TCA Srinivasa Raghavan

Are we in for a re-run of 1990-91?

T. C. A. Srinivasa Raghavan | Updated on March 12, 2018 Published on February 12, 2011

As 2011 gets underway, it is hard not to be reminded of the political and economic similarities between then and now.

Like the UPA-II Government, the National Front (NF) Government of V. P. Singh (December 1989-December 1990) was at the mercy of other parties for survival. It was not a coalition government but depended instead on the ‘outside' support of the BJP and the Left. But the gun being held to its head was of the same calibre as at the head of the UPA. It was highly vulnerable to sudden political squalls, and the danger of capsizing was ever present. Economic policy was framed within this larger political context.

In 1990, the main problem lay not on the economic side, which could have been managed if the political mandate had been forthcoming. It lay, instead, in the tangled and highly unstable political situation. Only a few internal and external jolts were needed to unravel the whole thing.

These came in the form of, first the announcement of the Rath Yatra by the BJP in July 1990, then the V. P. Singh riposte of Mandal in August and the simultaneous invasion of Kuwait by Iraq.

By October 1990, all semblance of political direction had vanished, and the Finance Ministry, having sought in the previous six months to cater to the political needs of the Prime Minister, became like a man who watches an accident that is about to happen, and not having been able to act in time, is unable to prevent it. If one must put a date on it, the Finance Ministry lost control of the economy around October 1990. The same thing could happen now in the summer when the present Finance Minister gets properly busy with the West Bengal elections.

And just as V. P. Singh had lost control, it is starting to look as if Ms Sonia Gandhi is also in similar trouble. Look at the way Mr Kapil Sibal has gone off half-cock.

Economy then and now

By the time he was defeated in November 1989, Mr Rajiv Gandhi had persistently ignored the repeated danger warnings from the RBI and the Finance Ministry from early 1988 onwards. It is not fashionable these days to say such things about him but the truth is that he left the economy in absolute shambles.

Fortunately, in 2011, things are not as bad on the fiscal side as they were then and, today, exports are doing well. But the current account deficit in 1990 was over 3 per cent. It is over 4 per cent now. Even more importantly, even though its owners were different, the proportion of quickly reversible foreign capital inflows was very high then, just as it is now. The RBI has been warning about this.

Commodity prices were also high and climbing, just as they are now. Inflation, too, was high; and equally significantly, the US economy was in the doldrums, just as it is now.

Other similarities

There are other similarities as well. In December 1990 a new RBI Governor was appointed; a new Governor is due in September this year. A new finance secretary was appointed in February 1991; a new finance secretary is due in March 2011. The new chief economic advisor who was appointed in March 1991 was an academic, just as the current one is.

But, most important of all, in 1991, the Budget could not be presented. The same thing could happen now, albeit for a different reason. From September 1990 onwards, two things happened: The dodgy political situation led to a sudden and massive withdrawal of NRI deposits and an almost total halt to remittances from them (leading a RBI wag to call them Non-Reliable Indians) caused largely by the invasion of Kuwait by Saddam Hussein.

Could, similarly, de-stabilising shocks happen again? There is no way of telling, just as there wasn't in 1990.

Consequence

In 1991, the consequence was that between January and July, for all practical purposes, the RBI under the extraordinarily able guidance of Mr S. Venkitaramanan was in charge of the economy.

The Finance Ministry simply did not have the mandate or the direction that was needed to take important decisions.

Given how tenuous the political situation has become now, the same fate may be about to befall the RBI soon, especially if there are some external shocks.

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Published on February 12, 2011
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