A Golden Op­por­tu­nity to Move For­ward on the Re­forms Path

The Economic Times - - Money & Banking Bringing In A New Order -

INDA’s overwhelming win at the hus­tings has fu­elled hopes it will act swiftly to set the econ­omy right. As it goes about its job, it should also fo­cus on es­tab­lish­ing new in­sti­tu­tions and strength­en­ing ex­ist­ing ones to build on the re­forms ini­ti­ated by Narasimha Rao govt two decades ago, says Sha­jiVikra­man

n early 1989, with clear signs of a po­ten­tial bal­ance of pay­ments cri­sis trig­gered by an ex­pan­sion­ary fis­cal pol­icy, Mon­tek Singh Ah­luwalia, then work­ing in the Prime Min­is­ter’s Of­fice, pro­duced a dis­cus­sion paper. The paper, and a sub­se­quent re­port of a com­mit­tee headed by for­mer fi­nance sec­re­tary S Venki­tara­manan made out a case for redesign­ing eco­nomic poli­cies and for open­ing up the econ­omy. Of­fi­cials who worked with the then Prime Min­is­ter Ra­jiv Gandhi re­call him con­ced­ing the sit­u­a­tion called for cor­rec­tive ac­tion and ac­knowl­edg­ing there was a need for a par­a­digm shift. But any changes would have to wait un­til af­ter the polls later that year, he told them.

Gandhi’s party lost the elec­tions, and it is now his­tory as to how it was left to Narasimha Rao, who headed a mi­nor­ity govern­ment, to pro­vide the po­lit­i­cal back­ing for In­dia’s fa­mous eco­nomic re­forms two years later. That is why the num­bers the BJP has se­cured on its own in the 2014 polls have fu­elled con­sid­er­able hope of sig­nif­i­cant changes and fur­ther re­forms. For sure, the pri­or­ity for the Na­tional Demo­cratic Al­liance, or the NDA, led by the BJP would be to clean up the mess on the eco­nomic front and to lower in­fla­tion and boost growth. But, in an econ­omy more open and way big­ger than in 1991, and with fewer big-ticket re­forms pend­ing, what will count more is the re­sponse to the chal­lenge in build­ing new in­sti­tu­tions and strength­en­ing ex­ist­ing ones. The new govern­ment with num­bers to back it for any leg­isla­tive changes has an ex­tra­or­di­nary op­por­tu­nity to do this if it moves wisely. In the early days of re­form in the 1990s, the govern­ment pro­moted two new in­sti­tu­tions in the fi­nan­cial sec­tor — the Na­tional Stock Ex­change and the Na­tional Se­cu­ri­ties De­pos­i­to­ries Ltd — to help mo­bilise sav­ings, at­tract for­eign cap­i­tal and en­sure pro­duc­tive use of cap­i­tal in the face of re­sis­tance from the en­trenched set in Mum­bai. What mat­tered then was po­lit­i­cal will, pro­fes­sional lead­er­ship — both at the min­istry of fi­nance and at these two new in­sti­tu­tions — and choos­ing the right people for the right job.

