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Ashok Dasgupta

FROM precarious foreign exchange reservesof less than $1 billion in 1991 — not enough to finance even three weeks' import — to well over $100 billion in 2004 and swelling each week, India has, indeed, come a long way. The arduous journey spread over 13 years, though not a long one for a sovereign 57 years young, has not been smooth by any standards. It marked the beginning of an era of economic crisis, political instability and scams — the likes of which the country had never before witnessed.

The roots of the crisis were imbedded in economic misadventures and laxity in correcting the ills over the previous couple of years. The crisis peaked in early 1991 and drove the economy to the edge of a precipice. To a large extent, the situation was aggravated by several extraneous factors, but the salvage operation that followed was, in a way, also a retribution for the economic doings of the previous Congress regime, led by the then Prime Minister, Rajiv Gandhi, a man ahead of his times.

In his zeal to usher in modernisation and growth in the still inward-looking mixed economy, Mr Gandhi, aided by his Finance Minister, Mr V.P. Singh, ushered in reforms of sorts in certain sectors, such as electronics and telecommunications, introduced de-licensing in automobiles and eased tax rates to regenerate the sagging economy while clamping down on tax evasion.

What was not given heed to was the fact that partial reforms do not work in a mixed economy.

Not surprising, therefore, the "piece-meal" policies put in place during Rajiv Gandhi's initial term as `Mr Clean' unwittingly led to a steady frittering away of precious foreign exchange. For, the high growth rate in the manufacturing sector, mostly from imports, largely satiated domestic consumer demand among the rich and the middle-class; hardly any efforts were made to boost exports to replenish the forex kitty. And by the time steps could be taken to put the economy back on track, the Bofors scandal overshadowed everything else.

The ninth Lok Sabha polls in November 1989 saw Mr Singh, who had earlier switched over to the Janata Dal, become the Prime Minister of the National Front coalition with the support of the Bharatiya Janata Party (BJP) and the Left parties. Sadly enough, instead of correcting the economic ills, Mr Singh sought to gain political mileage through `Mandalisation', resulting in unprecedented agitation by the student community and immolation deaths.

By then, external factors had further dampened the economy. The Iraqi invasion of Kuwait in August 1990 dealt a massive blow, as while the remittances tap dried up, additional expenditure had to be incurred to repatriate the Gulf labour to the country. On top of it, the oil import bill soared.

The Government, with Prof Madhu Dandavate as the Finance Minister, responded by levying a 25 per cent surcharge on petro-products and shelving imports. But that was not enough.

And, while borrowing abroad became difficult, the "otherwise patriotic" non-resident Indians (NRIs) wasted no time in withdrawing their deposits. Little wonder then that Moody's also wasted no time in sharply downgrading India's credit rating to junk grade.

Needless to say, following the ouster of Mr Singh after the BJP withdrew support, when Mr Chandra Sekhar took over as the Prime Minister in November 1990, the Finance Minister, Mr Yashwant Sinha, found to his horror that he had inherited empty coffers. To tackle the crisis, the Government increased taxes, drastically reduced spending and clamped curbs on imports. Alongside, a deal was reached with the IMF for a $1.8-billion standby loan. But worse was yet to come. For the first time in the country's history, India came to the brink of default on its external debt repayment obligations.

By then, the Government had been reduced to the status of a caretaker, pending elections. To avert a financial disaster, the caretaker-Government "secretly" pledged a part of its gold reserves to the Bank of England to meet its commitments. When the secret became public, there was no dearth of criticism. In a country as democratic as India, political leaders charged that the Government was selling away "the family silver". But what was more important — the family silver or the family's honour?

Just as `necessity is the mother of inventions', for democratic India, `crisis is the mother of reforms'. On final count, the economic crisis had reached such a point that the only option was to go in for reforms and structural adjustments. The most challenging aspect in this bold and stupendous task, left for implementation by the new regime after the 10th Lok Sabha polls in May 1991, was to change the mind-set of the politicians, the bureaucracy, the industry and the people at large. For a country used to protection under a mixed economy steeped in socialistic principles, that was a tall order. Curiously enough, it was the minority Congress Government, headed by Mr P.V. Narasimha Rao, that was destined to catch the bull by the horns. What, perhaps, helped in pushing through the reform process was the fact that the Finance Minister and the father of reforms, Dr Manmohan Singh, was not viewed as a politician but respected more as an economist. Besides, Mr Rao was also astute enough to regulate the pace of the reforms "with a human face" so as to make the seemingly "harsh" doses palatable and acceptable.

No gainsaying that Mr Rao and Dr Singh, while launching radical reforms, took adequate care to start with the "soft" measures. For one, the `licence permit raj' was officially discarded, as, barring a few select industries, the rest were de-licensed. No more was the Government there to dictate how much to produce. That was left to the entrepreneur to decide on his economies of scale, the market forces and competition.

