When I came to the west coast of the United States in 1992, I was the first minister to visit this country representing the new government in India that had announced major economic reforms in the summer of 1991. I was received with a large degree of cordiality but also with a considerably larger degree of scepticism. Although there was a new Prime Minister, and, more importantly, a renowned economist as the new Finance Minister, both of them had been part of the old establishment for nearly 30 years.
The party in power was also the Congress party… While the government’s statements promised change — and the government’s policies had indeed heralded change — it seemed that the driver of the change was the crisis faced by the economy and not the conviction that fundamental change was imperative to prevent an economic collapse.
My audience asked me searching questions. I was asked to spell out a road map for the future with definite milestones. I was asked when certain things would happen. There was no hostility, there was perhaps even a measure of sympathy, but few were prepared to believe that India had charted a new course.
Even after nine months in office, the new government was moving forward only tentatively, testing the waters at every policy step. There still remained controls on foreign exchange, a dual exchange rate, high tariffs, quantitative restrictions, severe limits on foreign direct investments, no entry to foreign institutional investors, controls on capital issues, administered prices, a huge fiscal deficit and many other aspects of the earlier dirigiste regime.
... I was then the Commerce Minister, and, naturally, could speak with some authority only on India’s trade policy... Nevertheless, I believe I made a valiant effort to sell the idea of a new-born India to my audience... I suspect many persons in the several meetings I addressed left with the impression that I was selling dreams and not a carefully crafted policy. I suppose that is when I acquired the reputation of a dreamer. I still have that reputation, but it has stood me in good stead.
A Virtual Revolution
The literature on economic reforms sets great store by liberalisation, privatisation and globalisation. Fifteen years ago, in India, these words had acquired an unsavoury reputation. Liberalisation was viewed as a capitalist tool to exploit and impoverish the masses; today, it is seen as the path that has brought in more investment, more competition and more choice to consumers in a large number of industries, products and services.
Privatisation was viewed as a reckless ‘sale of the family silver’ that would enrich the already rich and enable them to capture the vast assets belonging to the people; India did not quite take the road of privatisation (except for a brief period between 2001 and 2003), but the disinvestment of small portions of equity in public sector enterprises has helped unlock the true value of the enterprises as well as subject them to the discipline of the market.
Globalisation was viewed as an invitation to the corporations of the world to re-enact history and take over the country (and its businesses) in the same way as the East India Company had done in 1757; today, far from taking over India or Indian industry, globalisation is seen as an opportunity for Indian companies to acquire businesses abroad....
How did this remarkable change happen in a period of 15 years? Through this period, I know that we disappointed many who advocated ‘big bang’ reforms. Instead, we chose to do reforms in a calibrated way. It was always one measured step at a time, and at every step we were careful to ensure that the poor were not alienated or further impoverished. For example, we did not reject the need for the government to spend a large amount of money on programmes to alleviate poverty, and we continue to allocate large sums of money for meeting the basic needs of the people such as drinking water, sanitation, basic healthcare, primary education and rural roads. We also kept in mind the interests of our farmers: we continue to subsidise the cost of power, seeds and fertilisers, and we continue to procure through State agencies many farm products at prices that will be remunerative to the farmer. Another core concern has been inflation: it has been contained at a level below 5 per cent in order to bring relief to the common citizen.
Given the context of the Indian economic situation, ‘big bang’ may have meant ‘sudden death’, if not in economic terms, certainly in political terms. Slow and steady reforms may have disappointed our critics, but they have won the race to get public support on the side of reforms. Besides, slow and steady reforms have proved to be more stable and durable. I can say with pride that not one reform measure taken in the last 15 years has been reversed, despite the fact that there have been six governments and five Prime Ministers during this period.
There are, however, many challenges ahead... The foremost is to sustain the momentum of growth and maintain a rate of 8 per cent per annum in the medium term. This requires a mix of right policies, new initiatives and better governance. It also requires finding the resources to finance growth without compromising on financial stability and fiscal prudence. Among the other challenges, the more important are agriculture, energy and infrastructure.
India’s GDP in 2005-06 was about $ 750 billion. The savings rate was 29.1 per cent in 2004-05 and presumably higher the next year. The investment rate was 30.1 per cent in 2004-05 and presumably higher the following year. Obviously, there have also been productivity gains in these years that have not yet been fully assessed. Given the current state of the economy, to grow the GDP at 8 per cent or more requires very large resources for investment. It also requires further gains in productivity, which is possible only if we can make more investments in education and healthcare. The obvious answer is to supplement domestic resources with more foreign capital. The current account deficit was only 0.4 per cent in 2004-05 and 1.3 per cent in 2005-06, and hence there is ample room to accommodate a larger flow of foreign investment without affecting fiscal stability.
On the question of mobilising domestic resources, given our preference for moderate and stable tax rates, the challenge lies in enhancing domestic savings, especially for the long term. India’s banking system is one of the strongest and best-regulated in the world. The total outstanding credit at the end of September 2006 was $ 370 billion, representing about one-half of the GDP. It is the other half of the GDP that requires financing from well-regulated institutions and sources. To lend more, banks need to raise more capital in order to comply with Basel II norms and other prudential regulations. Hence, the banking system alone cannot perform the task. The obvious answer is to promote long-term savings through well-regulated pension and insurance sectors.
Bills are before Parliament for amending the banking laws and to put in place a statutory regulator for the pension sector. A Bill is on the anvil to amend the insurance laws. Early passage of these Bills will be important to garner the resources required to sustain high economic growth.
(P Chidambaram is the Union Finance Minister. This is an extract of a lecture he delivered at Stanford University, US, on October 24, 2006)