At an e.Adda held recently, NK Singh, Chairman, 15th Finance Commission, spoke on financial and banking sector reforms, being active partners in the gains of trade, privatising state-owned banks and his book Portraits of Power: Half a Century of Being at Ringside
P Vaidyanathan Iyer: In your book, you talk about the Westminster model of parliamentary democracy being de facto replaced by the presidential model…
NK Singh: The Westminster model is based on one central principle — the Prime Minister is the first among equals. The moment this is altered, you’ve altered the gene particles of the model. After all, votes are garnered and elections won on the basis of who is going to lead the country; what matters to the voter is who is more likely to deliver on the aspirations. If not de jure, then de facto, it is this unsettled equilibrium, in which the Cabinet Office increasingly takes the traditional role, namely the Cabinet Secretary is the secretary of the council of ministers. The Secretary to the PM is to carry out the orders and initiatives of the PM. Chief Ministers have also adopted a similar model. So, it is the changing voter psychology all over the world, which has been the most important guiding factor in moving away from traditional models of governance.
The pandemic has demonstrated one more thing, namely, the very important role of a central unifying factor in being able to work out social security systems. You may have to, in fact, write a new social contract.
Anant Goenka: In your experience, the autonomy given to bureaucrats and the strength of democratic institutions — in which of these models do democratic institutions thrive?
NK Singh: We need to opt for a hybrid between the two. The permanent bureaucracy is the most important institution, particularly in a federal polity like ours. It lends permanence to any volatilities and uncertainties in the governance rubric , fearlessly being able to put across their point of view, leaving the policy options to the political masters. In this framework, of course, there are other questions — does meritocracy always pay off in the changing dynamics, besides other factors that come into play.
Anant Goenka: There is this notion that coalition governments have actually delivered more reform. Do you subscribe to that view?
Shankar Acharya: I’m not sure that we have got enough data points to really come to a definitive view. Two of the best periods for economic policy were the Narasimha Rao government years — from 1991 to 1996, and the Vajpayee years from 1998 to 2004. Both of them were coalitions. But do you agree with my possibly rather bold characterisation that two of the richest periods for good economic policy were the Narasimha Rao years and the Vajpayee years. This essentially spanned almost 13 years, with a hiatus in between. And what do you think are the things that we should have done better in those 13-14 years, by way of economic policy?
NK Singh: Suppose we asked ourselves, in case the Narasimha Rao government had been what it was, how much of those reforms were acts of conscious choice, as products of compulsion? I wonder what the reply would be. We seem to be a nation acting with an amazing amount of coordination in moments of crisis but then complacency sets in. The Vajpayee government being the first BJP government, which followed thereafter, wanted to naturally prove, both on the economic and the political side, what he had inherited. So on the political side, he took the audacious step, notwithstanding sanctions which it invited, of India becoming a nuclear power. Equally on the economic side, he continued with some far-reaching economic reforms, which were left somewhat incomplete in from 1991 to 1993.
To your second question, what did we fail to achieve in the 13 years? Well, again, I want to raise the issue that you and I know, which is that we got out of the fund bank arrangement in 1993. We got off rather lightly. We felt no compulsions to undertake other reforms — structural reforms, reforms in factors of production, in terms of land and labour, financial sector reforms that went on a backburner, which haunt us even today. Issues of labour reforms that continue to be elusive, land has become more complicated, and issues of social reforms, in terms of education and health also did not take priority. Therefore, in the 10 years, where Dr Manmohan Singh, who had led these reforms as Finance Minister, became the Prime Minister, on many of these was far less satisfied.
Shankar Acharya: To a large extent what happened from the ’90s and continued in the 2000s was essentially an opening up of the Indian economy. In the last two to three years, some of our actions appear to have been reversing course, whether it comes to increasing tariffs on goods from abroad, whether it comes to not engaging, as we perhaps might have in the Regional Comprehensive Economic Partnership with the rest of Asia. Now, to me, this is disquieting. Is this a worry that you share?
NK Singh: Who can disagree that countries which seek to grow at seven-eight per cent or more must really use trade. Our second issue is, has the world increasingly become more protectionist? Multilateral institutions, including the World Trade Organisation, are languishing. Now, I would like to believe with you that this is a transient phase. And I would like to believe that we will go back to what common sense would tell us, namely the importance of trade and trade policies, and making once again, trade as an engine of growth. We will have to wait for perhaps January to see how the new policy framework by the United States, in this particular way, pans itself out. Your third important point was that should we not look at trading arrangements with nations where the benefits will be significant? I think that there it would be somewhat naive to forget that geopolitics has an important role to play. While certainly we cannot afford to be a protectionist country, we need to be active partners in the gains of trade.
P Vaidyanathan Iyer: Proximity to corporate or industry leaders is still seen as something which politicians or bureaucrats want to keep away from.
NK Singh: Corporates have easier access to top decision making much more freely than it was in my time. This is because there is a greater and easier relationship between them. Also, as we move away from direct controls into the regulatory framework, you have independent regulators in a whole host of activities.
P Vaidyanathan Iyer: In the book, you talk about bank nationalisation during Indira Gandhi’s time. We have come a long way. Do you think we have done enough in banking or financial sector reforms?
NK Singh: I feel we have not done enough on banking and financial sector reforms. For instance, trying to give greater autonomy to banks, the fact that the Insolvency Bill was a very major step, the exit process, the culture of ‘evergreening’, which many banks had begun to follow, has come to wear off. But if you want to ask the question, have we allowed the freedom and flexibility for new entrants to come to the banking and financial sector, the answer is that this was a can kicked down the street. When the crisis of 1991 had come, we appointed this Narasimhan Committee Report, which Shankar was very connected with and then the second version of that. But I don’t think that the reforms which have been undertaken are something which really are the best for 21st century India.
P Vaidyanathan Iyer: If you were the Finance Minister today, what would be the things on the agenda for banking reforms?
NK Singh: Well, first and foremost, to complete the ongoing reforms, which are there — which is really, banking amalgamation. Then the Indradhanush programme. The main ingredient of that programme needs to be completed in a significant way. We need to have greater accountability of shareholders, we need to accord the banks the necessary autonomy, and then look at rules of transparency and how space can be given for new entrants, who can add to the competitive efficiency of financial intermediation.
Shankar Acharya: I’ve long felt that our experimentation with essentially a public sector-owned banking system dominantly, which is still the case 65 to 70% of the total number of assets and liabilities, are held by government banks or government-majority owned banks and it hasn’t really worked. I think that no government, so far, has really bitten the bullet. I think the nearest we came was during Vajpayee’s tenure when, if memory serves me right, in the finance ministry, a bill was drafted, which would have amended the relevant banking legislation in a way that the minimum 51% ownership would be reduced to 33%. That’s the closest we’ve come to what I would regard as the desirable outcome. Nothing can be done overnight. Let’s be realistic. It’s not an easy process. But I think the time has come because otherwise we know the cycle. Three years down the road, you know, we capitalise again.
NK Singh: That’s the closest we came, it was at the time of Mr Vajpayee and I must complete the story, because then, there was huge opposition from the Congress party… but who can disagree that the path forward would be at least in the case of one or two banks to move forward, to do away with the kind of present ownership structure, which we have inherited from a decision (of bank nationalisation) and if you look at, historically, maybe that decision may have served its purpose and we need to move on.