'Extract after extract in Manmohan's 1991 speech was from my mini Budget'

Former finance minister Yashwant Sinha says his 1990 mini Budget shaped Manmohan Singh's 1991 speech, while calling for continuous reforms and infrastructure-led demand growth

Yashwant Sinha served as finance minister in the Chandra Shekhar-led government and prepared a “mini-Budget” in December 1990 that laid the ground for Manmohan Singh’s July 24, 1991, Budget. He also served as the finance minister from 1998 to 2002 and later as the external affairs minister (2002-04). In an interview at his Noida home, Sinha tells Archis Mohan and Gireesh Chandra Prasad how his Budgets aimed at spurring demand through infrastructure investments. He says reform should be a continuous process and bemoans the trajectory of India’s economy and its foreign policy. Edited excerpts:

 

Is it true that the same team worked on your “mini Budget” and the one Singh tabled on July 24? 

The Budget speech is prepared in two parts. Part A is written by the chief economic advisor (CEA), and Part B by the revenue secretary. Then it comes to the finance minister, whose job is to put the entire speech in his own language. 

When the Chandra Shekhar government came in, Montek Singh Ahluwalia was in the Prime Minister’s Office. Subramanian Swamy said he would take Montek as the commerce secretary. So, S P Shukla, who was commerce secretary, came in as finance secretary. We had Deepak Nayyar as CEA. There were also Suresh Mathur, the industry secretary, K P Geethakrishnan, the expenditure secretary, and P K Lahiri, the revenue secretary. Most of this team survived (when the P V Narasimha Rao government came in). 

It was Nayyar who wrote both the speeches (Sinha’s and Manmohan Singh’s), and you will find extract after extract common between Singh’s speech and mine, such as the assessment of the economic situation, imbalances, and options in front of India, which were limited. But then there is fate. For the launch of my autobiography, Relentless, I had invited Pranab Mukherjee, who had by then become a former president. He noted that if the Congress hadn’t blocked me, I could have been India’s first reformist finance minister — the original reformer.       

Yashwant Sinha’s column on Page 1 of Business Standard on July 25, 1991

 

In 1991, you spoke about the need for reforms. Even now, 35 years later, the government is speaking about reforms. Many of the things that you identified in your speech are still relevant now. So, what is wrong? What is standing in India’s way? 

The year 1991 was a crisis year so Rao and Singh were able to get away with all the reforms that an economist could have dreamt of. Set aside all the crisis years, and my personal experience suggests that if you dare to go a little further, let’s say you take three steps forward, then there is a lot of pressure on you and then you take one step backward so two steps survive in that. 

Was that your experience between 1998 and 2002? 

Absolutely, after every Budget it was the same experience. Why did they start calling me a rollback minister? Because I was under such tremendous pressure from allies and people from my party. They would tell me that what I was doing would affect their votes… BJP members used to get very angry. 

There are two-three issues in the Budget that are the most important. One is subsidy, which at that time was for oil, food and fertiliser. Containing the fiscal deficit was a very important objective of the finance minister. 

(Congress’s) S Jaipal Reddy once stood up in the Lok Sabha and called me a fiscal terrorist, which I didn’t mind because he was right, we used to try to contain the fiscal deficit. Nowadays, no one even talks about fiscal deficit in Parliament. I appointed an expenditure commission to look at the issue, which was a landmark step. In 1991, since there was a crisis it paved the way for reforms, otherwise it’s very difficult. 

In 1998, the situation was different, and at that time it was more difficult to take the reform process forward because the crisis was not on people’s minds. We were concerned about the fiscal deficit and controlling it. If we reduced the fertiliser subsidy, prices would increase and similarly for petrol. Vijay Kelkar was the finance secretary when I presented the 1998-99 Budget, and he suggested that I shouldn’t do it in the Budget, otherwise it would be judged solely on that. I followed his advice and we raised petroleum prices before the Budget. (A Gulf surcharge of 25 per cent on domestic prices of petroleum products, was introduced from October 15, 1990.)

Coming back to the present. What is your sense of the investment scenario? 

Investment is cyclical, and whether industry is using its full installed capacity or not depends on demand and purchasing power. Sequencing of demand is what we need to look at. If demand increases, industry will raise its production to 80 per cent, 85 per cent, 100 per cent, then the same capacity can also be used to 110-120 per cent, beyond that there needs to be fresh investment. You have to take the sluggish demand from below 100 per cent to 100 per cent and more before the industry will start investing. One has to be patient, since industry would not immediately begin investing if the government announces some measures to increase demand, and that is where we are in a big bind. 

