If you repeat a point often enough, it will, sooner or later, become a fact.
This seems to have happened with the story of India’s tryst with economic reforms. Repeated over and over again in the last two decades, most people in the country have come to believe that economic reforms began in 1991-92, when India was in the throes of one of its worst economic crises.
Responding to this challenge, the minority Congress government, despite severe political opposition, first mapped out and then implemented the economic reforms.
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There are two problems with this theory. One, it is too pat. Second, and more importantly, it denies a simple maxim of history: Continuity with change. The moment one accepts this logical view of history, the cast changes and so do the credit lines.
Contrary to popular perception, India took its first baby steps in the direction of economic reforms in 1980-81. Seen this way, India’s reform process is actually three decades old; it also adds some unlikely names to the cast, such as Indira Gandhi—a populist and until the 1970s, ideologically Left-leaning.
To be fair, it was not the first time that Indira Gandhi was toying with the idea of economic reforms. She did dabble with them in the late 1960s, when the country was besieged by an economic crisis and had to approach the International Monetary Fund (IMF) for a loan. The clumsy attempt by the US to leverage the loan to push its foreign policy agenda with India and the domestic political fallout after the loan conditions were leaked resulted in the move being aborted.
Around the same time in 1969, Jagdish Bhagwati and Padma Desai published their seminal work India: Planning For Industrialization: Industrialization And Trade Policies Since 1951, severely critiquing the industrial growth strategy adopted since the country attained independence, and argued that it was devoid of economic rationale. Through the 1970s, this theme came back to haunt the country as it lurched from one crisis to another.
Eventually, when a more mellow Indira Gandhi returned to power in 1980, she hit upon the strategy of approaching IMF for a fresh loan, but with the caveat that the loan conditions would be homegrown. That is: economic reforms would be initiated voluntarily by India and would be consistent with the loan conditions, a clever strategy politically.
She formed a close-knit policy team, made up of finance minister R. Venkataraman, governor of Reserve Bank of India (RBI) I.G. Patel, executive director to IMF M. Narasimham and former RBI governor L.K. Jha. Assisting them were Manmohan Singh (then member-secretary, Planning Commission), Bimal Jalan and Montek Singh Ahluwalia (officials in the finance ministry), who would play a key role in the second phase of reforms from 1991-92.
Close-knit team: Montek Singh Ahluwalia (left) and Bimal Jalan. Ramesh Pathania / Mint
The Sixth Plan (1980-81 to 1985-86) evolved as India’s economic reform strategy and the IMF loan was conceived as a part of it. So when it approached IMF for a loan, there was hardly any opposition, excepting from the US—which eventually abstained from the final vote, approving a $6 billion (Rs27,840 crore today), the largest ever, three-year loan to India. Indira Gandhi and her team also ensured that all the more stringent elements, such as reduction of import tariffs and delicensing, were back-ended. Once again, an adroit move to mitigate political damage; in fact, after the economy recovered, the government exited the loan programme a year ahead of schedule and also avoided implementing those difficult reform measures.
Even though economic reforms had made their advent, the politician was reluctant to embrace the process, giving rise to the strategy of “reform by stealth”. The vision was there, but execution was incremental.
Take, for instance, the long-term fiscal policy—one of the most seminal ideas in the country’s modern economic history— articulated in V.P. Singh’s 1985-86 budget. It was an idea that first took flight during the end of the last tenure of Pranab Mukherjee as finance minister in 1984.
The first seeds of public sector overhaul were laid during Rajiv Gandhi’s tenure, when he spun off the Delhi and Mumbai telecom circles to create Mahanagar Telephone Nigam Ltd. He later employed Sam Pitroda to launch a telecom mission and set up the Centre for Development of Telematics—they were governed by less stringent rules than other public sector undertakings. Similarly, RBI was systematically exploring ground on financial sector reforms—the blueprint was laid out in the 1985 report of the committee to review the working of the monetary system under the chairmanship of Sukhomoy Chakravarty.
What the 1980s did was to systematically effect a change in the mindset of the country even as the economic situation continued to deteriorate largely due to a reckless fiscal policy financed through overseas borrowing, which eventually led up to the balance of payments crisis in the beginning of the 1990s.
By then, the initial ideas put out by the core team around Indira Gandhi had been fleshed out sufficiently and the arguments for glasnost in the country’s industrial policy framework were becoming bolder and more articulate.
So when P.V. Narasimha Rao took charge as the next prime minister and appointed Manmohan Singh as finance minister, the duo knew what had to be done.
The call was more for Rao to make: whether politically the country was finally ready to bite the bullet in earnest. Using the Teflon-like image of Manmohan Singh, Rao moved ahead. The two together, in a span of six months, implemented the blueprint. The scale of change was so dramatic that it is often assumed that this is where it all began.
What the 1990s did was to bring the politicians and thereby the rest of the country on board the reform process. This was made easier by the fact that there were several coalition governments that included politicians of all hues, bringing about an informal consensus. Economic reform became a way of life, but unfortunately did not lose its elitist tag.
The Congress-led United Progressive Alliance has succeeded in reversing this by once again giving a clever tweak to the reform logic. It first showed that it cared for those who were not equipped to benefit from the unprecedented surge in economic growth in the country by setting up what is probably the world’s biggest social safety net—the Mahatma Gandhi National Rural Employment Guarantee Scheme. It linked its ability to fund this and other social sector spending programmes to sustained growth—not possible without more reforms such as an accelerated disinvestment of public sector undertakings.
It is an interesting quirk of historical coincidence that Mukherjee, who was at the helm in the early 1980s, has returned to North Block as finance minister in what will be the fourth decade of economic reforms—which should see India introduce the single goods and services tax and a direct tax code, something that would mark the culmination of the tax reforms process.
Reaffirmation of the maxim: Continuity with change.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics.
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