As a top official of the dirigiste regime of the 1970s which in Narasimhams words was perhaps the most regimented economy outside the communist world he recognised that the system had led to inefficient allocation of resources and encouraged corruption. Unlike the popular notion that the economic reforms were initiated in 1991, Narasimham was one of the thinkers who, in the 1980s, felt that the basic underlying logic of economic policies needed to be reconsidered. Reflecting this early recognition of the problem, Narasimham was assigned the task of chairing the committee on a shift from physical to financial controls. The report recommended industrial delicensing, and replacement of quantitative import restrictions through an appropriate tariff regime. The reforms of 1991 trace their ancestry to the recommendations of this committee.
As far back as in 1984 while delivering the Sachin Chaudhuri Memorial Lecture on Some Thoughts on Planning (Chapter 3 ), Narasimham emphasised that a poor country cannot afford capital inefficiency. He argued that we are not doing justice to those who provide savings by abstaining from an already low level of consumption. Here is a strong message to the policymakers who virtually disdain at savers and are ever ready to punish them .
In January 1990, Narasimham delivered the LK Jha Memorial Lecture under the auspices of the Fiscal Research Foundation (Chapter 16). He argued that to contain the monetary expansion induced by deficit financing, credit policy has to come down harshly on the more productive sectors. He felt that regulation was perhaps necessary at an earlier stage of development when the money and capital markets were somewhat inchoate, but it has the danger of resulting in over regulation. He called for a review of the administered interest rate structure. The subsidisation of credit to the priority sectors was a case of misplaced emphasis as it is timely and adequate credit, rather than its cost, which is more important. He, therefore, called for an early implementation of the key recommendations on interest rate policy by the Chakravarty committee on the monetary system.
It should have been no surprise that the government of India requested him to chair the Committee on the Financial System (1991). While the committees report bears the imprimatur of Narasimham, readers would find the Purshotamdas Thakurdas Memorial Lecture (Chapter 17) exhilarating as he sets out, in his inimitable style, the rationale of the committees report. While advocating greater autonomy for banks and financial institutions, Narasimham advocated a system of rewards and punishment: an issue which is pertinent even today. It is our sheer reluctance to take adverse action on incipient violations of the regulatory framework which encourages flagrant violations. He argued that while government could remain owner of banks, it should refrain from being the regulator and manager. The government has yet to come to grips with this issue.
Narasimham was once again called to chair the Committee on Banking Sector Reforms (April 1998) and in various lectures he outlined the rationale of the committees approach. At an address at Assocham (July 1998) he stressed that there should be no further recapitalisation of banks. While this message appeared to have gone home to the authorities, in the recent period there are ominous signs of the government going back to its bad old ways on recapitalisation. Narasimham makes the pertinent point that no system can be better than the people manning it. He, therefore, called for merit based assessment in the promotion system and that wage negotiations should be at the bank level. On the issue of mergers, he cautioned that one does not strengthen the weak by weakening the strong: a caution which should be taken note of while examining the recent suggestions of a holding company for the entire public sector banking system. On the issue of unviable banks, he advocated euthanasia after taking care of the depositors and labour.
It is often argued that if we allow some banks to die, we would tear the social fabric of society. It is unfortunate that the authorities have refused to bite the bullet. If drastic steps are impossible, the least would be to allow staff attrition through the natural course of retirement and strictly not replace them. Simultaneously, a transparent system should emerge wherein the deposit taking activity would require an open statement approved by the supervisor of the performance of the bank vis-a-vis key parameters; if nothing else, this should wean depositors away from the weak banks and euthanasia would be humane and at least cost. In Narasimhams words: No reform can indeed be painless. We have to appreciate that the quest for competitive efficiency will take its toll of the weak and the inefficient. These pains, however, are a necessary foundation for the emergence of a strong and viable financial system which will conform to best international practices and make its distinctive contribution to the furtherance of our national objectives of growth, justice and external viability.
In this short column it is virtually impossible to do justice to the vast expanse of ideas set out by Narasimham which apart from financial reforms covers planning and development and dimensional aspects of reforms particularly in the real sector. It is difficult to encapsulate the richness and expanse of these lectures and the repeated pleas of government that Narasimham pilot the drawing up of road maps in important areas of reform bear testimony to his invaluable contributions. Readers with any interest in economic policies and reforms would do well to possess this volume which, in a sense, is a salute to Mr Narasimham who can best be described as a national living treasure.