Millennium Post
Opinion

Cracking the 1991 myth

As C Rangarajan explodes the myth of the 1991 reforms being orchestrated entirely by IMF, the role of governments in altering a country’s economic fate gains precedence

Exploding the myth that 1991's big-ticket economic reforms were thrust on India by the International Monetary Fund, renowned economist C Rangarajan, one of the architects of the liberalisation process in India said, "The decision that we took to introduce reforms was entirely our own."

Assigning responsibility for initiating change to the Indian leadership of that time, C Rangarajan, former governor of RBI and chairman at the Prime Minister's economic advisory council, lent credit to then Prime Minister Late P V Narasimha Rao for his strategical thinking in couching reforms in a language that would appeal to the old guards of the Congress party by using an expression like the "middle-path".

Going deep into the genesis of reforms to answer some of the questions prevailing in the air, he said that the 1991 reforms were a continuation of the process that had already been put into motion in the 1980s. But it was a break from the past as the enormity of the economic crisis at that time was such that business as usual could not have determined the course of future action. "We had to move fast to make fundamental changes in our economic policy," he added.

As India approached the International Monetary Fund (IMF) for a loan to avert its balance of payment crisis, Rangarajan said that the multilateral institution was "very impressed" with the speed with which reforms had been undertaken. The IMF recognised India's intellectual prowess in macroeconomics as being very stable and credit-worthy. There were several decisions, including dismantling industrial licensing, that were not a part of the IMF programme. IMF was, however, in favour of promoting free trade and India too was keen to lift import restrictions prevalent at that time as they were not helping the economy in achieving greater numbers. Thereafter, the steps taken on exchange rates were "very bold".

Rangarajan's assertions are contained in a detailed book on India's relations with the International Monetary Fund, written by a senior civil servant V Srinivas, who has highlighted the growing relevance of China in the process of IMF's decision-making in recent years.

An IAS officer and additional secretary, Srinivas was the former advisor to India's executive director at IMF. He said that India's relations with IMF during 1991-2016 had provided robust insight into India's role as a founding member, apart from making a comprehensive study of how IMF has influenced the process of shaping the global economy.

Rangarajan said that the great merit of the Indian reform programme of the 1990s was that it was done without unnecessary disruptions. "We made a break with the past and followed it up with the gradualism."

India's economic performance clocking over 7 per cent growth on a sustainable basis has vindicated that economic reforms undertaken by India in 1991 were indeed on the right track, Rangarajan said.

He also said that the policymakers of the 1950s and 1960s in India cannot be blamed for the slow rate of growth at that point of time as there was no clear model available at their disposal to provide pointers on accelerating growth in developing countries. Only by the 1970s, it became clear that the model of state intervention on an extensive scale was not delivering as envisaged and, consequently, required a nudge. Our policymakers in the 1970s refused to recognise this even as China was preparing itself for a big change.

The 1991 policy objective was simple – to improve the efficiency of the system while emphasising upon making the economy truly competitive.

Yashwant Sinha and Gurupadaswamy of Janata Dal were among those who were critical of India's economic reforms in the Parliament in the early-1990s. Sinha, who became Finance Minister in the Vajpayee government, subsequently and vigorously pursued reforms and accused Narasimha Rao of unshackling controls on industries. He repeatedly said that Rao is "turning the clock back and undermining the very bedrock of economic development, which we have built-up".

The prime architect of reforms, former Prime Minister Manmohan Singh, while responding to the accusation during the budget discussion in 1991 which said that his reform budget would destroy the sovereignty of the nation and had been prepared at the behest of IMF, had said that the only way to protect the country's economic sovereignty was to deal with the causes that had brought us to this virtual state of bankruptcy.

Repudiating to the charge that the budget had been prepared at the behest of anybody outside India, the then finance minister said that "the budget has been prepared by us, it is our response to the situation that the people of India face and if we had not taken strong corrective measures to correct this fiscal distortion, I think we would be reneging in our responsibility as an effective government and I think that would be something which future generations of this country would never have forgiven us for".

Another renowned economist and former RBI governor, I G Patel, in a scathing criticism of the fiscal policy that had led to the balance of payment crisis, had said that it was the gravest economic crisis faced by India since independence and it was because successive governments in the 1980s chose to abdicate their responsibility to the nation for the sake of short-term partisan political gains and indeed out of cynicism. In as early as 1986, warning bells were sounded that India was heading towards a debt trap.

As the Modi government presents its first budget in July after a thumping victory in the general elections, the Indian economy is at crossroads. There are major economic challenges like unemployment, farm distress, growing bad debts of banks and a slowing economy. Bold initiatives are needed like those of 1991.

Srinivas, in his book, said that IMF has pointed out that the Indian financial sector is facing considerable challenges of high non-performing assets. India's key banks appeared resilient but the stress tests showed a group of public sector banks being highly vulnerable to further declines in their asset quality with higher provisioning needs.

The 2016 Insolvency and Bankruptcy code introduced a modern framework to deliver progress in the process of NPA resolution, Srinivas said, adding that the government has announced a recapitalisation plan for public sector banks and also sought consolidation across several PSBs.

The fund has supported Indian policy initiatives on recapitalisation and bankruptcy code but, at the same time, it felt that there should be greater regulatory autonomy to Reserve Bank.

It is clear that there are some warning bells in the economy as was the case in the 1980s and one only hopes that corrective measures are taken by the incumbent government in the upcoming budget to ensure that the economy is not driven to the wall as it was in 1991.

(The views expressed are strictly personal)

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