Q&A: P Chidambaram, Home Minister

P Chidambaram, the current home minister and a principal actor in the rollout of the economic reforms of 1991, recounts to Aditi Phadnis how the government did it. Edited excerpts:

It was around this time 20 years ago that your government started the process of economic reforms. Can you recall those days?
I was the commerce minister. The first set of announcements of a revamped export-import policy were made on July 4, 1991... just 13 points, part of the first set of measures towards a new trade policy. On July 24 morning, the government announced a new industrial policy resolution, and in the evening, the Budget. Then, more measures were announced to liberalise economic policy. On March 31, 1992, we produced a 100-page booklet encapsulating the new export-import policy. In this nine-month period, we virtually stood on its head the old policy, which was based – I may be oversimplifying – on the principle that everything was prohibited unless expressly permitted. In nine months, we moved to a position where everything was permitted unless expressly prohibited. That principle, given content and meaning, meant a position where trade was nearly free. In fact, in the March 1992 policy statement, one of the opening lines was: Trade is free. That is, and should be, the basis of trade. For 40 years until then, the government had lived in fear of free trade. We announced that era was about to be over.

 

How did you manage that with the government ?
P V Narasimha Rao was the prime minister and Montek (Singh Ahluwalia) was there. Of course, the finance minister was Manmohan Singh.

There was only one point of difference with the finance minister. He asked me to abolish Cash Compensatory Support (CCS) ,which amounted to Rs 3,000 crore, a huge sum in those days. I said a commerce minister can’t start by abolishing something – we had to compensate for it. So, a package was worked out and we took it to the PM’s residence. It was late in the night and Narasimha Rao was taking bath. We waited and he came out in his lungi. He asked if the finance minister and I had signed it. I said yes. Of course, he knew what it contained – A N Verma (then principal secretary to the prime minister) had already briefed him. Then he signed it. That’s how the package came into being.

But, there were so many financial problems of serious nature at the time…
Of course there were problems, that’s why we had a new policy in March. In July it was quite clear that we had to remove shackles on people who were engaged in export and import and replace so-called incentives (like CCS) by simply giving more freedom to export and import. Devaluation had taken care of exporters – the rupee had been grossly overvalued because of the pegged exchange rate, so devaluation was a huge boost to exporters. We administered a booster by removing as many restrictions on them as possible. So, one tranche was announced on July 4, followed by removal of most restrictions by March 31, 2002.

We began our work of rewriting the so-called Red Book – the export-import policy – by chopping chapter by chapter of a 500- to 600-page tome written in single-space small print in atrocious language where there was no match between what was said on page 5 and what was said on page 245. The new policy was all double-space, big-type and simple English, it was 100 pages. We sat through and wrote it over several days. That was followed by a handbook.

What is left to do now?
In policy terms? Very little. But I should sound a word of caution. We must always be on guard against creeping controls. Some controls tend to find their way through the back door. The control mindset will always try to smuggle in something that will ostensibly ‘help exporters’. The idea must be to prepare the country for freer trade. The restrictions still exist in the shape of anti-dumping duties, safeguard duties, non tariff barriers – not just India, every country in the world has those. But the battle is for freer trade. All countries must dismantle barriers. As an economy matures, it must become more competitive, more efficient, and it must shed the last barriers to freer trade.

What worries you the most today?
The interplay of high inflation and slow growth. Our goal must be high growth with moderate inflation. So, in a situation where inflation is high and growth may be slowing, we should worry.

How do you set it right?
There is no magic bullet. It has to be done through appropriate fiscal and monetary policies, which the government is trying to do.

The fact is low growth and high inflation are not a problem new to India. In 1991, Manmohan Singh had the same problem. We had to bring in investment. He slashed expenditure sharply – cut the budget brutally.

While that may not apply in 2011, the problem is the same – it is something that the Indian economy has had to struggle with cyclically. It was low growth and low inflation, followed by low growth and high inflation. After all, throughout the 1950s, growth was never more than three to four per cent.

But during the National Democratic Alliance (NDA) government….
Ah, let me correct you. The NDA left for us in 2004 an economy that had already slowed down. By the time Yashwant Sinha demitted office, GDP growth was 3.8 per cent and the average rate of growth during the NDA period was 5.8 per cent showing the economy had already begun to slow down. Add to that declining investment as well as plateauing of savings. There was a rise in PSU dissaving. From 2004 to 2008 we had to turn that around. In 2008, we had the financial crisis. Despite that India had a growth rate of 6.8 per cent. This was a pointer that the nerves and sinews of the Indian economy had become stronger.

What did you do right?
We brought down taxes, incentivised saving and aggressively sought foreign investment. We successfully managed the exchange rate through careful interventions by RBI. We put growth at the centre of debate and discussion.

Unfortunately today, growth has been displaced and other issues occupy the centre of discussion . For instance corruption. While corruption is there and should be tackled and the corrupt punished, the debate should be about growth tempered with equity and social justice.

The other issue that is dominating centre stage is security. While this is understandable after 26/11 and other attacks, we should continue to discuss growth and equity.

There was the great white hope of developing backward areas through Special Economic Zones (SEZs). And if India had managed its power sector better, things might not have been so bad in terms of equitable development…
There was a debate on SEZs – as finance minister, I said so myself. Which is better: Bigger SEZs occupying hundreds of acres of land? Or small enclaves on 10 acres ? I had argued against a proliferation of SEZs. That debate was decided in favour of the current policy.

As for power, yes, this has been a problem sector for many years. It is complicated by land acquisition, and forest and environmental clearances. We wanted to add 78,000 Mw but this has been revised downwards to 63,374 Mw. Till 31 December 2010, 32,000 Mw had been added. We will be lucky if we end the 11th Plan at 60,000 Mw. In the infrastructure sector, we have always had a problem achieving targets. It is not as though no project is completed on time. The Delhi Metro has completed some of its work ahead of target. Private sector refinaries manage to complete ahead of target. Achieving targets must be the rule. Slippages should be exceptions. This will require prompt decisionmaking.

All decisionmaking has an element of risk. If you take no decision, you run no risks.