1991 marked a paradigm shift in industrial, trade policy: Jairam Ramesh

Jairam Ramesh says the 1991 reforms transformed India's economy, but reviving private investment is now the country's biggest economic policy challenge

Jairam Ramesh, general secretary of the Indian National Congress, had a ring-side view of the reforms of 1991. At the time, he served as an Officer on Special Duty (OSD) in the Prime Minister’s Office. In an interview in New Delhi, he talks to Archis Mohan about the pressures the P V Narasimha Rao government faced, and the lessons that can be learnt today. Edited excerpts:

 

As someone who was part of the government in 1991, how did you view the reforms? 

The reforms launched by then Prime Minister P V Narasimha Rao and Finance Minister Manmohan Singh marked a complete paradigm shift in industrial, fiscal and trade policy, all at once. Some changes had been initiated in the early 1980s, but the basic framework remained intact. 

That’s why I call 1991 a paradigm shift. It was a paradigm shift in terms of the role of the public sector, and international trade, where it was realised that to export more we needed to import more. We had the beginning of import liberalisation, a revolution in industrial policy, and an aggressive opening up on the foreign direct investment (FDI) front. 

Prime Minister Narendra Modi talks of the reforms express, but the engine was built in 1991. It launched India on the process of economic reforms, and it’s served the country very well. We have had a growth rate of at least a 6.5 per cent over the past 35 years, which is not something that we can underestimate. 

Of course, the crisis had been visible from 1990, when oil prices trebled. Then there was an outflow of NRI deposits, export earnings began to stagnate, gold had to be mortgaged, and we were scrounging around for dollars. Even today we are scrounging around for dollars, but at a much higher level.

 

Are you suggesting that there are some parallels to the situation today? 

No, because in 1991 it was a crisis of unprecedented proportions. Manmohan Singh was very adamant, very clear that India would not default. 

Some people have argued that India did not adequately focus on manufacturing then… 

That’s absolutely not true, because the entire licencing system was abolished. Entrepreneurs were free to invest wherever they wanted to, locate wherever they wanted to. Capital markets also got a big boost. 

In any case, the concept of the government investing didn’t exist after 1991. It is enterprises and entrepreneurs that have to invest. 

However, what happened was the software boom just took over in the 1990s. Big global majors, software users discovered India as a source of competitive, low-cost but highly skilled manpower, and that’s how the entire information technology revolution happened. 

Jairam Ramesh had a ringside view of the reforms in 1991 as an officer on special duty in the PMO (Photo: Reuters)

 

In your book on the 1991 reforms, To the Brink and Back: India’s 1991 Story, you have written that the subsequent Budgets of Singh were not particularly reformist?

 

The 1991 Budget was, of course, revolutionary. The next one built on it, and so did the one after that. But from 1994, the Congress launched campaigns for state assembly elections, and in 1995, we were looking at the 1996 Lok Sabha elections. So, I wouldn’t call the Budgets of those years revolutionary.

 

It’s remarkable that Singh got attacked in 1991 both from the left and the right, but the design that he put in place has stood the test of time for 35 years. There is this famous interview that K N Raj, the guru of Indian economics, gave Frontline magazine in August 1991, where he agreed with Singh’s assessment and said it should be supported.

 

From the right, Vajpayee was attacking him but with a smile. Vajpayee told Singh later and asked him not to feel too bad about the political attacks.

 

Singh and Rao had at least two meetings with leaders of the opposition parties; Singh reached out to trade unions, to intellectuals. At that time the dominant intellectual ecosystem was that of the Left.

 

In analysing the success of the 1991 reforms, it’s not just the what, but the who is very important. Both Rao and Singh were not hardcore socialists. They came from the soft socialist tradition. Singh was not a marketwallah in the 1970s and 1980s. Rao certainly was not. Singh was pragmatic.

 

There was a Congress Parliamentary Party meeting after Singh presented his Budget on July 24, 1991. The two who supported him very strongly, surprisingly, were Mani Shankar Aiyar and Nathuram Mirdha. They met for three days and concluded that it was inevitable and long overdue — they felt that Rajiv Gandhi would have done it had he come back (Rajiv Gandhi was assassinated during the Lok Sabha campaigning in May 1991).

 

We had a good team. Commerce Secretary Montek Singh Ahluwalia, Rakesh Mohan, Amarnath Verma, who was basically the bureaucratic sutradhar, and Naresh Chandra, the cabinet secretary. Manmohan Singh had been the chief economic advisor and economic affairs secretary so he basically knew everything in finance. In commerce, he depended entirely on P Chidambaram and Montek. And on industry, there was Rakesh and there was Verma, who had been industry secretary, and he moved over as principal secretary to the PM. These were people who knew those measures for almost four to five years and had discussed it. It was not a black box. There was V P Singh’s Budget, then Rajiv Gandhi continued with it when Singh left. Then when V P Singh became prime minister and there was the ‘M’ paper, the Montek paper. What ’91 did was bring it all together in three paradigms — the fiscal, industry and trade paradigms.

