In the mid 1980s, during the first burst of reforms, Shankar Acharya came to the finance ministry as an economic adviser. From 1985 to 1990, Acharya saw the turmoil building, but he left on deputation to the World Bank just as the 1991 crisis unfolded. By early 1993, when he returned to the finance ministry as chief economic adviser, some of the important reforms had been launched, leaving policy makers like him to focus on “non -glamorous”, yet critical, areas such as tax reforms. Acharya’s stint as chief economic advisor lasted eight years — the longest any CEA has served so far — and straddled three governments: three years of the Narasimha Rao-led government, two years of the United Front government and three years of the Vajpayee-led government.
In 2001, he went on a sabbatical before leaving the government in 2002. In an interview to The Indian Express, Acharya says that over the last 25 years, while much ground has been covered, successive governments have not been able to carry out labour reforms, something that has hindered employment growth.
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How was the build-up to the crisis in the 1980s? Sitting in the ministry of finance, was it obvious to you and others then?
You could see the crisis coming. What struck me when I was economic adviser in the ministry of finance in 1985 was that there was an enormous deficit on the foreign trade front. Imports those days were nearly double that of exports — export earnings were only 55% of imports. The trade gap was a serious one. As economic advisers, our job was to prod the rest of the establishment to focus on depreciation of the rupee. Over time exports grew, responding to the currency adjustment. By that time,other problems arose. By the late 80s, all this forced us to resort to more and more short-term borrowings. What the government did was to nudge public sector entities such as Indian Oil Corporation to borrow abroad to plug this gap on the trade front. There was a lot of pressure on the Balance of Payments (BoP) front because of the weak macro-economic factors. Until the early ’80s,we had managed the fiscal situation conservatively. But we began indulging in fiscal profligacy to keep growth going and which led to problems in the late ’80s and early ’90s. By 1990, our fiscal deficit — Central government and states put together — had crossed 8%. The interesting thing then was that we didn’t measure fiscal deficit until then; we used to focus only on cash deficit. So the broad point I am making is that the trade deficit of the ’80s, fiscal imbalance and later, the Kuwait War tipped us into the BoP crisis.
How did the government and policy-makers respond to the crisis?
The response was extraordinarily good, pretty coherent. Industrial licensing was abolished and import controls on capital and intermediate goods were eliminated. Over two years, the exchange rate moved from a fixed peg to a market-determined rate. By April 1993, it was a market-determined rate. Secondly, there was the phased reduction of customs duty from a peak of 200% and to Manmohan Singh’s credit, by the time he left, it was lowered to 50%.We opened up to foreign direct investment and towards the end of 1992, to foreign institutional investors. Banking reforms were launched and major capital market reforms were unveiled. Sebi became a statutory regulator. The National Stock Exchange grew during the period and the National Securities Depository Limited was created. There was abolition of import licences and industrial licencing. The other important thing which was launched was tax reforms.
What was the level of political support, both during the reform period and before it?
The political support varied. In the mid-80s, we had a little bit of reform burst when Rajiv Gandhi was prime minister. But macro imbalances had started in the ’80s and during the last two to three years of the Rajiv-led government, there was little appetite for hard decisions because of the Bofors controversy and the rift between Rajiv Gandhi and finance minister V P Singh in 1987. My assessment is that without Mr. (Narasimha) Rao’s backing, a lot of these reforms could not have been done. He backed Manmohan Singh and P Chidambaram on most major issues.
How did your role play out then?
Some of the major reforms had already happened by the time I returned to the government in early 1993 — like industrial de-licensing and exchange rate reform. On the customs and excise side, the tax system was very complex and very discretionary. Much of it was cleaned up during the 1990s. It was not glamorous work. M R Sivaraman was revenue secretary and by the mid 1990s, customs tariffs had come down to 50%. After the Rao government, during the United Front government, the insurance sector was opened up. During the United Front Government of 1996-98, the insurance sector was opened up. The period which followed, with Atal Bihari Vajpayee as PM and Yashwant Sinha as finance minister, was much more fruitful in pushing reforms. The two outstanding prime ministers when it came to reforms were Rao and Vajpayee. There was also the integration of service tax with excise, the shift to revenue sharing in the telecom sector, and sectoral reforms, including the national highways. We had no National Highway Authority of India until then. The fiscal responsibility law was passed towards the end of that period.
What is still closed after 25 years and what, according to you, is yet to be opened up?
We have to recognise that a lot of things also didn’t happen. It is not that we didn’t know about labour market distortions. As early as the 1990s, there was a draft Cabinet note on amending the Industrial Disputes Act and labour reforms. But there was no political backing and we have paid a heavy price for that in terms of low employment growth and manufacturing growth compared to many other countries. Another area where we could have done more is the banking sector — lower the holding of the government in public sector banks to below 51%. There was no political appetite to do that although there was a draft Bill during the NDA government’s time to lower the government’s stake to 33%. Another area we have to look at are the problems faced by PSU banks, especially related to governance, and state electricity boards too. Though there was reform as reflected in the Odisha model of unbundling, there was no political appetite to change to an economic pricing model, especially for farmers, and their dues had to be written off. Another area which got worse is land markets. It has become more complicated, especially after the UPA 2013 Land Acquisition Act.
Over the next 25 years, what should be on the reforms agenda?
In the short term, my priority would be the Goods and Services Tax. Though there are bound to be glitches, over time, it can be a great reform. The other area which we should be focusing on in the short term is the implementation of the bankruptcy law. We need to follow up on the bad loans in banks and take up the the ownership issue of state-run banks. We need to find a quick resolution to all these. Another area I worry about is our declining exports. The world economy may be in trouble but other countries are increasing their exports. We need to look at the exchange rate policy, infrastructure and logistics. We also need to expand our tax base over the next few years. The fiscal deficit of both the Central government and states also need to come down At 6.5%, it is way too high considering that in 2007-8 it was around 4% of the GDP. And of course, we have to improve the quality of government spending and its composition — use Jan-Dhan, Aadhaar and mobile for better targeting and more productive use of government money. We should also be focusing on agriculture reforms.
If you were in a similar role, what would you do now?
I would focus on the banking sector, especially the weak PSU banks. We need to confront this issue on an experimental basis with the privatisation of some banks. On exports, a big bottleneck is our exchange rate as it is over-valued if we look the Real Effective Exchange Rate or REER. I would have addressed that. The other area I would have focused on is labour market barriers. Otherwise, our much-touted demographic dividend could become a nightmare of unemployment and under-employment. I would also have liked to work on expanding the tax base, considering India’s low tax to GDP ratio. I would also like to make the new monetary policy framework work — my bias would be towards a conservative monetary policy. In the long run, I would focus on areas where we have done poorly — like the power sector and urban infrastructure. It is critical to reform urban institutions to reap the benefits of urbanisation. On education, while we have high rates of enrollment, learning outcomes are frighteningly poor. Public health systems could also be a major challenge if we don’t iron them out. Infrastructure and institutional reforms are a must.
In the the new monetary policy framework, would you settle for the Consumer Price Index (CPI) as a benchmark?
A compromise would be to focus on core CPI, excluding food and fuel. We can’t go back to Wholesale Price Index as it has a lot of limitations.