The decisions taken by the RBI in 1991 added to the momentum of the reforms. Can you identify the key people and how they have performed?
NS reserve Bank of India (RBI) and I were deeply involved and engaged in the reforms. From the decision to devalue the rupee to reforms in the monetary, banking and foreign exchange sectors, the changes we have made have stood the test of time.
The most significant change was the phasing out of the system of issuance of ad-hoc Treasury bills by the government to the RBI and thus automatic monetization of fiscal deficit. This can indeed be considered as the first step towards giving autonomy to the RBI with regard to the conduct of monetary policy.
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In all sectors, the initial changes were followed by several other actions, all in the same spirit of liberalisation. Since 1991, we have had a comfortable balance of payments position. The growth rate of the economy had also reached a very high level, although the recent decline in the growth rate is a matter of concern and reconsideration.
When did you learn about historical measures?
I was part of the decision making process. In adopting various measures, we knew we were taking risks. However, we felt these were needed and were confident that we would be successful.
Were policymakers concerned about the measures?
I have written about stress and anxiety going through two phases of devaluation. The decision to have it in two phases and hand it over to the RBI were the new features. The code word for the exercise was ‘Hop, Skip and Jump’.
Shipping of gold, which was actually before the reforms, had its own worrisome moments when a bullion van carrying gold at the airport had to stop, of course, for a short period of time due to some trouble.
What areas need the government to focus on in the coming year?
The reform agenda of 1991 constituted a paradigm shift. Today we do not need a paradigm shift. We need to look at different areas and see which one needs improvement in terms of creating a competitive environment and improving efficiency.
There is a need for reforms in the power sector, the financial system, governance and even agricultural marketing. But we need a lot more discussion and consensus building. Timing and sequencing are also critically important.
For example, labor reforms are best introduced when the economy improves. Given the recent discussions on agricultural marketing reforms, the best course of action now may be to leave these measures up to each state whether or not they want these laws. This will set the stage for experimental economics and farmers will be able to see for themselves the best possible solutions for different crops and situations.
A few years back there was talk of India becoming a $5 trillion economy. Today we are a $2.7 trillion economy. To reach the $5 trillion target, India needs to grow at 9% per annum for at least five years.
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