Despite all reforms, the poor of India continue to be not only poor but deprived of basic amenities: Yashwant Sinha

Seven years later, when he became finance minister in the A B Vajpayee government, building a buffer to prevent a repeat of that crisis was part of a strategy adopted by him and his team. Forex reserves rose and over the next four years, from 1998 to 2002, the government unveiled the national highway programme and a project to build rural roads. During this period, administered rates were cut as the government cleaned up the excise duty structure, pushed Kisan credit cards, helped provide a momentum to housing, opened up foreign investment in insurance and addressed the issue of bad loans and clean-up of bank balance sheets, paving the way for a revival of private investment.

READ: We are still not a fully open, competitive economy… too much government interference: Chidambaram

However, speaking to The Indian Express, Sinha says that unless the basic concerns of the poor are addressed, reforms would not be acceptable and would continue to face resistance. He also believes that the finance ministry and the RBI should engage far more closely on the issue of interest rate management, indicating that both governor Raghuram Rajan and his predecessor D Subbarao were wrong in keeping interest rates high. Edited excerpts:

How do you see the progress on the economic front after 25 years, considering that you were in charge of the economy for a brief while in 1990-91?

There is no doubt that we have covered a lot of ground. And if you look at, let’s say, economic growth rates — annual growth rates recorded from 1950, you will find that there are 18 or 19 times that India has grown at more than seven per cent. That’s a benchmark I have fixed. And out of these 18 or 19 years, there have been only eight years between 1950 and 1991 and 10 years during this reform period. So if you look at the growth period, anyone will come to the conclusion that the reform years from the point of economic growth have been decidedly better than the non-reform period. Point number two is in the earlier period — eight years that one has identified — there has been, let’s say, growth of seven per cent plus in one year but it has not been able to sustain itself even the next year. It has collapsed. The first time that sustained growth lasted more than a year was in the post-reform period of two years — the last year of Manmohan Singh’s finance ministership and Chidambaram’s tenure as FM in 1996-97.

The more important thing is that for the first time in India’s history, we attained a seven or even eight per cent plus growth for five years running between 2003-04 and 2007-08. Why is it? My complaint always has been that our commentators and economists have not done any work to find out what was going for India to enable us to record this continuous high growth for five years. And then why it came down. And what will it take to revive it again on a sustained basis. So, clearly the reform years have been better from the point of view of economic growth compared to the non-reform period.

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Statistics will prove that in terms of sustainability of growth, the post-reform period has been better than the pre-reform period… And going into the causes of the decline which took place after 2007-08, we will find that we gave a go-by to the fundamental principles of reform, which caused a decline and brought the vicious cycle back into the Indian economy.

What are the fundamentals which were allowed to go haywire during this period starting 2008-09? Number one was fiscal deficit. But we let go of it. In my interim budget speech of 1990-91, I spoke about it and Manmohan Singh spoke about it in his first budget speech of 1991. Restraining or curbing or controlling fiscal deficit was the first and most important part of reform. The second was getting the better of inflation. The third was, which we attempted post Manmohan Singh’s and Chidambaram’s years as FM in 1996-97, bringing down interest rates. The fourth element of this strategy was to create demand — first of investment goods followed by consumption. And the fifth element was battling the situation on banks’ NPAs so that the private sector would be able to take off and there would be private investment. The sixth element was that despite the opposition, promote FDI wherever you can and get over the problem of balance of payments crisis from time to time and raise the level of our foreign exchange reserves to such a high level that a 1991 would not be repeated.

Then, there were a whole lot of supplementary steps like the reformation of the banking sector, the capital markets and rural development in order to be able to sustain demand. Underlying all this was the philosophy that India or the Indian economy would grow on the strength of domestic demand backed by domestic resources. So encourage domestic savings, demand and top it with FDI and there you are — you have the formula ready for growth.
Now this is what we painstakingly did, between 1998 and 2004, and this is what was destroyed in 2008-09 and subsequently by the UPA government. And the consequences are there for all to see. My point is that there were four chronic problems: fiscal deficit, inflation, high interest rates and low growth. We have licked all these problems between 1998 and 2004. We brought down the fiscal deficit, inflation, interest rates and we revived the investment cycle which led to growth. So in a nutshell, this is what I would say we were able to achieve.

