Sinha pays for Singh’s omissions

Structural reforms during 1991-96 would have made India better off

P N Vijay

We learnt a nursery rhyme in school which runs as “...Humpty Dumpty had a great fall; and all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” This fairly sums up the state of the bedridden Indian economy. The economy has had a great fall and but for the huge growth of 5.5 per cent expected in agriculture (the Cinderella), we would be growing at something like 4 per cent. Even now, growth is going to be less by about 15 to 20 per cent as compared to the previous year.

I don’t know if all the king’s horses are meeting — unless one could refer to the National Development Council by that sobriquet — but surely all the king’s men have been in conclaves. First, the Prime Minister meets the business lobbies which tell him to spend government money and give away big contracts; and then the economists tell him not to do anything of the kind! Mr Vajpayee must be totally confused and wondering whether he gained anything from such discordant advice.

Unfortunately as it invariably happens, it is the finance minister who takes the lion’s share of the blame just as he takes the lion’s share of the kudos when things go right. Right now Mr Sinha is busy fielding the bouncers being hurled at him in various forms. There is no industrial growth inspite of interest rates being at their lowest for years, business confidence — the catalyst that transforms ideas into projects — is at an abysmally low level and the stock markets have gone into slow death. But frankly, is he the culprit or does the blame lie somewhere else?

In my view, many of the problems of the economy today are traceable to the lack of action on key fronts during the first five years of reform. We started reforming our economy in 1991. At that time, there were several things wrong with it. The inefficient public sector was dragging the economy down and monopolising the savings of the community. The only ones’ making money were those in oil, telecom and such sectors where there were administered prices. There was total distortion in product prices, power tariffs being a glaring example. State electricity boards had become not only unbankable but also totally bankrupt. So much so, no investor was prepared to invest in power unless he had a bank guarantee and an escrow in his briefcase.

We had trade unions which believed that one gets paid for coming to work. For actually doing any work, one deserved overtime. As a consequence, the cost competitiveness of Indian manufacturing was only a pipe dream. And we had the monolith called the Indian financial sector, which was bloated, inefficient and going down the drain. Decades of directed lending a la Indira Gandhi had ensured that public depositors’ money was usurped for making loans that were irrecoverable ab initio.

And so, among this backdrop we had reforms. Admittedly most of them were necessary and not a day too late. We changed rules regarding foreign investments so that multinationals could hold 51 per cent in most segments of the economy. We cut down industrial licensing, removed curbs on large business houses and reduced customs tariffs so that we could globalise.

The Indian consumer long used to the quality levels typified by the Ambassador car — remember Time magazine’s comment that “the only part that does not make a noise is the horn!” — at last got access to some world class goods. We abolished the controller of capital issues and made the capital market more driven by the market than by the capital viz New Delhi! We permitted the foreign institutional investors who have since added sum and substance to the market. We brought in screen based trading, depository systems etc.

The above analysis will make it clear that while Dr Manmohan Singh, the then finance minister, did some good work in removing unwanted regulations, he failed woefully in the area of structural reforms. He did not bring in many of the key changes that would have made a lasting impact on the Indian economy. He played safe when the whole nation was backing him. For example, he neatly side-stepped the vexing issue of privatisation of the public sector. In fact, he hardly ever used the word ‘privatisation’, preferring instead typical Indianisms like ‘divestment’ etc. Whenever he needed money to plug the fiscal deficit, he got servile government entities like the Unit Trust of India, the Life Insurance Corporation and the General Insurance Corporation to pick up the shares. So we had ITDC, ONGC, IOC etc all divested without any change in the way they operated.

So now Mr Sinha is facing the music for all these acts of omission. He also does not have the luxury of a single party government. I am repeating this point because off late one has begun to hear from various sources that while Dr Singh pushed ahead with reforms, Mr Sinha is doing little to take things forward. In my view, the second generation of reforms are much tougher than the first. The country would have been immeasurably better off if during the 1991-96 period we had initiated some actual changes in administered prices, subsidies, financial sector and privatisation. Then we would not have been spared the mortification of the Prime Minister of India getting a lecture from McKinsey on how to run the country.

P N Vijay is a Delhi-based investment banker. He can be contacted at pnvijay@vsnl.com