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Thursday, Dec 30, 2004

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Not a reluctant reformer

By C. Rangarajan

P.V. Narasimha Rao provided the support from behind for the reform process.

HOW MUCH of a reformer was P.V. Narasimha Rao? Was he a reluctant reformer or was he an enthusiastic reformer? These questions have been posed to me by several friends. Perhaps these doubts arise partly because Narasimha Rao had himself talked about the `middle path' and had also expressed certain reservations about disinvestment in the more recent period.

During the period of 1991-96, I was for a year member of the Planning Commission and later Governor of the Reserve Bank of India. I had several occasions to meet Narasimha Rao, in both capacities. I did not, however, meet him regularly. My own perception is that he was an advocate of liberalisation and was convinced of the need for fundamental changes. He may not have expressed himself strongly but he stood behind the various measures that were introduced. That he was willing to provide the political support was adequate to carry through the reforms.

The decision to devalue the rupee was one of the earliest decisions to be taken by the new Government. I was involved with it at the decision making stage as well as at the operating end. Some questions have been raised whether there was some re-thinking, even as we were implementing the decision. Even originally it was decided that we should go through a two-step process. We wanted to gauge the reactions to the first step before going to the next. In any case, unlike on previous occasions when the decision to devalue was announced by the Government, this time as the system had changed, it was done as part of the daily routine of determining the exchange rate by the RBI. The second step was advanced by a day because the market was full of rumours of various sorts after the first step. I had, however, no intimation of any rethinking at that stage.

The Eighth Five Year Plan was formulated as the reform process was under way. The Plan document provided perhaps the most detailed rationale for the liberalisation process and it had also a chapter on policy framework. Narasimha Rao was the Chairman of the Planning Commission and I had a major responsibility in drafting the document. He had no differences at all with respect to the various formulations in the Plan. The one change that he wanted to make was a substantial one and that was to increase in a big way the allocation for rural development. At the meeting of the full Planning Commission, the document was approved and no dissent with respect to the liberalisation process was voiced by anyone. In fact, the basic framework of liberalisation was accepted and was taken as given.

The need for fiscal consolidation was a major concern at that time. The National Development Council appointed a committee at that time under the chairmanship of Biju Patnaik and I was a member besides several Chief Ministers. This Committee, which came to be known later as the Austerity Committee, produced a report that made strong recommendations for containing the growth in salary and administrative expenditures of State Governments. But the NDC meeting convened to consider the Report had to be postponed. Apparently it was found to be difficult to carry it through politically, even though my impression was that Narasimha Rao was willing to have the matter brought into the open and discussed.

The reform process in the early years had made far-reaching changes in the foreign trade, foreign investment and exchange rate regimes and in the financial sector. These were changes with which I was associated closely. While I had not discussed directly these changes with Narasimha Rao, I knew he stood solidly behind the Finance Minister (Dr. Manmohan Singh) who was in full command. The shift in the exchange rate regime was a fundamental one and could not have been accomplished without the full support of the Prime Minister. I do not recall any occasion when he had expressed any reservations on the reform measures in these areas.

On the issue of the role of the Government, certainly Narasimha Rao had talked of the `middle path'. This was never the issue. The question to be debated was on the right kind of mix. The Eighth Plan document had a clear statement on the role of public enterprises and it said:

"(1) The public sector should make investments only in those areas where investment is of main infrastructural nature and where private sector participants are not likely to come forth to an adequate extent within a reasonable time perspective. The public sector must withdraw from the areas where no public purpose is served by its presence."

After he ceased to be the Prime Minister, at a later stage, Narasimha Rao had certain misgivings on disinvestment. When he was staying in the guesthouse of the Raj Bhavan in Hyderabad, I once discussed the issue with him and told him that his current views were somewhat at variance with the approach we had earlier. But he felt that while there might not be a case for public enterprises to enter certain areas, it was not necessary for them to vacate the space they currently occupied.

The reform process had many facets. We had a Finance Minister who was clear about the direction in which the economy should move. Controls that inhibited growth and expansion were counter productive and had to go. We needed to impart the spirit of enterprise and innovations by injecting a greater element of competition. This broad approach was applied to various sectors and a reform agenda evolved as a consequence. Certainly the origins of liberalisation can be seen in the various measures taken in the later half of 1980s. But they were tentative and uncoordinated. Under the shadow of crisis, liberalisation acquired a more definitive form. It marked a new beginning and not just a continuation. However, the need to take care of disadvantaged sections of society was never forgotten and the reform process always had a `human face'.

Narasimha Rao was not a reluctant reformer. He was in tune with the spirit of the reform process and provided the support from behind. He may not have sounded an enthusiastic reformer. He played it in a low key, though his fingers were on the right notes. He was a reformer, albeit a subdued reformer.

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