But despite all the reforms, the poor of India continue to be not only poor but also deprived of the basic amenities of which we have been talking since Independence and before that. Those basic amenities have not been provided especially to the rural masses and the urban poor, who are deprived of potable drinking water, sanitation, toilet facilities, electricity, roads, irrigation, housing. Reforms will not become acceptable to the people of India until and unless we take care of them through direct government action and ensure that they are provided the basic amenities. Underlying all this would be employment generation. We have in this country jobless growth.

When you took over as finance minister in the Chandra Shekhar government in November 1990, India was bang in the middle of a crisis and it was all about firefighting and trying to avoid a default…

It was all about firefighting given the precarious balance of payments position which meant also pledging our gold — a most difficult decision, negotiating with the IMF and the World Bank for assistance, taking tough decisions in national interest to avoid a sovereign default. That would have made India a basket case. We were able to ensure that there was no default.

When P V Narasimha Rao took over in June 1991, one of the first moves was on devaluation. It seems obvious that within your government, too, in 1990-91 and in discussions with multilateral institutions such as the IMF prior to Rao’s government, this must have been on the agenda.

The Fund bank was suggesting that the rupee should be devalued and we had not yet agreed. The major reforms, of course, fiscal deficit was there, then trade reforms, banking sector reforms, capital market reforms, taxation reforms. These were all parts of the reform process that had been discussed and generally agreed upon with the Fund bank but devaluation was a suggestion on which we had not made up our mind. In any case it was not a budget item, it could have been done outside the budget. But the fact is that in Prime Minister Rajiv Gandhi’s time, the situation had become stark and was understood by all observers of the Indian scene. During V P Singh’s time as Prime Minister, they made some tentative attempts to get to the Fund as some discussions had started but they picked up speed when Chandra Shekhar became the Prime Minister because there was no way we could have managed without getting money from the Fund. And Rangarajan as RBI deputy governor was part of it.

When you were finance minister the first time in 1990-91, you also had Manmohan Singh as economic adviser to Prime Minister Chandra Shekhar.

Yes, Manmohan Singh used to be present whenever I used to discuss economic issues with Chandra Shekhar or on the budget. The final full-fledged budget didn’t happen because the cabinet had already decided that the finance minister will not present the budget in order to accommodate the Congress party.

It was also clear that there was little political support then for the Chandra Shekhar government, wasn’t it?

There was no political support during that time, when I was finance minister in 1990-91 in the Chandra Shekhar government. At that time the Chandra Shekhar government fell as the records will show because the Congress government was not in favour of a hard budget. And we needed a hard budget of the kind that Manmohan Singh presented and made a name for himself because he got the political support of Narasimha Rao. The Congress government which prevented me from presenting the same budget adopted it as its own and presented the budget as its own when Narasimha Rao became Prime Minister. But be that as it may, the point I am making is that critical opposition to reforms has always been a reality. And it is a reality even now. And why is that there is political opposition to reforms? It is because all the elements of policy that you need for ensuring high growth are of little interest to people. Of greater interest to the people is the problems that they face on a day-to-day basis, chief among them employment, their children getting jobs, and other things.

The Chandra Shekhar government couldn’t present a full budget in 1991 with the Congress pulling the plug. The Rao government which followed with Manmohan Singh as finance minister presented what has come to be hailed as a landmark budget, elements of which had been in the works during your stint. How do you view that now?

Like most Indians, I also take it as fate. Somebody else would have done it and I take that in my stride. But I got my chance when I presented five budgets and was able to carry forward the reform process. I have no regrets.

Twenty-five years later, what is your assessment of India opening up? What needs to be opened up further?

I am satisfied with what has opened up. But I will consider them to be minor events. Why I am saying that is because sectors opening up means what: FDI. The problem in this country has been that we have identified reforms with foreign direct investment. You are a reformist government if you open up more and more sectors to FDI. You are not a reformist government if you hold back. It is this crippling debate on reforms which has done enormous harm to the reform process. Let me tell you this. Once a famous TV anchor asked me, “What is the most important contribution in your four years as finance minister?’’ I said, “Kisan credit card”. And he almost fell off his chair. Now we have covered entire farming families with Kisan cards. But who is interested? Is anyone interested in rural roads? So these are not sexy subjects. When I used to invite people for pre-budget discussions in the finance ministry, the whole world — the media — would be present on the day industrialists came. But when the agriculturists came, nobody would be there. This is the problem. FDI, FDI, FDI. That is not the totality of reforms. It is a very small part. And that is why there is so much opposition to reforms.

If you were in the government now and if you were the finance minister, what is it that you would have pushed for?

