“I do not lose sleep over what happens in the stock markets.” This is one quote of Manmohan Singh’s that will definitely not surface in articles about the silver jubilee of the 1991 reforms. Instead, what will be repeated endlessly are the lines from his first landmark Budget of 24 July 1991: “Victor Hugo once said, ‘No power on earth can stop an idea whose time has come’… Let the whole world hear it loud and clear. India is now wide awake”.
Is it fair to bring up this remark, made in the context of the roiling of the stock markets in the wake of the Harshad Mehta scam in 1993, when assessing the post-1991 Finance Ministers? Yes, because an FM is to be judged not just by his reforms record, but also by how he steered the economy and handled crises.
In the 25 years since that epochal day, India has seen six Finance Ministers: Manmohan Singh, P. Chidambaram, Yashwant Sinha, Jaswant Singh, Pranab Mukherjee and Arun Jaitley. Four—Singh, Chidambaram, Sinha and Mukherjee—left an indelible mark on the economy (hugely negative in one case) in their individual ways, Jaswant Singh was doing just a holding operation, and Jaitley is still on the job.
Singh’s remark appeared callous then but probably needs repeating now when Finance Ministers are expected to be constantly responding to stock market reactions to just about everything under the sun. Of his successors, only Sinha had to deal with a stock market scam in 2001—in which stockbroker Ketan Parekh was the central figure. Sinha, fortunately, didn’t talk about his sleep patterns; steps were taken to limit the damage, and a statement was made in Parliament. So who will get the award for best Finance Minister of them all?
If maintaining macroeconomic stability is the litmus test of an FM, then certainly Singh comes out tops. Remember, he inherited an economy that was teetering on the edge. By the time his five-year term ended, the economy had not only been pulled back from there but he had also put it back on its feet. Inflation,17 percent in August 1991, had come down to five percent, the external debt to GDP ratio had dropped from 41 percent to 29 percent, the share of short-term external debt in total external debt had halved from 10 percent to five percent. The industry had not been run to the ground by foreign competition as India Inc was sure it would, but was doing quite well. He set the foundation of a strong economy, which his successors built on.
Sinha was the only one who had as difficult a time as Singh, perhaps more. He inherited a slowdown—growth had halved to 4.3 percent in 1997-98 from eight percent in 1996-97. Barely had he settled in, then his government conducted a nuclear test, and many advanced countries and multilateral lending agencies suspended aid and loans to India. The East Asian crisis, which had happened before he moved into North Block, saw foreign funds withdrawing from India, exerting pressure once more on forex reserves. Inflation had started to inch up during the previous government’s tenure. To check that, RBI Governor C. Rangarajan had hiked interest rates to levels where it started hurting the economy.
Public finances were in bad shape, worsened by the acceptance of the Fifth Pay Commission award by the previous United Front (UF) government. Then the government fell, and though it returned to power, crucial decisions could not be taken in the run-up to the 1999 elections. His tenure also saw the Kargil war, a super cyclone in Odisha, an earthquake in Gujarat, the worst drought in 30 years, hardening oil prices, the 9/11 fallout, and the dotcom bust. And yet he not only kept the economy on an even keel but even delivered on growth, the dividends of which his successors reaped.
In most rankings of post-1991 Finance Ministers, Chidambaram usually comes second after Singh, but he did not have to face the kind of macroeconomic challenges Singh and Sinha dealt with and bested. When he became FM for the first time in 1996 in the UF government, Singh handed over an economy well on the recovery path; in 2004, too, he inherited a robust economy with buoyant revenues, and he presided over what is widely acknowledged as the boom years of the Indian economy. He was lucky to narrowly escape two globally-induced crises.
The UF government fell soon after the East Asian crisis developed and Chidambaram was spared the ordeal of having to cope with the consequences. The crash of 2008 got triggered off in September that year, but two months later, Chidambaram had to move to the Home Ministry after 26/11, and the crisis got handed over to his successor once again; this time it was Pranab Mukherjee.
