A legacy squandered

Sunil Jain Posted online: Saturday, Jan 04, 2014 at 0000 hrs
Take any set of numbers, and they show up the stark difference between the various phases of Manmohan Singh’s career, as finance minister and then as the head of two governments. If it’s GDP you wish to look at, it rose from 1.4% in FY92, Dr Singh’s first year as finance minister, to 8% in FY97 when the party demitted office; it has been falling since, from 8.6% in FY10 when UPA2 began its second term to around 5% by the time it demits office in May.

Manmohan Singh

The fiscal deficit fell from 7.9% of GDP in the year before Dr Singh became finance minister to 4.9% when PV Narasimha Rao’s regime came to an end; though it will fall from 6.5% in FY10 to 4.8% in FY14, this will be after deferring subsidy bills worth more than 1% of GDP. The current account deficit halved from 3% in FY91 to 1.6% in FY97; in UPA-2’s tenure it will remain flat at around 2.7%. Expenditure on subsidies fell from over 2% of GDP in the year before Dr Singh became FM to 1.1% in FY97; in UPA-2, it remained steady at around 2.1%…

These numbers, stark as they are, don’t really convey the magnitude of the change. When Dr Singh became finance minister, India was a shackled left-of-centre economy with most things from iron and steel prices to interest rates and even IPO prices and exchange rates determined by the government. In this environment, with the country having to hock its gold, Dr Singh slashed away at all administered controls, removed industrial licensing, brought down peak customs duties from 400% to 50% and floated the rupee. And though it had to be rescued by the next government, the telecom space was opened up to the private sector.

The peak rate of income taxes was almost halved from 56% to 30% and the corporate tax rate — 51.75% for Indian firms and 57.5% for foreign ones — was unified at 35%. Bank interest rates were largely decontrolled and the stock market freed by replacing the Controller of Capital Issues with Sebi, and cleaned up by introducing electronic and demat trading. With more emphasis on private investors, government expenditure was slashed, subsidies reduced… While GDP naturally responded, the main change could be seen in private sector fixed investments rising from 12.3% of GDP to 17.5% in Dr Singh’s tenure as finance minister.

That was then. While UPA-1 saw the government badly hamstrung by the Left, it remains an open secret that the real opposition lay within, with Congress president Sonia Gandhi more interested in her social agenda. So while the anti-money-laundering Act was passed, as was the one to set up an airport regulator and an Act passed to formalise SEZs, greater attention was paid to the ones on rights for forest dwellers, rural employment guarantee and the right to information Act. The Bill to hike FDI in insurance was a casualty to the Left and the BJP and it’s not clear why the coal denationalisation Bill was never passed, considering it was the BJP that brought it in when in power. While pushing public-private partnerships as a means to get more investments was something UPA-1 deserves credit for — the NDA will argue the Delhi and Mumbai airport privatisation process was begun during its tenure — subsidy spending saw a huge jump, from 1.4% of GDP to 2.1% by the end of UPA-1.

Although UPA-2 saw more reforms, global growth going into a tailspin along with Sonia Gandhi’s inclusion agenda at centre stage, is what really finished Dr Singh’s reputation. So while FDI in retail was an obvious reform, this was allowed to be delayed by over a year with the industry ministry playing spoilsport. Nandan Nilekani ensured Aadhaar was a stunning success but it was never implemented seriously. While FDI in aviation was a grand success, what was pushed more aggressively was a land acquisition Act that delays land purchases, a food security Act that adds massively to costs and lowers the incentive to work, a right to education Act that forces the private sector to bear a large part of the government’s responsibilities. And till the fag end of the government’s tenure, the environment ministry has chosen to stop as many large projects as possible on the grounds of protecting tribal and other people’s rights.

If reforms took place in UPA-1 and 2, it was either by stealth or by force — credit rating agency pressure, for instance, has ensured the fiscal deficit isn't breached, and it was the rupee’s collapse that ensured CAD-control took centre stage. These were good moves, but not enough to restore Dr Singh’s credibility as a reformer.

And we haven’t even talked about the 2G and Coalgate scams on which Dr Singh’s amazing defence at his press conference was that he had always been in favour of auctions — no one asked him why, if that was so, he never pushed for it or resigned. The silence of the reformists at Dr Singh’s retirement press conference recalls the old adage about how it is better to go when people ask “Why” than when the reaction is “Why not?”

FM (1991-96): THE CHANGE AGENT

*Licensing abolished for all but 6 industries, number of industries reserved for PSUs also cut to 6

*Automatic FDI raised to 51% in 48 industries, 74% in 9 industries. In 1997, India got into the list of top 10 FDI destinations

* Peak import rates cut from 400% to 50% (avg falls from 80% to 40%), so export-to-GDP ratio doubles

*Maximum income tax rate cut from 56% to 30%, corporate tax rates cut from 51.75% to 35%

*Rupee made convertible

*SLR cut from 38.5% to 25%, CRR from 15% to 10.5%, interest rates decontrolled and PLR introduced, recognition rules for NPAs put in place, market pricing of GSecs

*CCI replaced by Sebi, electronic trading and demat introduced, sweeping capital market reforms

*Price controls abolished for many items, including iron & steel

*Private fixed investment rises from 12.1% of GDP to 15.6%

PM (2004-09): THE MAINTENANCE MAN

* Passed the SEZ Act in 2005, giving specific sops to both developers

and the units in them

* Accelerated PPP, achieved success through the model in airports

* Launched MGNREGA, guaranteeing 100 days of employment a year

* Created an airports regulator via AERA, 2008, to regulate tariffs

* Passed Forest Rights Act to protect the rights of forest communities

* Right to Information Act, 2005

* Brought down peak customs duties from 25% in 2004 to 15% in 2009

* Tax-to-GDP ratio raised from 9.2% in FY04 to 12.5% in FY09 through better enforcement using TIN, etc

* MSP raised 56% in wheat, 33% in paddy — good for farm income, bad for the overall macro and inflation

* Flagship programmes like Bharat Nirman, NHRM,JNNURM launched, meaning higher infra spend

* Nuclear deal with US signed, but troublesome fine-print remains

PM (2009-PRESENT): THE PLASTIC SURGEON

* FDI in multi-brand retail passed by Parliament, Tesco comes in

* Jet-Etihad deal signals dramatic opening up of Indian skies

* Diesel partially deregulated, cap on subsidised LPG cylinders

* Land Acquisition Act, which makes purchase very difficult, passed

* Food Security Act passed, which hikes subsidies dramatically

* Cabinet Committee on Investment to fast-track stuck projects, some success achieved

* Right to Education puts large part of burden of providing these services on private schools

* Aadhaar-based cash transfers begin, success in enrolment, but scheme hardly implemented

* Witholding tax on corporate bonds cut, FII debt limits raised in both GSecs and corporate bonds

* New Companies Act progressive

* Work begun on both DTC and GST, but political opposition ensures it does not get finalised