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on Jul 24, 2021)In an interview with TOI, Montek Singh Ahluwalia recalls how the government moved nimbly to make fundamental structural changes, with PMO not questioning the experts. Excerpts:
What do you think led to 1991’s historic decisions — political will or the reality of the economic crisis?
The crisis was clearly an important factor. We were in a desperate situation, with the foreign exchange reserves having more or less run out. The government outlined a two-part agenda. One was to stabilise the economy, and the other to introduce structural reforms, to transit to a higher rate of growth.
The stabilisation part was conventional: reducing the deficit and bringing in the International Monetary Fund (IMF) and World Bank to provide funds that would see the economy through a couple of years as stabilisation took effect.
However, the decision to bring in reforms was innovative. It cannot be explained by the crisis, or the need to approach the IMF or World Bank, because the reforms went much beyond what those institutions were pressing for.
In any case, the crisis was over in 1993…(but) the fact that the reforms continued showed the government was keen on the reforms independent of the crisis.
What’s your standout memory of 1991?
My favourite incident relates to the speed with which we were able to bring about changes in the trade policy in 1991. When Manmohan Singh announced the second devaluation on June 3, he wanted to abolish cash compensatory support (which was given to exporters as an incentive) from June 4 onwards.
He asked me to brief minister of state for commerce P Chidambaram on the rationale for it. I did so, but also said we should try to persuade Singh to agree to an accelerated announcement of our proposals for trade liberalisation, including Exim scrip that was aimed at replacing import licences.
We went across to the finance minister’s office and he readily saw the merit of our proposal, overruled his officials who were not in favour, and asked us to come back with a written proposal, “on file” as they say in government, so we could get the Prime Minister to approve.
We did that in a few hours and we all went to see Prime Minister Narasimha Rao at about 7 pm. After Chidambaram explained our proposal, the PM asked Manmohan Singh whether he agreed. Singh said he had signed the file, at which Rao took the file and signed it, and it was done. There was no examination of the proposal by the PMO.
The whole process of abolishing import controls and moving to market-based methods of allocating imports, with an ultimate shift to a market-based exchange rate, was done in the space of eight hours.
Do you think the appetite for reforms has increased among politicians?
If you judge “appetite” by the acceptability of slogans, one could say there is now much greater acceptability of the notion that economic dynamism will be led by the private sector and that the government must not get into areas where the private sector can do a good job. But there are many areas where we see very little progress.
Reforms of the land market are proving extremely difficult. Reforms in the labour market are also going slowly. I think the same is true of banking reforms.
We are now at a stage where the reforms we need are much more complex and their benefits will become evident only after many years. Education, for example, is an area where it will take 10 years for reforms introduced now to show up in terms of improved quality of the labour force.
Another problem is that most of our public discussion of reforms focuses on what the central government should do, but water, electricity distribution and health are critical areas which are all in the state sector. If you check what politicians are saying in state elections you will see that it does not reflect an awareness of the need for reforms.
Economic reforms reduced poverty but the Covid pandemic has eroded the gains. What do you think needs to be done now?
We have to act on two fronts. One, to do what we can during the pandemic to extend support to the poor, and the various measures taken for this are all in the right direction. This must be accompanied by concerted efforts to ensure the quickest possible recovery.
Unless we experience another setback in the form of a third wave, the economy will recover in the course of the year and by the start of the next year we will be back where we were in 2019-20. The most important thing to achieve this outcome is a successful vaccination strategy.
This will not by itself offset the negative effects of the pandemic on the poor because the informal sector has been hit much harder, and to that extent even if the economy gets back to the 2019-20 level the poor will still be worse off than they were in 2019-20.
All we can do is focus on ensuring healthy post-pandemic growth from 2022-23 onwards. If the economy only grows at the tepid pre-pandemic rate of a little over 4% or even 5% there is little hope of making a dent in poverty. We need to aim for 7% growth at least.
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