Secondly, the sequencing of demand is important. I was a huge critic of the United Progressive Alliance’s (UPA’s) demand sequencing. What I followed was to spur the demand for investment goods, consumer goods and export goods. I decided that consumer demand will increase if people have money in their pockets, if we create jobs and emoluments of those in jobs increase. Therefore, we decided to build national highways, invested in building railway bridges and new railway tracks, and ports. We gave preference to infrastructure demand, which increased jobs, put money in people’s pockets and increased consumer demand. We criticised the UPA because they took lots of steps that got people money in their pockets and increased consumer demand, but investments remained weak. For example, the National Rural Employment Guarantee Act (NREGA) had lots of weaknesses. 

One reform that we did during the A B Vajpayee government, which has largely gone unnoticed, is the housing revolution. The multiplier effect of the housing sector is bigger than infrastructure development. In 1998, I ensured that the income tax exemption on housing loans was increased from ₹15,000 to ₹1.5 lakh, along with repealing the Urban Land Ceiling Regulation Act. We coordinated it with the National Housing Bank, and made it easy for young people to take a loan to either buy an apartment or build a house. It had a huge salutary effect and generated demand. It was a silent housing revolution, but because it was silent nobody noticed it. 

I think there is a need to change our Budget cycle. The work season in India starts in October, after the rains, this is why Budget cycles should be from July to June to be consistent with our climatic conditions. The monsoon session of Parliament should be converted into the Budget, which could be presented on July 1, and Parliament can function for two-and-a-half months. In any case, there is very little work in MPs’ constituencies during this time. The government gets the Budget passed and work could be undertaken from October.

 

Is demand generation the primary duty of a finance minister? 

Demand generation is a very important duty because if it does not go up then industry or services will not work. Agriculture has its own momentum, that continues, but industrial and services progress depend on demand, that is why every finance minister should seriously think about ways to spur demand and what kind of demand. What the National Advisory Council, led by Sonia Gandhi, did during the UPA government through schemes, such as NREGA, was that it added to consumer demand not investment demand, and then there was the 2008 global financial crisis that impacted the economy further.

 

The government is celebrating the annual growth rate of 7.7 per cent. But India’s statistical system has been downgraded by the International Monetary Fund. A number of eminent Indian economists have also challenged India’s growth figures. Are we in a middle-income trap? 

India’s gross capital formation has hovered around 32 per cent of the GDP, which can support a growth rate of only 6.5 to 7 per cent. This is a far cry from the 8 per cent needed to make India a developed economy by 2047. 

The crisis in the Indian economy started last year; it is not because of the war in West Asia, which began on February 28. Inflation, petroleum product prices are already going through the roof. They are bound to have a serious inflationary impact. Net foreign direct investment (FDI) has been flowing out of the country for the last two years. 

El Niño is going to cause massive rural distress in the coming months. The shortage of fertilisers and their high prices will further contribute to rural distress. A country’s leadership is tested in trying times. It is here that the current leadership is failing. Our foreign policy, including the tariffs imposed by the US, has a direct bearing on our economic policy. Submission to the US is a matter of great national shame. India should have played an important role in bringing the West Asian conflict to an end. Instead, we have surrendered to the US even here. According to experts India appears to have lost the artificial intelligence (AI) race already. 

Our economy has an automatic momentum, even if we were not to do anything it would grow at 5 per cent, and if you want to go beyond that, you need government policies to have an impact.

 

Are more reforms needed? 

Yes. It isn’t that we have done it today and we are set for the next 20 years, because the situation, both domestic as well as global, keeps changing and you have to adjust keeping in mind the developing situation and assess how the situation is going to develop in the future. That should inform your policymaking, and the Budget is a document in which several interests need to be accommodated so that it becomes a big policy document every year. 

Today’s reforms will be different from what we saw in 1991. In the five Budgets that I presented until 2002, there was hardly any sector of the economy that I did not give a reformist push. When a prominent journalist asked me what I considered the most important reform, I told him that it was the Kisan Credit Card. He thought I would talk of the stock market, foreign investment, or something else. But I do regard the Kisan Credit Card as a major reform as far as financing of agriculture is concerned.

There is more need for reform when there is no crisis. Opposition to reform is greater when there is no crisis.

 

During your stints as the finance minister in the Chandra Shekhar and Vajpayee-led governments, how often would you consult experts and stakeholders? 

I believe if a person in the government is open minded, especially the PM, it helps immensely if he is willing to receive advice from all quarters. For example, as finance minister, during pre-Budget consultations, I added three-four new groups, including consumer interest groups, and also reached out to experts involved in research to seek suggestions on what we could do to promote research. 

One can say hard work is more powerful than Harvard (University), [but it is not] as if someone would pass Harvard without doing hard work. Vajpayee had this great quality that he wanted talented people around him. The important thing is it shouldn’t create a crisis of confidence for you if well-educated people are around you, and Vajpayee had that large-heartedness.