Dr C Rangarajan former RBI governor, spoke on
"Economic reforms" at a program organized on December 2, 2016, by
the Triplicane Cultural Academy and the Kasturi Srinivasan Library. The venue
was the second floor auditorium at the CP Ramaswami Art center, in Eldams Road,
Alwarpet.
In India, almost every major scheme, plan, reform, program,building,
brick, nail or board-pin introduced or implemented by the central government is
attributed to the Prime Minister. The one exception is the 1991 economic
reforms, which are credited to the then Finance minister, Manmohan Singh,
rather than the Prime Minister of that time, Narasimha Rao.
These are my notes from that lecture. Since I am no
professional journalist, the reader will feel a certain level of discontinuity in
the narrative; the fault is mine, obviously, not the speaker’s. I have
highlighted some of his salient points, by marking them in bold font. I have added some phrases in parenthesis to clarify what
I think the speaker meant.
------Thus
spake Rangarajan------
In 1991, India suffered a terrible crisis and
balance of payments situation. The extant model was in deep trouble. In the 1960s
the economic consensus was that there was
a market failure - the market failed
to deliver certain services. (Nationalization
of banks, industries, vast swathes of the industry and the economy followed,
under Prime Minister Indira Gandhi and others, until the 1980s.) This led to
diversion of national income, especially into rent taking activities because of
socialist regulations.
There can be both market and government failure.
More market doesn't mean less government but different
government.
The 1991 crisis was compounded by Iraq war and the
fact that current account deficit could not be bridged. Our foreign exchange
reserves dropped to three weeks of imports. Totally traumatic period, difficult
to manage on a day to day basis. The transfer of gold was decided by Chandrasekar
government but the idea came from Reserve Bank of India. Today (in 2016) we get
$500M in a couple of days, but (in 1991) we pledged forty tons of gold... It
was in very different forms including Victorian coins.
The first break with past was dismantling controls
(in several sectors of industry). Second was changing role of the state.
Reduced the role of state as marketable goods and services and increasing role
as regulator and providing public goods and services. Third was integrating Indian economy into the world economy.
What was the role of Narasimha Rao? Ardent advocate?
Did reforms start in 1991 or 1980? Thirdly, what changed the mindsets of
politicians who had been part of the controlled regime? Fourth would anyone
have done what Rao did?
(1)Economic
policy making is not merely the role of economists. Political cover provided
by Rao was vital. Rao as Industries Minister decontrolled the economy and
announced it on the morning of the budget. Rao couched the reforms in language
which appealed to the old guard of the Congress party. I wrote the Eighth five
year plan and Rao as pm and chairman of planning commission approved it.
(2) 1980 showed some changes,but also responsible
for the crisis in 1991. But 1991 was a watershed.
(3) The enormity of crisis made the change possible,
and while IMF had a philosophy and played a role, the decision was ours. Upto 1990 all interest rates on deposits or
loans were fixed by RBI. Malhotra allowed banks to set interest rates upto 180
days but there was no support and so we had to withdraw it after a month.
(4) Manmohan role was primary. He was part of the
South commission which held on to the
old ideas even until 1990. But he realized the magnitude of the problem and changed his mind.
We introduced tax reduction which would pay off only several years down the line.
(This was partly inspired by the tax reductions in 1980 USA under Reagan and UK
under Thatcher, which led to both their economies booming. But the failure of
the USSR economically and politically was the immediate trigger).
We initiated bank reforms. Most importantly,
exchange rate system changed. Before that RBI determined the exchange rates. I
used to determine the exchange rate as governor, but I was also part of a
committee that recommended ending that system.
Higher growth rate in national income produced much
better performance in social development. But it is still much less impressive
than in economic growth. Which is why Amartya Sen called it "uncertain
development ".
Growth impacts social development in two ways.
First, the rising tide effect. (A rising tide lifts all boats – that is the
population as a whole benefits, not just some sectors of the economy). Second,
a pattern of growth. South Korea grew at 7-8% for over three decades. If agriculture
improves faster it would help rural India improve.
Poverty has reduced dramatically. Dropped at 2.7%
per year from 2004-2014, which was far faster than 0.7% from 1991-2004. But
poverty is still at 30% (in 2016).
Domestic private investment is not picking up.
Let me move on to future reforms. One important one
is improving efficiency. Another is the introduction of GST (Goods and Services
Act).
There are still some industries like sugar and
molasses under pre 1991 model. This is subsiding alcohol. Agriculture and its
marketing needs reform. APMC Act needs more reform. Farmer cannot sell his
products directly. If India grows at 8-9% until 2030, then per capita income
will increase to $8000 and only then will India be a middle income country.
Social improvement
needs high growth.
Reforms have gained
wide acceptance. (By this he meant the 1991 reforms – no major political party
wants to go back to the pre 1991 era).
Neither reforms nor growth are ends. Their benefits must go to all.
------End of notes from Rangarajan speech---
My comments: This lecture was delivered in 2016. GST was
implemented in 2017. The APMC reforms was passed last year(2020), which led to protests
for its repeal by mostly farmers from Punjab and Haryana, later supported by some
opposition parties. Labour laws have not been substantially reformed. The corona
lockdown has perhaps reversed or halted the rate of reduction of poverty. But
it has also launched huge gains in productivity, made organizations consider massive
reductions in travel and physical
infrastructure. I wonder if these cost reductions will impact positively on the
economy and on the individual.
There does seem to be the spirit of ferocious entrepreneurship in
urban centres. The courts, the bureaucracy and the media seem completely dead
set against these. I hope I am wrong.
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