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Indira Gandhi’s legacy of economic reforms

Indira Gandhi’s legacy of economic reforms
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First Published: Mon, Oct 26 2009. 12 33 AM IST

Updated: Mon, Oct 26 2009. 12 33 AM IST
On 31 October, the country will observe the 25th death anniversary of Indira Gandhi—a key link in the Nehru-Gandhi family’s legacy over the leadership of modern India. Her assassination will be remembered differently across the country.
Understandable. Gandhi’s death triggered one of the worst riots in modern memory that left many thousands, predominantly Sikhs, dead and injured. I was studying in Delhi University at that point of time and was an eyewitness to this terrible slur on the city where I was born and raised. The Congress party has never really been able to live it down.
Gandhi’s legacy has largely been remembered, at least by her critics, in the context of her decision to bring the country under Emergency rule in 1975 to retain political power and the bloody riots that broke out after her 1984 assassination. It is my sense that a lot of newsprint and air time would be devoted to these aspects this week.
Instead of adding to this deluge of information and commentary, Capital Calculus will seek to shine the mirror of history on a lesser known aspect of Gandhi’s legacy: laying the foundation of economic reform. Something that has had a far more enduring legacy.
This may seem counter-intuitive when seen in the backdrop of Gandhi’s very strident populist image. After all, populism and economic reform do not go together. Further, anecdotal history and writings by lead commentators, in the last decade, have led most of us to believe that economic reforms actually commenced in 1991. By crediting Manmohan Singh, the then finance minister and a technocrat, for managing the reforms, one has also disengaged the politician from the process. Think again. Could reforms have ever happened without political support? Absolutely not.
It is to the credit of the politician that this image was conveyed so successfully, using Singh’s personality as a technocrat who is honest and non-controversial to win popular support for a game-changing policy.
A more astute reading of modern economic history suggests two things. Firstly, if one was to look for a cut-off date as to when big-ticket economic reforms took root, then it is 1980—when Gandhi was returned to power after a three-year break of the Janata Party misrule. Secondly, it also highlights the simple point that Indian economic history has always been continuous and not something that moves in discrete jumps. This is because it follows the simple maxim: change is constant.
The context had been set in 1979 with the onset of an external sector crisis triggered after the second oil shock. By the time Gandhi regained power, the situation was rapidly deteriorating. There was no option other than to approach the International Monetary Fund (IMF) for assistance. Eventually, a loan came through—around $6 billion (Rs27,900 crore today), at that time the largest to any developing country, to be disbursed over a three-year period and in three tranches—in November 1981.
To mitigate the political damage of depending on the IMF, in which the then unfriendly US wielded unchallenged clout, Gandhi did two things. One, her government unravelled the 6th Plan (1980-85) that essentially promised to undertake a series of measures designed to improve the economy’s competitiveness—which meant fiscal reforms, revamp of the public sector undertakings, reductions in import duties and delicensing of domestic industry (wherein the government determined and allocated production capacities in each sector and company).
Second, negotiators in Gandhi’s government back-ended the associated conditionalities towards the end of the IMF loan programme.
Gandhi was able to defend her government by arguing that the IMF loan conditions specified exactly what the country had sought to do itself as laid down in the 6th Plan. In any case, the conditions were to kick in only towards the end of the loan programme.
By that time, the economy recovered and her government decided to exit the loan programme in 1984 and in the process also avoided implementing an IMF reform programme. Gandhi was shrewd enough to realize that the country was not prepared for such a rapid structural transformation.
Though the programme ceased to bind India, the process of reform had already been initiated. Not surprisingly, therefore, if you look back, the biggest reform initiatives came immediately after. Revamp of the public sector was kicked off by spinning off the telecom circles in Mumbai and Delhi into separate corporate entities under Mahanagar Telephone Nigam Ltd in 1987; the Long Term Fiscal Policy, 1984, which is the basis of all tax and fiscal reform; selective delicensing of industry. And, it was Yashwant Sinha in his aborted 1990 budget who first formally referred to public sector disinvestment.
To sum up, then, economic reform, as we know of it today, was first initiated in 1980-81 and then accelerated at an unprecedented pace in 1991. That she laid the foundation is, to me, the laudable part of Gandhi’s legacy to this country.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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First Published: Mon, Oct 26 2009. 12 33 AM IST