Mukherjee, a seasoned Finance Minister, initially handled the global crash well, putting out a stimulus package for the economy. But he erred in not withdrawing the package once the immediate crisis was over. Investor sentiment got killed during his tenure because the tax bureaucracy went on the rampage, trying to make up for the revenue loss arising from tax concessions and the economic slowdown. Policy paralysis set in after the telecom and coal block scams erupted, and the economy never really recovered. He couldn’t manage to get a grip on runaway inflation, which started touching double digits. For the first time in his career as FM, Chidambaram inherited an ailing economy when he returned to North Block in 2012. But the overhang of the scams, a bureaucracy scared of taking decisions, investors unwilling to put down money, cabinet colleagues clearly out to impose taxes of their own on businesses, put him in a spot. He could do little more than lament about his predecessor having delayed withdrawing the stimulus package and about the RBI not cutting interest rates. He tried to rein in the tax bureaucracy. But nothing helped. And he was once again left with the reputation of passing on a poorly performing economy to his successor.
Would Chidambaram have handled the 2008 crisis better? That hypothetical question may never get an unequivocal answer, but he cannot escape the charge of having blotted his copybook during his UPA-1 stint. The healthy economy and sound public finances he inherited could have become a launch pad for the take-off of the economy. But he squandered the opportunity, caving into the bleeding-heart pressures from Sonia Gandhi, allowing fiscal consolidation targets to be relaxed (even as he claimed credit for notifying the Fiscal Responsibility and Budget Management Act) and allowing fiscally ruinous policies to go through. The three big announcements in his 2008 Budget—the implementation of the Seventh Pay Commission award, the nationwide rollout of the National Rural Employment Guarantee Act (from 200 districts) and the Rs 70,000 crore farm loan waiver—saw the revenue deficit in 2008-09 soaring, though the blame was quietly put on the global crisis.
Experts, however, are near-unanimous that the economy would have been better able to withstand the global shock if public finances were in better shape. The high inflation that set in towards the middle of the UPA years were also attributed to the over-generous procurement price hikes and farm loan waiver during his UPA-1 stint. He tried to moderate the procurement price hikes during his second stint in UPA-2, but it did not have the desired effect immediately.
So who should get the award for the boldest reformer?
No one can grudge, or take away from, Singh the mantle of the architect of the 1991 reforms. At best one can quibble about his Prime Minister P.V. Narasimha Rao not getting as much credit. Singh’s July 1991 Budget speech certainly set out the broad contours of the economic reforms that changed not just the Indian economy but India itself. Chidambaram was Commerce Minister at that time, and it was then that he earned his spurs as a reformer, but he may not have been able to do this if Singh had not set out the broad philosophy.
But (and this is not to belittle anything Singh did in those initial years), what Singh steered were the easy reforms. Certainly, industrial de-licensing, devaluation of the rupee, current account convertibility, external trade liberalisation, easing foreign direct investment were not only pathbreaking but also all difficult sells, but not as tough as the reforms his successors—Chidambaram and Sinha—undertook. To these two fell the task of getting the second-generation reforms through, apart from carrying forward many of his initiatives.
For example, Singh started piecemeal disinvestment by offering a minority stake in select public sector undertakings (PSUs), Chidambaram set up the Disinvestment Commission to recommend strategies for disinvestment—including strategic sales—for individual PSUs, and Sinha actually flagged off privatisation.
Chidambaram bolstered his reformer image in the UF government, and this was no mean task, considering he had just two years and was hobbled by being part of a coalition with the Communist parties. He further eased foreign investment rules, made investments by venture capital funds easier, discontinued ad hoc treasury bills as a part of a series of steps to end the automatic monetisation of the fiscal deficit, brought in the Foreign Exchange Management Act to replace the draconian Foreign Exchange Regulation Act. Under his watch, other ministries also pushed reforms. Some controls on the marketing of agricultural goods were abolished, de-reservation of the small scale sector was kicked off, and the Urban Land (Ceiling and Regulation) Act repealed. PSUs got their first whiff of managerial and commercial autonomy; nine well-performing PSUs were identified as Navaratnas, which got greater freedom to be competitive.
