As the finance minister in the short-lived regime of prime minister Chandra Shekhar—led regime in 1990-91, Yashwant Sinha saw the build-up to the country’s economic crisis, that eventually triggered an accelerated phase of economic reforms. Subsequently, he returned in 1998 to take charge as finance minister during the tenure of prime minister Atal Bihari Vajpayee. A former bureaucrat in the Indian Administrative Service, which he quit in 1984, Sinha will turn 70 this November. At present, he is a Rajya Sabha MP from Bihar and still takes a keen interest in the economy as a member of the Standing Committee on Finance. Clad in a starched khadi kurta pajama, Sinha spoke last week to Mint’s Anil Padmanabhan at his home in Lutyens’ Delhi on a range of issues. Edited excerpts:
What is your sense of the state of the economy?
The factors that have enabled the economy to grow at this fast pace are in danger today. Therefore, medium and long-term outlook of rapid growth appears to be under risk. Very few people have actually analysed the reasons for the India growth story. My own take is that India’s growth story is largely explained by consumer-demand-led growth. This has been unleashed because of a low interest rate regime that we ushered in. For six years under the National Democratic Alliance (NDA) regime we lowered the administered interest rates from a high of 13% to about 8%. This very sharp reduction in interest rates had its impact on government’s fiscal deficit and on overall demand in the economy. Secondly, the lowering of interest rates, and consequent boost to liquidity, also triggered a housing revolution in the economy. This has had its own multiplier effect on the rest of the economy. Consequently, the economy started to pick up a growth momentum. Thirdly, we paid attention to infrastructure, and the national highway project has been a major contributor to the growth story. If this analysis is correct then those factors must remain in place if the growth rate is to be sustained. That appears to be threatened today because of rising interest rates. We seem to be back to the old regime of high inflation and high interest rates. I personally consider this to be the bane of the Indian economy.
How do you resolve the dilemma of growth versus inflation?
The government does want to contain inflation and push growth at the same time. Here the nature of the economy should be understood. The inflation rate is not because of increase in money supply. Just as administered interest rates determined the market interest rates, similarly the supply side of essential commodities determines price rise. If we can’t manage supply side properly, we will have inflation of the kind that we are witnessing right now. Let me tell you that we had even higher inflation in the early part of 2004-05—and was 7-8%. But, one did not see the kind of distress in the rural areas and impact on the aam aadmi as we see today. This was because that inflation was led by manufactured products and now it is because of essential food items. It is not that suddenly the demand for wheat, dal (pulses) or any other essential item has gone up. Instead, it is because the supply of these items is in danger.
Again I would like to go back to 2002, when we had the worst recorded drought in our history. And, foodgrain production declined by 30 million tonnes. But because we had very large stocks the impact of this drought on foodgrain production was minimal. Under this government, the public distribution system is not working. Offtake has gone down because the government has not been able to procure enough foodgrains. The reluctance to be liberal with release of foodgrains through PDS has put prices under pressure. It is not so much the increase in money supply as the mismanagement of supply that has caused the current inflation.
What are your expectations?
Taking a macro view of the economy, it will be difficult to continue with the same growth in housing, consumer goods and infrastructure sector in the face of rising interest rates—the Reserve Bank of India has triggered another round on 30 March. I am not finding fault with RBI. They are a technical body and looking to tighten liquidity to curb inflation. That is the only thing they know; they have no jurisdiction to improve the supply-side of the economy. What I am trying to say is that this phenomenal rise in interest rate, from 6.5-7% in 2002-03 to over 11-12% now, will have an impact on the economy.
Is it all about economic mismanagement?
Yes. The economic managers seem to have only one mantra—the same that they tried in 1994-95. The parallel is too strong to be ignored; both politically and economically. If you go back you will see that the economy was on an upswing, but the Congress party was losing elections in state after state. And the then finance minister (Manmohan Singh), who is today’s Prime Minister, came under political pressure to do something about inflation—which was identified as the main cause for defeat. He did exactly what is being done now. It was that squeeze which brought the Indian economy down to a lower growth path.
If you were the FM, how would you address the problem?
I would say that we are much better off in terms of growth today than we were in 1994-95 or in 1998-99 when we faced inflation. Government coffers are in a very happy state. Secondly, our foreign currency reserves are at an all-time high. Other countries manage their inflation through imports. Shortages are something that can be anticipated. How come there was no shortage of LPG (cooking gas) in our time? In many places now people have to queue up. Nothing has changed: It is still subsidized and there has been no price increase. It is just mismanagement. Take wheat for instance—I am glad that the government has decided on a bonus or Rs100. This is exactly what I had said in Parliament (during the debate on the general Budget). Minimum support price has two functions—one is support the farmer and the second is to buy for PDS. If you find that you can buy cheaper abroad, then do so. And do all this in good time. I would have paid attention to the supply-side: Used the (foreign currency) reserves to encourage imports—both by the private sector and government agencies—at competitive prices. Ensured that the PDS functioned normally. At the same time, I would have dealt with foreign currency inflows in a manner without adding to money supply. Then there are some other unpopular political steps, which the government of the day has to take. One, is the petroleum price hike. Also, the government has done great disservice to the economy by not passing on the petroleum price hike. Secondly, don’t waste money on populist schemes. NREG (National Rural Employment Guarantee Scheme) is a loot.
Why is NREG a loot?
Muster rolls are manipulated and all kinds of things are happening.
Do you think this is leading to the emergence of a new political class in rural India?
It is certainly adding to the muscle of the new tier—a politico-economic class has already emerged in rural India, which is profiteering on these amounts of money being spent on rural areas. Unfortunately, it is not a group of beneficiaries, but pure contractors. And, there is a complete nexus between officials and this politico-economic class.
Would the BJP extend support to push reforms through Parliament, assuming that the Congress party would make such a request?
There are many reforms that were started in our time and the legislation on them is still pending. When we were in power we reached out to the Congress. We could not have passed the Insurance Bill in the Rajya Sabha without the support of the Congress. We accommodated their concerns and moved on. In fact, it was at the insistence of the Congress that it (foreign direct investment) was capped at 26% and not 49%. We had no option but to accept their demand. Now, wisdom has dawned on them and they are saying that it should be 49%.
The question here is not whether we will extend support. Instead, the question here is: Will the government ask for our support? You can’t give your support without being asked for it. This coalition is in such a bind that it is not even in a position to ask for our support. Because the moment they ask for our support to pass the Bills in Parliament—in the teeth of opposition from the Left parties—then this government will go.
Was coalition management different in your time?
Let me give you an example. DMK was our partner in government. (Atal Bihari) Vajpayee was able to get them to go along on several reform measures, including privatization. Why has the DMK suddenly emerged as a champion of the public sector and opposed privatization? Because they perceive this to be a weak government with a weak Prime Minister.