The suc­cess of those ef­forts by a mi­nor­ity govern­ment is re­flected in the fact that two decades later, both these in­sti­tu­tions have emerged as in­sti­tu­tions with world-class mar­ket in­fra­struc­ture. The cap­i­tal mar­ke­treg­u­la­tor,firstem­pow­eredintheear­ly1990s, has since grown in stature. So what is it that a new govern­ment with the com­fort of par­lia­men­tary num­bers should do? In­dia now has sev­eral reg­u­la­tors in the fi­nan­cial sec­tor en­joy­ing vary­ing de­grees of au­ton­omy and re­spect. Over the last decade or so, af­ter trans­fer of power from the min­istry of fi­nance to the new reg­u­la­tors, the govern­ment has chipped away at some of the in­sti­tu­tions. One of its fail­ures has been the in­abil­ity to ac­cept and set­tle pro­fes­sional dif­fer­ences with the reg­u­la­tors as il­lus­trated by the ex­pe­ri­ence of Sebi dur­ing CB Bhave and KM Abra­ham’s ten­ure and at RBI dur­ing the tenures of YV Reddy and later D Sub­barao. A new fi­nance min­is­ter will have to mend ties with some of the reg­u­la­tors, al­ter the terms of en­gage­men­tan­dal­lowthem­togrowan­drespect­themwith­out the shadow of a mai-baap re­la­tion­ship, and also en­sure ac­count­abil­ity. The chal­lenge now is more dif­fi­cult since it was eas­ier to re­form two decades ago and build new in­sti­tu­tions in a vac­uum. For sure, in­sti­tu­tion build­ing is far more dif­fi­cult. A new in­sti­tu­tional blue print has been worked out by a com­mit­tee headed by Jus­tice Srikr­ishna but the BJP is yet to re­veal its mind on it. The new fi­nance min­is­ter and the prime min­is­ter will have to de­cide whether they would pre­fer an ex­plic­itly in­fla­tion fight­ing cen­tral bank, a new reg­u­la­tor em­pow­ered to have over­sight over the fi­nan­cial sec­tor, ex­clud­ing banks, and a few new in­sti­tu­tions, in­clud­ing a res­o­lu­tion agency that will work on dis­tressed firms. Add to that a new gov­er­nance struc­ture for sta­te­owned banks weighed down by bad loans and the need for cap­i­tal. That of­fers a po­lit­i­cal chal­lenge as it means­doin­g­away­with­pa­tron­age­an­dend­ing­moral sua­sion by the es­tab­lish­ment in New Delhi, in­clud­ing the depart­ment of fi­nan­cial ser­vices. This time, the govern­ment doesn’t have to look too far. A com­mit­tee headed by the for­mer chair­man of Ax­isBankPJNayakhas­stat­ed­what­need­stobedone toim­prove­g­ov­er­nanceat­state-owned­banksandthe rate of re­turn on govern­ment in­vest­ments, ob­vi­at­ingth­e­need­forthe­se­len­der­sto­go­tothe­gov­ern­ment with a cap in hand to raise cap­i­tal. Nayak per­haps is best suited to over­see this tran­si­tion given that he is aformer­civilser­vantwho­later­wen­ton­to­help­build apri­vate­bankan­dis­are­spect­ed­pro­fes­sion­al­known forhis­in­tegrity.If the­gov­ern­mentsuc­ceeds,it­would also mean shut­ter­ing the depart­ment of fi­nan­cial ser­vices — a rec­om­men­da­tion first made by M Narasimham, the for­mer RBI Gover­nor. Re­build­ing of many in­sti­tu­tions in the fi­nan­cial sec­tor will be con­tin­gent on a re­boot­ing of In­dia’s min­istry of fi­nance to suit the needs of a mod­ern econ­omy. That would mean build­ing a min­istry which is re­cep­tive to change and new ideas — one that in­ducts pro­fes­sion­als from out­side, helps build in­sti­tu­tional ca­pac­ity and works as more of a pol­icy-mak­ing body for the medium and long term. It also ought to lead to a sep­a­ra­tion of the tax wings —theCBDTandCBEC—pat­terned­per­hap­son­the lines of the US In­land Rev­enue Ser­vice, which is delinked from the US Trea­sury, a Fis­cal Coun­cil, which will have over­sight over fi­nances, and a new Re­forms Com­mis­sion, which could re­place the Plan­ning Com­mis­sion, and a relook at the role of in­sti­tu­tions first pro­moted by the state and its lenders for fi­nanc­ing in­fra­struc­ture projects, which have not ful­filled their man­dates. In the 1990s, it was per­haps eas­ier to carry out struc­tural changes be­cause there was a broad in­tel­lec­tual and pro­fes­sional con­sen­sus on what needed to be done in the min­istry of fi­nance headed then by Man­mo­han Singh. There was a recog­ni­tion even be­fore the 1991 cri­sis that poli­cies were faulty and cour­sec­or­rec­tion­was­needed.The po­lit­i­cal back­ing that was miss­ing ear­lier was pro­vided by Prime Min­is­ter Narasimha Rao. The fi­nance min­istry then had the likes of Mon­tek Singh Ah­luwalia; Shankar Acharya; a lib­eral econ­o­mist like Ashok De­sai; and civil ser­vants with strong eco­nomic ground­ing such as YV Reddy, who was suc­ceeded then by PJ Nayak; Ran­gara­jan in the RBI; and, in Mum­bai’s fi­nan­cial sec­tor, GV Ra­makr­ishna, SS Nad­karni,RHPatil,Rav­iNarainandCBBhave,who helped build crit­i­cal in­sti­tu­tions. There is a grow­ing recog­ni­tion now that over the years, the fi­nance min­istry has been weak­ened, mak­ing it in­cum­bent on the new lead­er­ship to help build its in­tel­lec­tual and pro­fes­sional fire­power again.

Not just that. In the early days of re­forms, the min­istry of fi­nance en­gaged a lot with eco­nomic re­search in­sti­tu­tions and the academia, reach­ing out for fresh ideas. In early 1993, Man­mo­han Singh in­vited renowned Pro­fes­sors Jagdish Bhag­wati and TN Kr­ish­nan to study the re­forms un­der­taken by the govern­ment and to rec­om­mend fur­ther ac­tion. A sep­a­rate pub­lic dis­cus­sion paper was also pro­duced then by the min­istry on eco­nomic re­forms (two years af­ter the re­forms were in­tro­duced) and the task ahead. It is this re­port — half-way through the re­form pe­riod in 1993 — which men­tioned that old habits of think­ing and work­ing should be shed and dif­fi­cult de­ci­sions, which could hurt pow­er­ful vested in­ter­ests, need to be taken. “They must be ac­com­pa­nied by re­forms of laws, rules and pro­ce­dures. But it can be done,” the paper said. That is a doc­u­ment which could well have been writ­ten in 2014 also.

In 1984, af­ter a land­slide win, the Ra­jiv Gandhi-led govern­ment,which­start­ed­well,fal­teredthree­years down the line af­ter poll re­verses and cor­rup­tion charges weighed it down. Sim­i­larly, re­form fa­tigue set in for the Narasimha Rao govern­ment af­ter the first flush of re­forms in the ini­tial two-and-a-half years. The new prime min­is­ter elect is surely po­lit­i­cally well grounded to know that the win­dow open for tak­ing hard de­ci­sions be­fore po­lit­i­cal re­al­i­ties set in is the first year or two. It may in­ter­est the new fi­nancem­i­nis­ter­to­knowwhatBJPleaderand­former fi­nancem­i­nis­terYash­wan­tSin­hahad­tosay­on­what he had learnt the hard way af­ter his first full budget in 1998 — that it pays to take hard de­ci­sions out­side of the­bud­get­inIn­dia,anad­vice­of­fered­to­him­by­his fi­nance sec­re­tary Vi­jay Kelkar.

For a $2-tril­lion econ­omy, In­dia faces a crit­i­cal chal­lenge that many other mid­dle-in­come coun­tries have en­coun­tered and found it tough to over­come — sus­tain growth over a long spell. His­tory shows that the ones who suc­ceed are those who have ro­bust in­sti­tu­tions.

The new

A mod­ern

They key

The new

Broad in­tel­lec­tual

Changes to

In that

PJ Nayak C Ran­gara­jan

Man­mo­han Singh

GV Ra­makr­ishna, SS Nad­karni, RH Patil, Ravi Narain CB Bhave

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