First thing, I would have cleared all pending projects, whether they are roads, ports, railways, power or steel. The pending projects in the system should either be cleared or they should be told they are not worth caring, and build a system where projects will not be delayed like this. This is the first thing because this in itself will be the biggest antidote to tackle non-performing assets or bad loans of banks. Second, I would have certainly taken up the issue of interest rates more strongly with the RBI for the simple reason that the Wholesale Price Index had been in negative territory for month after month after month and therefore the Consumer Price Index or CPI cannot be the sole guiding factor for monetary policy. And in CPI, food items cannot alone be the guiding factor. Monetary policy is no remedy for food inflation, that is something I am convinced about and therefore what happens is when you attack food inflation or CPI through monetary policy, it does little to help ameliorate that situation but it makes investment that much more unattractive and therefore has side effects. It is like taking a medicine with severe side effects. That is what we have witnessed. So while I have great respect for the intellectual capabilities of Raghuram Rajan, I think he made a mistake here and before him Subbarao who was governor. Subbarao, in the sense that he raised it (interest rates) 13 times to tackle food inflation.

Now that the NDA government has signed the historical monetary policy framework agreement, do you think benchmarking inflation to CPI was a mistake? Do you think there is a need for such a binding agreement which reduces elbow room?

I don’t know. Things were working out quite well even when the governor was deciding and now you get more experts to put their heads together and it becomes that much more difficult. But I think there is a case for more discussions between the RBI governor and the Ministry of Finance, particularly the minister, and some of these issues should be discussed. It does not impinge on the autonomy of the RBI. The RBI is not an island unto itself to say that we will do whatever irrespective of the consequences for the larger economy.

Now that India have completed 25 years of economic reforms, what are the things we should be doing over the next 25 years?

I think first, we should be clear about our objective. I think we should take the nation into confidence and say that we need an eight per cent, 10 per cent, whatever, growth rate. Why do we need such a growth rate? That’s because a higher growth rate creates wealth and it is wealth alone that will tackle the problem of poverty. So we need a high growth rate. What should that high growth rate be will depend on how soon do we want to tackle the problem of poverty. So if you say we would like to tackle the problem of poverty in this country in 15 years, the growth rate will be x per cent and if you want to tackle poverty in 20 years then the growth rate will be less than x per cent. So the NITI Aayog experts have to sit down and prepare this first with all the reasons, so you have this long-term plan saying that in the next 15 years India will get rid of the problem of poverty and we will target them at sustained growth of eight per cent, nine per cent, whatever. In order to achieve that growth rate, we need resources. Where are those resources going to come from? As history will show, they will largely come from domestic savings. So we need a savings rate of 33 per cent or 35 per cent. In order to achieve that savings rate, you have to make sure that there is no dis-saving by the public sector. Which means government’s own deficit should be less, public sector entities deficit should be less and they should make their own contribution to overall national savings. Then you say on top of it foreign direct investment and therefore in order to achieve this figure of 40 billion, 50 billion, 60 billion, we need to do steps 1, 2, 3, 4. Then the other very important thing will be inflation and interest rate. This jugalbandi between inflation and interest rate must be ensured on a long term basis. So in the past to boost demand, we did two things: we went for large infrastructure projects and for housing; in the process you are creating demand for investments and in the process you are also creating employment opportunities. And then you are creating these employment opportunities and through this route you are putting money in people’s pockets. Then consumption demand will automatically build up and then everybody will become interested in creating the financial instruments products for meeting that demand. These equated monthly instalments, did we know about EMIs in this country before 1998?

So, as these financial products are created more and more people will come into the field and the economy will start reviving.

There is so much talk about the word “reform” now. What does it signify to you?

That the government is committed to reforms is clear. That they are committed to both big and small reforms, that is also clear. They have inherited problems and they are trying to tackle those problems, which is also clear. Hopefully, they will be able to get the better of these problems like bank NPAs. And they are doing a lot more on inclusive growth and there also they will succeed. It is only that we have to make sure that it does not result in waste because our experience in this country has been that we have come out with the best of schemes and they have failed because the schemes have not been implemented properly on the ground. So if it is Jan Dhan then we have to make sure Jan Dhan does not add to bank NPAs. If we are creating swachchta and building these toilets make sure that the toilets are a permanent asset and are not put out of use after six months or a year and so much money down the drain. So implementation is the key and there you need a lot of administrative tuning in and toning up to make sure that money is not wasted.