HVK Archives: Once again to the fray
Once again to the fray - The Economics Times
S Venkitaramanan
()
March 30, 1998
Title: Once again to the fray
Author: S Venkitaramanan
Publication: The Economics Times
Date: March 30, 1998
It is on predictable lines. Mr Yashwant Sinha has presented his
interim budget to Parliament. At the time of writing, it appears
almost certain that he will present the full budget also and last
a full term. I had the privilege of working with him in 1991 when
he was finance minister and I was governor, RBI. I am confident
that if he had been given a chance in 1990 to run the full
course, he would have acquitted himself extremely well. He is an
able minister, unafraid of taking tough decisions and backed up
his troops when in trouble. He turned out to be an outstanding
advocate of India's case before international fora. His
presentation of India's case to Hong Kong's hard-nosed bankers in
1991 was acknowledged to be one of the best.
Let us recall that at that time India was teetering at the edge
of default. Our reserves were scarcely sufficient to cover a
fortnight's requirements. Whatever the cause, India was in
serious trouble then. Mr Yashwant Sinha faced up to the problems
boldly. It cannot be denied that the able reformers who succeeded
him in 1991 would not have been able to carry through reforms so
painlessly if Mr Sinha had defaulted in his tenure on India's
external obligations. Not only did he courageously face the
situation, he also laid the basic ground work for the reforms
that followed. The government was in suspended animation when Mr
Sinha took the famous but controversial decision not to default.
At that time, many distinguished economists some in the prime
minister's office itself tried to argue that the idea of paying
back debt was a bourgeois vice. It must be said to the credit of
Mr Sinha and to Mr Chandrasekhar that they accepted the
unconventional suggestion to move gold. The first tranche of gold
pledged abroad was that held by government out of stocks acquired
>from smugglers. I recall how this important decisions was
criticised by unthinking politicians and media specialists, who
did not realise the gravity of the situation. But, it did mark an
important point in India's economic history. To pledge the
country's gold to prevent default, indicated how deep the crisis
was. Mr Yashwant Sinha fully recognised the political fallout of
the decision. He decided rightly that, even with all this
fallout, a failure to prevent default would have placed India at
the mercy of foreign forces.
While the reforms that followed Mr Sinha are important, they
needed Mr Sinha's activist tenure was a prologue. I know how the
Rao government balked at taking the follow-up decision in June
1996 to move another thirty tonnes of gold. Ultimately, they took
refuge under the fact that their predecessors (Messrs Sinha and
Chandrasekhar) had taken the decision and if need be, they could
always say the decision was that of Mr Chandrasekhar. Even as the
memories of the threat of national humiliation of 1991 are fast
fading, we should recall that the simple act of pledging the gold
averted greater disgrace of our having to go through the "lost
decade" which Latin America had to undergo because of its
default.
This time also, Mr Yashwant Sinha has a difficult job on hand,
though the texture of the task is different. As he surveys the
economy today, he must be wondering how it is so vulnerable in
spite of the relatively high level of reserves and fairly
comfortable balance of payments. The economy is growing, but at
too low a rate to meet the pressing demands of a growing
population. Inflation is under control, but employment is not
growing. There is a feeling of inadequacy all around.
Infrastructure is bursting at the seams. Power has expanded at
too low a rate to keep up with demand. Worst of all, we have the
unusual situation that power is in surplus in some states, like
West Bengal, and it cannot be evacuated to other-states. Few
power projects have taken off in the much vaunted private sector.
The "constituency" of financial investors and rating agencies
>from abroad is keenly watching not only what Mr Sinha says and
does, but also what lie does not say or does not do.
It is a pity that Mr Sinha's distinguished predecessor did not
listen to those of us who pointed out almost ad nauseam that
there was a slowdown in the economy. His able aides made fun of
the "slowdown" as a figment of the imagination. Some of them
tried to silence critics by saying that it was all part of the
capitalist cycle boom and burst. "Government should not and could
not intervene to boost demand". Benign neglect became the mantra
of governance.
To add to all this, we had the comic spectacle of banks having
surplus funds and borrowers in key sectors, in the small and
medium industries, not having enough credit. But, bankers were
happy to lend to government, more than the statutory liquidity
ratio required them. This was doubly blessed. Bankers would have
no probing enquiries as to whom they lent to. Government was
pleased because the deficit had to be bridged and RBI was
unwilling to print. Further, bankers had the mumbo-jumbo of
capital adequacy to take care of. If they lent to a manufacturer
of vehicles, or some other product, it was risky and more share
capital had to be provided. If they lent to President Narayanan,
they did not have to add to capital. All parties were satisfied
except those who needed credit to keep the machinery of
production humming.
The engine of growth in the Indian economy was and is the public
sector. However inefficient, it is the initiator of activity.
Infrastructure, heavy engineering, railways, fertilisers,
shipping and roads - all these and more are mostly in our public
sector. Unfortunately, the level of investment in Indian public
sector has gone down in real terms over the last five years.
Once, for instance, investment in railways goes down, the demand
for products which goes into such investment suffers. The same is
true of investment in power, roads and so on. Unfortunately, the
negative multiplier impact of these gaps in investment has led to
a slowdown in many units in the small and medium sector. The
pursuit of fiscal balance has been wrongly directed towards
cutting down investment in key sectors. This has had the
unexpected(?) impact of reduction in indirect taxes in the shape
of customs and excises, which goes on to further worsen the
fiscal picture.
I only hope that Mr Yashwant Sinha, whose budget speech
recognises the importance of revival of the economy, does not get
too easily persuaded by the mystique of reform. Reform is not
casting stone. The Washington Consensus itself is under question.
Its "one size fits all" remedy has been criticised in many
quarters, including the World Bank itself. Mr Sinha should not be
deterred in his task of revival by the siren calls of cynics who
ask him either to leave it all to the market or to forbear lest
the fiscal deficit is increased.
Government has a duty to intervene when the markets have failed.
The current state of Indian economy deserves to be tackled with a
healthy disregard for conventional wisdom. Pump priming is called
for on a massive scale. If additional investment needed for it
will lead to some higher deficit, so be it. It should be Mr
Yashwant Sinha's endeavour to be tough on revenue deficit, not on
investment for infrastructure.
I do hope that Mr Sinha will not follow his predecessors' stance
that the decline is only in the minds of his critics. The
problems of slowdown are real. They cannot be tackled by mumbo-
jumbo or clever evasion, least of all by monetarist medicine and
fiscal therapy. We need activation of the infrastructure and
strong action to control revenue deficit. The finance minister is
a person who is aware of the crisis. He has managed India's
economic crisis successfully once before. I do hope that he will
do so once again and prove his detractors wrong.
Back
Top
|
