What do you think led to the landmark decisions of 1991 – the political will or the reality of the economic crisis?
The crisis was clearly an important factor. We were in a hopeless situation, the forex reserves were more or less exhausted. The government outlined a two-part agenda. One was to stabilize the economy, and the other was to implement structural reforms, transitioning to a higher rate of growth.
The stabilization part was traditional: reducing the deficit and bringing the International Monetary Fund (IMF) and the World Bank to provide funding that would see the economy stabilizing over the course of a few years.
However, the decision to introduce reforms was innovative. This cannot be explained by the crisis, or the need to contact the IMF or the World Bank, because the reforms went far beyond the institutions they were pressuring.
In any case, the crisis ended in 1993 … (but) the fact that reforms continued, the government was eager for reforms independent of the crisis.
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What is your extraordinary memory of 1991?
My favorite incident relates to the speed with which we were able to bring about a trade policy change in 1991. When Manmohan Singh Announced the second devaluation on 3 June, it wanted to end the cash compensatory support (which was given to exporters as an incentive) from 4 June.
He asked me to give information about the Minister of State for Commerce P Chidambaram On its justification. I did so, but also said that we should try to persuade Singh to expedite the announcement of our proposals for trade liberalization, including the EXIM scrip that was intended to replace import licences.
We went to the finance minister’s office and he immediately saw the merits of our proposal, dismissed his officials who were not in favor of it, and asked us to come back with a written proposal, “on file” as they were. Says in the government, so we can get approval from the prime minister.
We did this in a few hours and we all went to meet Prime Minister Narasimha Rao at around 7 pm. After Chidambaram explained our proposal, the PM asked Manmohan Singh if he agreed. Singh said he had signed the file, to which Rao took the file and signed it, and it was done. The PMO did not examine the proposal.
The entire process of dismantling import controls and moving to market-based methods of allocation of imports, with the final shift to a market-based exchange rate, was done in a span of eight hours.
Do you think the appetite for reforms has increased among politicians?
If you measure “hunger” by the acceptability of the slogans, one might say that there is now a greater acceptance of the notion that economic dynamism will be led by the private sector and that the government should not go into areas where the private sector is a dominant force. Can do very well. But there are many areas where we see little progress.
Land market reforms are proving extremely difficult. Reforms in the labor market are also taking place slowly. I think the same is true of banking reforms.
We are now at a stage where the reforms we need are far more complex and their benefits will become apparent only after many years. For example, education is one sector where it will now take 10 years to show improvements in terms of better quality of labor force.
Another problem is that most of our public discussion of reforms is focused on what the central government should do, but water, electricity distribution and health are important sectors that are all in the state sector. If you check what politicians are saying in state elections, you will see that it does not reflect an awareness of the need for reforms.
Economic reforms have reduced poverty but the COVID pandemic has eroded the benefits. What do you think needs to be done now?
We have to work on two fronts. One, what we can do to support the poor during the pandemic, and the various measures taken for this are in the right direction. This should be accompanied by concerted efforts to ensure the earliest possible recovery.
Unless we experience another setback in the form of the third wave, the economy will recover during the year and will be back where we were in 2019-20 by early next year. The most important thing to achieve this result is a successful vaccination strategy.
This in itself will not offset the negative effects of the pandemic on the poor as the informal sector has been hit hard, and to that extent, even if the economy returns to 2019-20 levels, the condition of the poor will be worse. Will be were in 2019-20.
We can only focus on ensuring healthy growth post-pandemic from 2022-23 onwards. If the economy grows at a pre-pandemic rate of only 4% or a little over 5%, there is little hope of breaking into poverty. We should aim for at least 7% growth.
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