In the past three decades the world has changed and so has the paradigm of reforms. India launched its momentous economic reforms under the shadow of a severe economic crisis 30 years ago. The forex reserves were running so low that it could hardly cover two weeks’ imports, and inflation was close to 17 per cent.
India had no option but to go to the IMF for a loan to bail itself out of the fiscal mess. The negotiations with the IMF had started during the brief Chandrashekhar regime with Yashwant Sinha as Finance Minister. This short-lived government collapsed when the Congress, which was providing outside support, pulled the rug.
The reforms were enacted not only under the backdrop of a serious balance-of-payments crisis but also a political one, a fact that is often not acknowledged. Between late 1989 and mid-1991, the country was going through a period of acute political instability with two Third Front governments collapsing at the Centre.
In late 1990, the BJP, which was providing outside support to the VP Singh government along with the Left, decided to turn up the heat on the Ramjanmabhoomi issue. LK Advani, the then BJP President, embarked on a Rath Yatra from Somnath to Ayodhya, leaving behind a tragic trail of bloodshed. VP Singh’s decision to implement the Mandal Commission recommendations to implement reservation in education and jobs for OBCs led to a backlash from the upper castes.
This situation was further exacerbated by the tragic and gory assassination of former Prime Minister Rajiv Gandhi in the midst of the 1991 Lok Sabha elections.
When Congress formed a minority government after the elections, PV Narasimha Rao was a surprise choice for the Prime Minister’s post. He was acutely aware of the economic crisis and the need to approach the IMF for a bailout. He shrewdly wanted a technocrat for the post of the Finance Minister, knowing well that the IMF loan would come with the condition of reforms and opening up the economy, which was fraught with political risk.
Rao’s first choice for the Finance Minister’s post was economist IG Patel. It was only after Patel turned down the offer that Rao turned to Manmohan Singh.
Manmohan Singh was assisted by bureaucrats and advisors such as Montek Singh Ahluwalia, S Venkitaramanan, and C Rangarajan. Guiding the reform process was the concept paper written by economist and academic Jagdish Bhagwati, a long-time proponent of reforms.
Rangarajan, in a recent newspaper interview, recalled how the vehicle in which the pledged gold sent to Britain was being transported to the airport developed some technical snag adding to some last minute drama. Ahluwalia in another newspaper interview recalled how the new trade policy, where import tariffs were slashed across the board, was formulated in just eight hours, with Finance Minister Manmohan Singh, Commerce Minister P Chidambaram and Ahluwalia all working in tandem.
The early backlash
There, of course, was a lot of opposition to reforms both within and outside the Congress Party. Within the Congress, the leading opponent was Arjun Singh. The Left was, not surprisingly, vehemently opposed to it and so was the BJP. But with the collapse of the Soviet Union and Communism in Europe, the Left was running out of steam.
Economists KN Raj and Pranab Bardhan had both candidly said then that it was time the Left shed some of its ideological baggage. But consensus over the necessity for reforms gradually picked up. When the United Front government succeeded the Narasimha Rao government, its Finance Minister was none other than Chidambaram whose maiden Budget, with its reformist thrust, was hailed by the industry captains as a ‘dream Budget’.
A rocky path
It took a while for the reforms to take root and show results on the ground. It was only in the early 2000s that growth started really picking up. But in the interim what reforms successfully did was to create an aspirational middle class, a huge constituency for reforms, which got used to the consumerist goodies that reforms ushered into the country. The IT boom, and the jobs it created, was very much a child of reforms.
The first jolt came with the global financial crisis in 2008. China and India valiantly batted for globalisation and open economies when the West was slowly beginning to turn inward. But after 2011, corruption scandals and runaway oil global prices led to a ‘policy paralysis’ in the UPA-II government and growth started faltering.
Narendra Modi came to power in the summer of 2014 with huge expectations of pushing forward reforms. But Modi has been cautious on that front, carefully mixing reform with welfare measures, a tactic not very different from that of the UPA’s. Growth since 2017 has spluttered with private investment continuing to be anaemic. The pandemic dealt a further blow.
There is now a consensus among economists that the next generation reforms must focus on regulatory and governance aspects, which are harder to implement. Here health, agriculture and power reforms are vital and since all three are States subjects, the role of States come to the fore. The heat and protests generated over the agricultural reform Bills passed in Parliament shows that it is an area best left to the States.
Future tense
But the world today is a very different from the one that existed three decades, when there such euphoria of Communism being defeated and the liberal ideology, both in the political and economic realm, having triumphed resoundingly. Today the world is more divided, fractured, and less certain of itself. The West has grown weary of multilateralism and the pathetic state of the WTO today, launched with much fanfare in early 1990s, is proof of this.
China is now coming down hard on its tech billionaires and the regulatory changes there are sending jitters to investors. ‘Socialism’ has once again returned there with little tolerance for the excesses of capitalism. In India, who would have thought that the long forgotten shibboleth of self-reliance will come back under the guise of ‘Atmanirbhar Bharat’?
For the near term, recovering India from the Covid wreckage and returning to the growth path will be the immediate priority for the government. Governance reforms will have to wait for another day.