforms.
Thanks to PV—the man who undertook a long journey from Patwari to Prime Minister sans any celebration at any stage—he has already shown the way forward! Let us hope that political wisdom and courage dawns on the present crop of leaders to launch such reforms that will enable us to catch up with the real chance for growth that today’s world is offering.