Rajesh Bhayani: Reforms then and now

The PM admitted that the economic situation is worrisome but he has not admitted that his government's policy paralysis is responsible for the current state of affairs supplemented by the series of corruption scandals

Prime Minister Dr Manmohan Singh’s silence is much different than the silence of his ex-boss P V Narasimha Rao, the then PM under whose leadership (1991-1996) he implemented reforms programme. Rao was also well-known for his silence but he managed to carry his government for five full years with the support of coalition partners and was much less controversial. His government didn’t get a second term though. However, Manmohan Singh got the fame, glory and reputation during that period which helped him become the PM for two successive terms now. He broke his silence last week when he addressed the nation after taking decisions of opening up retail trade for foreign investors in multi-brand segment.

To justify his government’s decision to allow foreign direct investments (FDI) in multi-brand retail and the diesel price hike, he said the country was facing a grave economic situation similar to one seen in 1991, which has compelled the Congress-led coalition to implement reforms. He seems to be trying to get sympathy of all stakeholders for not doing anything for a long period of time, justify his silence and get support after the political mess that was sure to come as Mamata was waiting to withdraw support.

At the time of the 1991 reforms, the country had seen four PMs in two years. Rajiv Gandhi lost the 1989 election, V P Singh had to step down due to internal quarrels and vacated the seat for Charan Singh and then Chandrasekhar became the PM who mortgaged gold in the international market to raise foreign exchange. But in June 1991, the Congress-led coalition government came to power and implemented the first wave of reforms.

Crude oil prices are much higher and the rupee is much weaker today than in 1991. The current account deficit too has deteriorated from 3% in FY91 to 4.2% while the GDP growth for the first half of 2012 was 5.4%, about the same as 5.3% in 1991. However, India still enjoys investment grade rating from international rating agencies which was not the case then. The fear of downgrading India’s sovereign rating to junk is forcing the Manmohan Singh government to implement fresh reforms measures and justify measures like allowing FDI in multi-brand retail. Perhaps, for the first time in the recent past, the government is taking cognizance of the ratings downgrade danger.

A reality check suggests that the ground level situation is much better today. Economic cycles will keep changing but the industry is much more mature, enterprising and forward-looking now. Education and job opportunities are much greater and trade practices and banking are much more transparent now. Pre-1991 when provisioning and capital adequacy norms were not there, banks were paying income tax on loan interests which they were not able to collect along with principal. Everything was controlled by the government and there were no independent regulators for most markets or industries.

The new rules had led to chaos after reforms were implemented in 1991 and the measures taken had much more serious implications. Several professions and businesses were adversely affected as reforms progressed. Some of these people who couldn’t adapt went out of work. Even in trade, several commodities had more than one layer of brokers for selling raw material from producer to consumer, which was reduced to just one after value added tax system introduced in excise tax.

In his speech, the PM admitted for the first time in recent years that the situation is worrisome but he has not admitted that policy paralysis of his government was responsible for the current state of affairs supplemented by the series of corruption scandals. Instead he drew attention towards the 1991 crisis.

Well, his government now seems to be taking more and more action and one can only hope that talks of decisions will be translated in giving them legal shape. Several of these decisions will require the Parliament approval and that will not be easy.