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Economic reforms remembered

S. Venkitaramanan

IT IS ten years since Dr Manmohan Singh and Mr P. V. Narasimha Rao initiated economic reforms in the country, with the Budget presented in July 1991. Ten years may not be a long time in a country's history, but it is a fairly long period in the life of e conomic reforms. Those who came to scoff at the temple of reforms have remained to pray.

Particularly is this true of the present ruling coalition, which initially opposed the economic reforms, but later accepted them and has now proceeded further with second generation reforms. The economic crisis of 1991 marked a watershed in India's histo ry when dwindling reserves with the RBI that year acted as a trigger for economic reforms.

Fortunately, India was lucky to have had as leader of the reform process, Dr Manmohan Singh, who dominated the stage first as Adviser to the then Prime Minister, Mr Chandra Shekhar, and later as Finance Minister. The successful conduct of the transition from the era of controls to the era of freedom is primarily the result of Dr Manmohan Singh's wise leadership. That we avoided the Asian flu and emerged as one of the few economies with a high rate of growth and low inflation is a tribute to Dr Manmohan Singh's contribution to India's economic history.

The gains of economic reform are undeniable. Today, against the reserves of less than a billion dollars in June 1991, we have a reserve of nearly $40 billion. As Dr Manmohan Singh mentioned in a recent interview, till 1991 the history of India was the hi story of chronic forex shortage. He says: ``So, bending the forex constraints was crucial to the further development of India''. One of the reasons he opened up the entry of portfolio capital was to serve as another window for forex inflow, because ``he did not want to go back to IMF''.

Looking back, the foreign exchange situation in May-June 1991 was really scary. India had less than one week's requirement of imports. Industry was on short rations; every enterprise seeking release of foreign exchange, even for essential imports, had to place a heavy rupee deposit. The central bank tried to manage with the fragile resources it had.

One of the defining moments of the crisis of 1991 was the decision to send out gold from India as security for a forex loan. The Government initially transferred some of the smuggled gold in its possession to SBI. SBI was then asked to raise a loan again st the gold from one of the international banks. It was only later that a decision was taken to move out some of the gold in the RBI's reserves. The insistence by the IMF that India's gold reserve be used was understandable, because donor nations whom In dia approached for help asked why we were not using our own gold resources in the dire emergency.

There was high drama accompanying the actual transportation of gold, as extraordinary precautions had to be taken. A special plane was chartered to move the precious cargo to London. The decision to move the gold out of India was described as a national humiliation, even by some responsible observers. But the then Prime Minister, Mr Chandra Shekhar, showed tremendous courage in endorsing this proposal. He was, however, aware that his political opponents would exploit it to the hilt, and his fears were p roved right. The Congress Party attacked the despatch of gold in its political campaign against Mr Chandra Shekhar, though the late Prime Minister, Rajiv Gandhi, saw nothing wrong in using the country's gold to help its industries and agriculture.

What the pledging of gold did to the foreign exchange situation was to bring in about $500 million -- a large sum those days, although a fleabite, compared to the current foreign exchange reserves. More important, it helped alert the national ps yche about the catastrophic situation in which the economy was. It became clear that the extreme solution of going to the IMF was unavoidable.

Once Dr Manmohan Singh came on the scene, his high credibility in the international aid community became an important factor in speeding the aid packages from not only the IMF, but also the World Bank and the ADB. The international financial community no ted that India had never defaulted in its external obligations, and that its external commercial borrowing was relatively small by international standards. To prevent default, aid was necessary.

The contribution of eminent World Bank professionals, including Mr Ernest Stern, and the then Bank President, Mr Lou Preston, in the quick resolution of doubts in the multilateral financial community deserves mention. So too, the Japanese Ministry of Fin ance under the leadership of Mr Otsumi, and the Japanese Central Bank under Governor Mieno, were also extremely forward-looking. They played an important role in persuading the Japanese banks to keep open their lines of credit to SBI, whose short-term bo rrowings had become the critical factor in the threatened forex crisis.

Chief among the helpful international financial statesmen at the time was Mr Michel Camdessus, the then MD of IMF. In London also, we received every kind of assistance from the Bank of England, its then Deputy Governor, Mr Eddy George (now Governor) and Executive Director, Mr Andrew Crockett, now at The Bank of International Settlements. The fact that Dr Manmohan Singh, a well-known economist and economic administrator, was at the head of the Finance Ministry, played an important role in persuading thes e decision-makers in Washington, London, Bonn and Tokyo to speed up aid to India.

The whole saga of economic reforms includes the opening up of India to investment from abroad and the easing of restrictions on industry and trade. Dr Manmohan Singh's role in this is etched in letters of gold. Looking ahead, his introduction of current account convertibility in 1993 is an essential feature in the transformation of the financial scene.

In one of his recent interviews, Dr Manmohan Singh has stated that slippage in the reform process started with the Babri Masjid episode, when Mr P. V. Narasimha Rao started having second thoughts about certain aspects of fiscal adjustment. The fiscal pro blem has continued to haunt the reformers, from Dr Manmohan Singh to Mr Yashwant Sinha. The increasing flab of high establishment costs and public sector losses, besides the growing burden of subsidies, has put paid to the concept of rational management of fiscal deficit.

Whatever the successes of the reformers in managing the foreign exchange situation, for which Dr Manmohan Singh rightly claims credit, the fiscal malaise persists. Not only the Centre but also the States are in deeper trouble, threatening to finally brin g down the Centre with them. Economic reforms cannot succeed unless the political parties resolve to handle the fiscal mess. The fiscal problem, which makes resources scarce and restrains public investments in critical infrastructural areas, is holding t he country back.

Mr Yashwant Sinha is trying his best to influence his colleagues at the Centre and the States to implement fiscal responsibility. It is not, however, enough for Mr Sinha to convince his party colleagues alone -- itself a difficult task. He has to brin g about a consensus with the Opposition too. The success of the reform process depends very much on such a wide consensus reached with the parties, both in the ruling coalition and outside.

What Dr Manmohan Singh and Mr P. V. Narasimha Rao started ten years ago will remain an incomplete chapter in the history of India's economic progress unless the principal players today face up to the current challenge. We may, for the present, avoid goin g to IMF because of our foreign exchange situation being relatively comfortable. But we are only postponing the day of reckoning if we continue to live beyond our means.

The year 1991 saw the initiation of an era of liberalisation and economic emancipation. The reforms deserve to be carried through to their logical end. Much remains to be done. Fiscal stabilisation, financial sector reform, legal reform and industrial li beralisation are still incomplete aspects of the reform agenda. There are difficult tasks ahead. Messrs Sinha and Vajpayee deserve the fullest support from all political parties in this exercise.