Again, starting with select sectors of the industry that hitherto remained protected, the doors were gradually thrown open to foreign direct investment (FDI) to the extent of 49-51 per cent under the automatic approval route while higher levels were approved on a case-to-case basis. The industrial sectors that immediately stood to gain were automobiles, telecommunications and electronics, including computers and software.

To settle external payment problems, multilateral agencies stood ready to extend structural adjustment loans, but with a string of conditionalities attached. These, among other things, included gradual lowering of import tariffs and other taxes, apart from trimming the fiscal deficit and officially devaluing the currency, which rendered exports more attractive and imports costlier. Accordingly, over the years, the rupee stood devalued from Rs 20 to a dollar to Rs 26 in 1991 and, thereafter, to Rs 30 in March 1992.

Simultaneously, efforts were also initiated to tackle the burgeoning subsidy bill while curtailing the drain on public sector undertakings (PSUs) by disinvesting the Centre's equity stake in them. Left untouched as a "holy cow" all these years, not much progress could be made on this front, except for selling tiny portions of the Centre's stake in select PSUs in "bundles". The problem with the reform exercise initiated by Dr Manmohan Singh was that various policy measures could not be sequenced well, perhaps due to lack of time, and, as a result, the full benefits could not be reaped. With no tangible benefits evident, rural folk as also the common man were left confused as to whether the reforms would do any good. For one, it did not add to the employment levels, which gave rise to dissatisfaction and the rise of rural aspirations.

As was predicted, the 1996 polls resulted in a hung Parliament. The BJP, led by Mr Atal Bihari Vajpayee, with the maximum of 195 seats, lacked majority by a single vote in the Lok Sabha and quit on the 13th day of power. After days of a game of numbers, it was the United Front (UF) that assumed power under the leadership of Mr H.D. Deve Gowda and later, Mr I.K. Gujral.

As the UF comprised political parties of various hues, including the Left, it had to work out a Common Minimum Programme (CMP) and set up an Empowered Committee to advise the Cabinet on reform and other policy issues. The saving grace was that the Finance Minister, Mr P. Chidambaram, had always favoured reforms.

The beauty of the Indian reform exercise was that irrespective of the parties in power, the process carried on — it was only the pace that differed. The UF Government took off from where the previous regime had left, as it was realised by all that going back on reforms would be catastrophic.

During its stint in 1996-98, the UF, apart from tinkering with tax and import tariffs, further liberalised the FDI sectoral caps and initiated steps to replace some redundant Acts, such as the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA), but failed to complete the exercise. It also set up a Disinvestment Commission for seeking recommendations on the sale of Government equity in PSUs based on `core' and `non-core' sector of activity.

For all practical purposes, it was the BJP-led NDA Government, headed by Mr Vajpayee, that carried on with the reforms in full swing since 1998. While easing direct and indirect tax rates further over the years, the Finance Minister, Mr Sinha, also rationalised excise and customs duties by reducing the slabs; progress was also made on replacing FERA with the Foreign Exchange Management Act, the MRTP Act with the Competition Commission, and introducing the Fiscal Responsibility & Budget Management Bill (FRBM) and the Companies (Amendment) Bill. As for FDI, some of the sectoral caps were raised to 100 per cent while insurance was thrown open to private and foreign companies. Attention was paid to the country's infrastructure and sectors such as roads, ports and telecommunications witnessed rapid development.

The disinvestment exercise underwent yet another change as the word "privatisation" was no longer seen as a dirty word. Modern Foods Ltd was sold to Hindustan Lever, so was Balco to Sterlite; the IPO of Maruti Udyog Ltd (MUL) to offload the Centre's equity was a huge success. The sell-off of PSUs was based on `strategic and non-strategic' reasons, in that even oil PSUs were lined up for stake offloading.

Clearly, by now, the hard work done by Mr Sinha had started paying dividends. It was, however, left to Mr Jaswant Singh as the Finance Minister to reap the rewards. Most of the pro-reform Bills were close to being legislated.

Foreign inflows, mainly as investment by FIIs and pension funds, into stock markets zoomed. Interest rates for various sections were lowered in keeping with global norms and India turned attractive in various fields, especially software exports and BPO.

It's now time for elections again. And in the name of reforms, the Government has embarked on a "populist" game-plan of give-aways, which have benefited certain sectors of the industry, farmers, senior citizens, and even vendors.

Taken together, the largesse amounts to a total revenue loss of about Rs 15,000-Rs 20,000 crore. The bright spot is that tax collections have been significantly higher than Budget estimates by about Rs 16,000 crore. The million-dollar question now is whether the electorate will bite the bait. Only time will tell.

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