But his biggest contribution was the reform of direct taxes—the slashing of personal income tax rates as well as corporate tax, and the reduction in the number of slabs. That was the main attraction of this dream budget of 1997-98. He also kept the tax bureaucracy in check.
Had it not been for the leftists and socialists in the UF government, Chidambaram may have pushed through more reforms. But that reforming zeal disappeared during his UPA stint. What was most glaring was the complete abandonment of even aggressive disinvestment, forget about strategic sales of PSUs. Chidambaram started talking about not touching profitable PSUs and of trying to revive and restructure poorly performing ones through a Board for Reconstruction of Public Sector Enterprises. Then there was the fiscal profligacy he turned a blind eye to. He could do nothing as Petroleum Minister Mani Shankar Aiyar effectively rolled back the phased withdrawal of the administered price regime (APM) in petroleum that he had once championed and which Sinha had pushed through. The old Chidambaram was evident in the Direct Tax Code that he was closely involved in draughting before he left for the Home Ministry in 2008, and doing the initial groundwork for the goods and service tax (GST), but these were just flashes in the pan.
Sinha got off to a rocky start. His first Budget was panned as a Swadeshi Budget, and its protectionist tones were attributed to the fact that he was supposedly forced on Prime Minister Atal Behari Vajpayee by the RSS. He has refuted both charges. But he soon came into his own, and there is no denying that some of the most difficult structural reforms, which are benefiting the economy today, were done during his tenure.
His four biggest contributions were the overhaul of the indirect tax regime, privatisation of PSUs, steering the Fiscal Responsibility and Budget Management legislation, and preparing the ground for a national value added tax (VAT). Unfortunately, he could not see the last two through till the end; Chidambaram got the credit. Other feathers in his cap included the opening up of the insurance sector, setting up the Competition Commission to replace the Monopolies And Restrictive Trade Policy Act, strengthening the Securities and Exchange Board of India and starting the process of dismantling the APM in petroleum. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act, which he was responsible for, was the precursor of the Insolvency and Bankruptcy Code, 2016, which his son Jayant Sinha has piloted as Minister of State for Finance.
Sinha earned the moniker of Rollback Sinha for a number of proposals he announced and then withdrew due to trenchant opposition—fertiliser price hike, LPG price hike, exit policy for labour, privatisation of Air India are some. But that, unfortunately, diverts attention from the two extremely politically difficult steps he stood his ground on—the reduction in interest rates of small savings, and hike in the issue price of food grains sold through the public distribution system to bring down the subsidy bill; the issue price has not been increased since 2002.
Mukherjee was never an ardent reformer like Singh, Sinha and Chidambaram. When the team of Singh, Chidambaram and Montek Singh Ahluwalia (Deputy Chairman of the Planning Commission in the UPA government) could not push through reforms, he could hardly be expected to make greater efforts to do so. But inheriting an economy in the grip of an external shock was no excuse for not facilitating the GST—something state Finance Ministers complained about, making a mess of the Direct Tax Code and introducing measures like retrospective taxation and General Anti-Avoidance Rules (GAAR). He was forced to withdraw the last.
How does Jaitley fare in this listing, going by his record of two years? There has been some disappointment at the lack of big-ticket reforms, though that has changed slightly with the passage of the Insolvency and Bankruptcy Code, an extremely significant piece of legislation. He cannot be blamed for the lack of movement on GST, but his cautiousness on privatisation has been disheartening, given that he presided over the first few strategic sales as Disinvestment Minister in the Vajpayee government. He still appears captive to the tax bureaucracy. But his Finance Ministry has been extremely supportive of small, incremental changes in other ministries which can make a difference to the economy.
Only time will tell whether he will make it to the Hall of Fame like Singh, Chidambaram (in the UF) and Sinha. Here’s hoping he will follow in their footsteps.
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