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Reforms: One step forward, two steps back

P Vaidyanathan Iyer & Subhomoy Bhattacharjee in New Delhi

If there is one discerning trend in the first three years of the tenure of Atal Bihari Vajpayee, P V Narasimha Rao and Rajiv Gandhi, it is the withering away of the reforms process no sooner than it started gathering pace. The Vajpayee tenure, however, is marked by the absence of a central thrust to policy-making.

Ashok Desai, former chief consultant and adviser in the finance ministry, says: "All ideas, like reduction of customs and excise rates, or even divestment, have been inherited by Vajpayee. And these too have been carried out very erratically."

According to him, there is no one in the present government with ideas. Except for Vajpayee, no one else has the authority or the stature to push through reforms.

"Rajiv Gandhi and his finance minister, V P Singh, were very active. In the case of Rao, his finance minister Manmohan Singh provided the thrust."

Indeed. V P Singh in his 1985 Budget, cut taxes steeply, liberalised imports and eased the rigour of industrial licensing. In his next Budget, he gave an impetus to growth by pumping in more money into the system and carried forward the process by further cutting taxes and reducing tariffs.

Shankar Acharya, RBI professor at the Indian Council for Research on International Economic Relations, and chief economic advisor during the 1990s, feels the "big picture" was most evident during the Rao years.

"There was a clear view in the finance ministry of what needed to be done. The government systematically went about making structural changes like the passage of the Sebi Act and easing import of capital and intermediate goods by sharply cutting the peak customs duty."

Despite this, the Rao tenure did not achieve the primary task of restoring public finances to good health. By mid-1991, the fiscal deficit had ballooned to nearly 9 per cent of GDP, the current account deficit almost 3 per cent of GDP, and there was a flight of capital from India with confidence plummeting to depths hitherto unimagined.

Even before the Budget, Manmohan Singh devalued the rupee in two steps - by 16 per cent and 6 per cent - slashed export subsidies and abolished industrial licensing.

In his first Budget of 1991, he chopped expenditure but political pressure tied his hands down in the subsequent years. So, although he set a target of reducing the fiscal deficit to about 4 per cent of GDP in 5 years, it still remained at 5.5 per cent.

Looking back, Desai says the International Monetary Fund would have been very happy with the work done by Manmohan Singh. One could sense that both Rajiv Gandhi and Rao had the feeling India was falling behind, but the present government does not look at the outside world.

Acharya is more mild in his assessment of the Vajpayee regime. "There is a critical difference between the Rao and the Vajpayee years. While most of the reform measures during Rao's tenure just required administrative orders, Vajpayee had to go to the legislature for most of them," he says.

The reform-linked Fiscal Responsibility and the Budget Management Bill, the Electricity Bill and the bill to reduce government stake in public sector banks to 33 per cent, were introduced, but remain stuck in Parliament.

The former economic affairs secretary and now principal, Administrative Staff College of India, E A S Sarma, says the Rao period stands out more prominently than others since not only were all-round reforms launched then, but a wide awareness of the need for structural changes was revealed.

"Despite this, this was the period that perhaps lacked clarity on the true objective of reforms and their sequencing. For example, reforms should mean competitive prices for the consumer whereas almost all infrastructure projects at that time were pursued without competition," Sarma says, pointing to the problems of today, like Enron and Cogentrix.

If there is one clear-cut reform measure Vajpayee has persisted with, it is privatisation, says economist-turned-politician Jairam Ramesh.

Although secretary to the economic affairs cell in the Congress, he says, "One distinguishing characteristic of the first three years of Vajpayee is that privatisation has been firmly put on the agenda."

While Rajiv Gandhi talked about MoUs to reform public sector undertakings, Rao sought to sell small chunks of PSU equity. Both, however, failed, he points out.

Unless a scorching pace is set in the very first year and followed up in the subsequent year or two, it is unlikely that reforms will make a mark, Ramesh says. In the last two years of any government, not much can be expected except policies with an eye on vote banks.

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