 

Why did the government opt for a two-step devaluation?

 

Manmohan Singh and C Rangarajan (Deputy Governor of RBI) wanted to do it in two steps. They wanted to first test the market and then go in for the second step. Rao wanted to do it in just one jhatka, be done with it. But they did it in two steps. Once they did the first devaluation, there were a lot of political attacks. Rao became defensive and so he tried to stall and called on Singh to stall the second devaluation. But by then Singh had spoken to Rangarajan, who had already announced it. So, he told Rao, it’s already been done. That was hilarious.

 

In fact, 1991 showed to me the value not only of formal institutional relationships but the informal ones too. Singh and Rangarajan, Singh and Montek, Singh and Chidambaram… Chidambaram was given commerce at that time.

 

There was a team, there was camaraderie… all of us were young, in our 30s and 40s, barring Singh. Manmohan Singh would pick up the phone and talk to people in a spirit of free discussion. In the finance ministry, the secretary was S P Shukla, who was not in favour of the reforms. Chief Economic Advisor Deepak Nayyar was not in favour, neither was Foreign Secretary Muchkund Dubey. But Singh took them along. 

 

Looking at the current situation, what more do you think needs to be done?

 

Today, the biggest paradox, according to me, is official data shows that we are growing at more than 7 per cent, but private corporate investment sentiment is subdued. The growth rate would have been worse had public investment not picked up the slack. So, it is paradoxical that PM Modi, who is very critical of the ancien regime, which was based on public investment, has had to depend on the same public investment to give him the growth rate that he is claiming credit for.

 

Now, I don’t want to get into the debate on the veracity of economic growth data. That is a separate issue. But it’s inexplicable to me that you can grow at 7 per cent with these rates of private investment. The central challenge in 1991 was not how to stimulate private investment, it was how we get our foreign exchange problem sorted. That problem is there today as well, but facing pressure on capital inflows when your forex reserves is $900 million and now when it is $690 billion is a completely different ballgame.

 

How to stimulate private investment has become the single most important element of any reform agenda today. It is completely puzzling to me that we are reporting such healthy growth rates with such low levels of investment. There is a lot of investment taking place, but it is the rate of investment that we are talking about. The short-term challenge is also that we have seen capital outflows, both FDI as well as on foreign portfolio investment, even before the current Iran war. Plus, the rupee and capital account have come under pressure. So, we have to shore up our dollar earnings by anywhere between $30 billion and $50 billion. I am glad that Modi has rediscovered the value of what the Singh government did in 2013, when Raghuram Rajan was the Reserve Bank of India governor, by introducing Foreign Currency Non-Resident (Bank) accounts.

 

Between now and September they are hoping to mobilise $50 billion. But I think that’s only a band-aid. The real issue is you have to get private investment to somewhere between, 35 to 36 per cent of the GDP. It is hovering about 30-31 per cent.

 

Now, why is that not happening? Well, I would say demand is not sufficient enough because real wages have stagnated over the past decade. I think the Indian market has got sharply cleaved because inequalities have gone up. The mass market has not increased, but niche markets have, and investors will invest when they see an uptick in the mass market. As you know, Singh was very fond of quoting John Maynard Keynes, that investment is as much a psychological decision as a financial one. Now, the question is that PM Modi has to ask whether the psychological factor is conducive for investment.

 

Paradoxically, I think, in the past 10 years, while you had the goods and services tax (GST), digitalisation and so on, the power of tax authorities and investigative agencies has increased manifold. This is not to justify corporate malfeasance. But I would say the extraordinary powers given to the tax authorities, the feeling of uncertainty, the feeling of intimidation… The doors of government are not as freely open to investors as they were say during Singh’s tenure or even during Vajpayee’s or Rao’s. Do businessmen meet ministers freely? Do they express their views freely? I mean ministers go to meetings with industry associations and read out a text prepared for them, which is full of gungan (praise). But are you engaging? Do businessmen feel like they are being heard? My feedback is that it [free engagement] is not taking place.

 

Besides, there is a growing sense in Indian business that there are certain areas in which there are oligopolies to an extent that was unimaginable 20 or 35 years ago. One thing that was done in 1991 was to abolish the Monopolies and Restrictive Trade Practices Act, which aimed to control the growth of monopoly power. But the philosophy of 1991 was we will control the abuse of monopoly power, not growth.

 

Today, whether you look at ports, airports, or cement, you are basically seeing one or two players [dominate]. Finally, you cannot run from the $115 billion trade deficit with China. This has knocked the bottom out. A classic example is the stainless steel industry. More than half of the capacity is in Gujarat, and over a third is lying closed. No matter what we have done, we have not been able to control imports from China. Now, some imports from China result in exports — such as phone components and chips — but not all imports are in that category. The Chief Economic Advisor has written about this. So, it’s not as if they don’t know. I don’t think the tax rate is the issues anymore; in September 2019, the government brought down corporate tax rates. Today, personal income tax exceeds corporate tax collections.