By Sanjaya Baru
‘If the present crisis is the greatest we have faced since Independence,’ wrote former RBI governor I G Patel in the article, ‘New Economic Policies: A Historical Perspective,’ in the January 1992 edition of Economic & Political Weekly, ‘it is for no underlying economic factor which is more adverse now than what we have had to contend with in the past several decades. It is because successive governments in the 1980s chose to abdicate their responsibility to the nation for the sake of short-term partisan political gains and indeed out of sheer political cynicism.’
In the most recent example of such cynical abdication of fiscal responsibility, Congress president Rahul Gandhi has proposed an income distribution scheme, Nyuntam Aay Yojana (NYAY), literally minimum income scheme, that could spiral over time, through competitive populism of political parties, into yet another fiscal and economic crisis. The governments of the 1980s that Patel was admonishing were those of Indira Gandhi and Rajiv Gandhi. Rahul Gandhi is walking in their dubious fiscal steps.
Patel was not the only economist who traced the origins of the economic and fiscal crisis of 1990-91 to the economic policies of Rajiv Gandhi. Manmohan Singh’s doctoral adviser at the University of Oxford, I M D Little, co-authored a book with Vijay Joshi in 1994, India: Macroeconomics and Political Economy 1964-1991. In this widely quoted publication, they, too, blamed the policies of Rajiv Gandhi during his prime ministerial tenure, 1984-89, for the economic crisis of 1990-91.
Joshi and Little concluded, ‘The major mistake of macroeconomic policy lay in neglecting the danger signs evident in 1985-86 on the fiscal front. Fiscal deterioration was allowed to proceed apace. As a consequence, the current account deficit continued to worsen and domestic and foreign debt continued to increase at a dangerous rate. By the end of the decade, the macroeconomic fundamentals were out of joint. Even a strictly temporary shock like the Gulf War was enough to trigger a full-scale crisis.’
The political populism of the 1980s contributed to a sharp increase in government spending on a widening range of subsidies. The share of fiscal deficit in national income shot up from an average of 6.3% in the Sixth Plan period of 1980-85 to 8.2% in the Seventh Plan period of 1985-90. To make matters worse, the internal debt of the government also went up from 36% of GDP at the end of 1980-81to 54% of GDP at the end of 1990-91. Interest payments by the government doubled during this decade, with their share in GDP going up from an annual average of 2.6% in 1980-85 to 3.9% in 1985-90.
A signal achievement of the post crisis decade was the greater, though inadequate, political commitment to fiscal responsibility. During his term as Union finance minister in 1991-96, Manmohan Singh brought the fiscal deficit-to-GDP ratio down from 8.13% in 1990-91to 4.91% in 1995-96. In 2003, the Atal Bihari Vajpayee government legislated a Fiscal Responsibility and Budget Management (FRBM) Act that set the parameters of fiscal responsibility.
However, no sooner had the ink on the FRBM legislation dried, GoI began reneging on the targets. During its 10 years in office, the UPA government failed to adhere to FRBM timelines.
The fiscal deficit-to-GDP ratio increased from 3.88% in 2004-05 to 6.46% in 2009-10. It then hovered over 4.5% for the rest of UPA’s term. This, despite the fact that whenever fiscally irresponsible ideas were proposed to PM Manmohan Singh, he would respond with one of his favourite aphorisms, ‘Money does not grow on trees.’ One wonders on which tree the money for Rahul Gandhi’s NYAY would grow.
If NYAY were to substitute for most existing subsidies, GoI may be able to fund it. But Congress has not named a single subsidy it would be willing to eliminate. Union finance minister Arun Jaitley has had a better record at fiscal management, even though he has been unable to conform to the original FRBM timelines. These were then reworked by a committee chaired by N K Singh.
But GoI has not been able to adhere to even the revised targets. Even as GoI has struggled managing its deficit, most state governments have also been fiscally irresponsible, making spending commitments way beyond their means.
What should be truly worrying is that Rajiv Gandhi’s fiscal adventurism of the 1980s was at a time when his government commanded an overwhelming majority in the Lok Sabha, with over 400 MPs. Given the kind of coalition that Rahul Gandhi may lead if he even manages to get half that number into the Lok Sabha, the fiscal pressures on GoI would only increase, raising danger signals for the economy.
(The writer was media adviser to Prime Minister Manmohan Singh)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)