In a democracy every citizen has the right to express his or her opinion on an issue of national importance. Former Finance Minister Yashwant Sinha chose to exercise it (‘I need to speak up now’, IE, September 27). Did Finance Minister Arun Jaitley have to respond by deriding him as “an applicant for a job at 80”?
Jaitley did not dispute Sinha’s data on the decline of the economy because all of it came from the Economic Survey, and more recent official reports. Instead, he sought to impugn the personal capability of his critic. “I must confess that I do not have the luxury as yet of being a former finance minister…Therefore, I can (not?) conveniently forget a policy paralysis… (and)… forget the 15 per cent NPAs (non-performing assets of the public sector banks one presumes)… of 1998-2002”. Political jousting is normal in a democracy but Jaitley’s remarks bode ill for the country because they show that despite being in office for three years he has no idea of what caused the recession of 1997-2002, or the role Sinha played in pulling India out of it.
The 1997 recession was triggered by a savage tightening of money supply by the Narasimha Rao government two years earlier when the surge of investment that had followed economic liberalisation in 1991 pushed inflation into double digits. This worked, but the earlier momentum kept industry growing at 12.2 per cent in 1995-96 and, with help from a Pay Commission award and a bumper harvest, at 7 per cent in 1996-97. The full impact of the credit squeeze was therefore felt only in November 1997 after the Diwali festive season ended and industrial growth dropped to 3.1 per cent. By then, the United Front government was on its last legs, so it did nothing; and the high interest rates the Vajpayee government had to offer to attract NRI funds after India’s nuclear tests in May 1998 ensured that industrial growth stayed around of 4.1 per cent from 1998 all the way till December 2000.
The difference between Sinha and the FMs who have followed is that he was conscious throughout the recession years that high interest rates were the main cause of the severe deceleration of industry. The Economic Survey for 2000-2001 listed “a high interest rate environment, (and consequent) lack of demand for capital goods” among its principal causes. When year-on-year inflation measured by the wholesale price index fell to 1.3 per cent in January 2002, the Survey pointedly shifted blame to “continued high real interest rates, and lack of both consumer and investment demand”.
Therefore, as soon as the India Resurgent Bonds had done their job, Sinha began to ease money supply till, by 2003, both deposit and credit rates were half of what they had been four years earlier. Not surprisingly, share prices began to rise and new IPOs began to be offered from late 2002 onwards. Maruti Udyog’s public offering of 16 per cent of its shares in May 2003 lit the fuse for the eight-year economic boom that followed.
Sinha had no difficulty in achieving this because he was supported by Bimal Jalan, perhaps the best RBI governor the country has ever had. Jalan felt no need to guard the RBI’s autonomy because he never felt it to be threatened. On the contrary, he had begun to lower interest rates and was beginning to get a mild recovery out of industry in early 1998 when the nuclear tests forced him to change tack. The allegations of high interest rates in successive economic surveys did not, therefore, provoke a defensive response from him as they did from Raghuram Rajan a decade later.
Sinha was also acutely aware that any spurt in fixed capital investment — a requisite for sustaining high growth — would inevitably create inflationary pressures because it would increase purchasing power long before the additional flow of saleable goods and services arrived to the market. He understood the way to prevent this was to reduce government consumption in step with the rise in investment. He achieved this with the Fiscal Reform and Budgetary Management Act. So well was this implemented that the UPA inherited an economy growing at 8.4 per cent, with a fiscal deficit of only 2.5 per cent of GDP. That was the bonanza it frittered away on welfare schemes without sparing a thought for how its profligacy would rob the youth of their future.
When the Modi government came to power it inherited an economy that was not too dissimilar to the one Sinha had faced in 1999. More than three years of sky-high interest rates forced upon the UPA by two growth-insensitive RBI governors, D. Subbarao and Raghuram Rajan, had brought industrial growth down to below 3 per cent. Industry had been begging for a lowering of interest rates since 2012, and had quietly invested $70 billion of its savings abroad. But the relatively new, and daring, entrepreneurs who had sunk their money into basic industries and infrastructure were forced to abandon Rs 8,60,000 crore worth of planned and half-completed projects.
Then, in August 2014, the Modi government got a bonanza Sinha had not even dreamed of: China stopped investing and global commodity prices collapsed. This made inflation across the globe, including in India, negative. But the RBI continued to imagine inflation where none existed. This turned the 12 per cent nominal borrowing rate that Indians had been facing into a real rate of close to 14 per cent.
Every last whisper of an excuse for not bringing down borrowing rates to less than half of what they were, as Sinha had done, therefore disappeared. But Rajan was not Jalan. So interest rates for investors went down by barely a sliver, the stock of abandoned projects increased to Rs 1,140,000 crore, and 40 of the largest private companies in the country entered bankruptcy court. That is not exactly a road to recovery.